Incentive Issues In HRM Business Essay

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To an organization ethics means, the set of rules or principles with which it will conduct its operations. The compensation and incentive issues are vital for an organization because employees do not like to be treated unfairly and unfairness causes design necessary ethics, justice and fair treatment practices. This chapter tries to explain all the measures which an HR manager takes to ensure ethics in relation to compensation of employees.

Overview of Ethics

One can draw inspications of Ethics from various ways:

Codes of Ethics

Spiritual books like bible


Type I Ethics:

This shows the inter relation between what an individual or organization consider to be morally correct and does it refer to the available sources of guidance (maybe some religious books). For e.g. although it is inadvisable to discriminate minorities on the basis of compensation but many HR managers practice the same.

Type II Ethics:

It is the co relation between the belief of an individual and his actions. For example, although some practices like discrimination should be discouraged but many managers does not follow the suit.

A firm does not afford to insure ethics by the use of law, because something which is legal may not be right, while something which is right may not be legal. For example, one can fire a 38 year old employee with 20 years tenure without notice, this is unethical but legal. So, fairness has an important role in the management of human resources of an organization. The organizational justice has been defined in three ways with respect to employee relations-

Distributive justice

Procedural justice

Interactive justice

Distributive Justice: It shows fairness and justice as a result of some decision (for example, after the performance appraisal an employee may think, did I get a suitable incriment?)

Procedural Justice: It indicates for the fairness of the company's processes like is the performance appraisal process of my company is fair?

Interactive Justice: It indicates for the inter personal skills of HR manager. For example, the extent to which they treat employees with respect against to abuse against to disrespect, for example: does my supervisor gives me respect?

The research shows that the organizations which treat their employees fairly have lesser complains about unethical behaviors. There can be various ethical issues in terms of hiring, performance, evaliuation, discipline and termination as they all involve fairness and dignity of an individual. The next part of this chapter explains the various HR ethics activities.

Fig: HR Ethics activities

HR manager ensure ethical behaviors among their employees by enforcing following activities:

1. Staffing and selection: The easiest way to have an ethical work force is to hire only ethical people in an organization.

2. Training: Ethical organizational culture can be ensured by training people.

3. Performance appraisal: The HR managers can ensure ethics and fairness by conducting the firm's performance appraisal process in a proper way. First, the appraisal can signal that company aim to follow high ethical standards and also rewards the employees who follow those standards. Second, the way a supervisor conducts the appraisal is also important. Some research shows that in practice, some managers appraise their sub ordinates on the basis of political process (like appreciating employees with whom they do not get along to leave the firm) ignoring accuracy and honesty. So, it is necessary for an HR manager to set up clear standards that signal fairness among all employees.

4. Rewards and disciplinary systems: An HR manager is responsible to reward the employees with ethical behavior and penalize unethical behavior. The research also suggests that there is the tendency among employees that, those who conduct unethical practices must be handed over harsh punishment.

The next section focuses on the steps which HR takes to maintain ethics by providing suitable compensation and incentives for employees.

Determining Pay rates

The compensation of an employee consists of payments and rewards going to him from the employment. It consists of two components, direct financial payments (wages, salaries, incentives, commissions and bonuses), and indirect payments (financial benefits like employer paid insurance and vacations). The employees are paid accordingly to their performance or with time and this is what is called direct financial payments. Generally, the managers are paid on the basis of week, month or year while the payment of blue collar workers is settled daily. The major part of the pay plan consists of time based pay. Another direct payment option is to pay the employees as per their performance. For example, in automobile industry, workers are compensated according to the number of pieces produced by a worker. Another example of performance based compensation can be of the sales commission. Generally, employers like to have a combination of time based pay plus incentives. This section of the chapter tries to explain how to formulate plans for paying employees a time based wage or salary, financial incentives and bonuses, and employee benefits in order to maintain ethics in the organization.

Equity and its impact on pay rates

There have been various researches on the re action of workers or a group of animals to inequitable pay. According to the research of Emory University of Capuchin Monkeys on their behavior for inequitable pay, there were following results: First, the monkeys were trained to exchange pebbles for food. Some monkeys received grapes in return of pebbles while others got cucumber slices. The monkeys who received sweeter grapes traded their pebbles while monkeys receiving cucumber slices didn't exchange an in turn ate their cucumber. So, one can conclude that even lower primates maybe genetically willing to be treated fairly when it comes to the matter of compensation.

According to the motivation theory of equity, people want value fairness at work. They like to be motivated and keep balance between their efforts and their rewards. Equity theory further explains that when a person considers equity, a drive governs him and he becomes motivated to eliminate the drive and perceived equity. The research also support equity theory and says that it applies generally to the people who are under paid. The HR managers need to balance four forms or equity: external, internal, individual and procedural.

External equity defines the equivalence of a company's job pay rate in relation to other companies.

Internal equity defines the equivalence of the job pay rate in relation to other jobs of the same company (For example, is the sales manager pay ethical in comparison to what the production manager is earning?)

Individual equity defines the equivalence of an individual pay in relation to the earnings of his co workers for the same kind of job in a company, also in relation to respective job performance.

Procedural equity defines the expected fairness of the processes and the procedures needed to make decisions related to compensations.

The HR managers can answer all these equity issues in a number of ways. For example, in order to maintain external equity of an organization, the HR managers monitor salary structure of the other organizations in the market. The job evaluation and the job analysis techniques are the best way to maintain internal equity. The performance appraisal method is the solution for individual equity. The HR managers can ensure ethics in the pay plan by other processes like grievance mechanism, communication and deciding the company's pay plan by the suitable participation of employees. There are frequent surveys in the market which reflect the attitude of an employer regarding the pay plan. So, the question is, "how satisfied are the employees with their pay plan?" "What criteria have been used for the performance appraisal of the employees?" and "Which are the factors considered by the management to decide the pay increments of the employees?"

In practice, many big corporate houses face the problem of pay inequities. For example, after a wide spread problem of law suits and reported racial discrimination, inequities in payment, the Coca Cola Co. did a salary review of other companies like Pepsi Co., Proctor & Gamble, Yahoo to find some solution. After the salary analysis, the management did a pay increase from around $1,000 to $15,000 for most of its employees. Some companies maintain secrecy for their compensation issues in order to control the conflicts arising from pay inequalities. The web sites like, help the employers to maintain external equity as well as the employees can have a brief idea if their earning in a company or what they should expect at some other company. Thus, an HR manager should ensure external, internal and procedural equity in order to improve ethics on compensation and incentive issues. It is a five step process:

1. To do a salary survey and try to find out how the other organizations are compensating their employees for comparable jobs (to maintain external equity).

2. To use job evaluation techniques in order to find the relative worth of a job inside an organization (to maintain internal equity).

3. To put equivalent jobs into pay grades.

4. To use wage curves in deciding the compensation for each pay grade.

5. Fine -tune pay rates.

In the next part of the chapter, we describe each of these steps.

Step1. The salary survey

The current wage rate is determined with the help of salary survey. An efficient salary survey provides suitable information on specific wage rates for specific jobs. A complex way to do the survey is formal written questionnaire method while surveys via telephone and news paper ads are another source of information. The surveys help an organization to price bench mark their jobs. Then the companies slut other jobs around these bench mark jobs based on the relative worth of each jobs. Second, employers typically price 20 per cent or more of their positions directly in their market place based on the findings of the formal and informal surveys. Third, the surveys also help to find information related to other benefits comprising of sick leave, vacations, health insurance.

Commercial, professional and government salary survey

There are various government agencies and professional associations which publish data related to many employers. For example, the US Department of Labors Bureau of Labor statistics (BLS) does three types of annual surveys:

1. Area wage survey

2. Industrial wage survey

3. Professional, administrative, technical and clerical (PATC) surveys.

Using the internet to do compensation surveys

The internet provides an easy platform to do the comparison of compensation across the companies. Some data related to international salary structures are not provided free of costs and generally includes some charge. For example, William M Mercer ( annually publishes a planning report on global compensation detailing the trends in compensation across forty different countries plus the pay data of four common bench mark jobs.

Step2. Job evaluation

Job evaluation is a process to find the relative worth of a job in comparison to other jobs. The basic principle which HR managers follow in determining compensation is that the job which comes with greater qualifications, responsibilities and job duties are paid more in comparison to the jobs with lesser requirements.

Compensable factors

The various factors which determine the compensation of a job are skills, effort, responsibility and working condition. The managers compare various jobs on the basis of above mentioned factors. As the ranking of the job is generally based on the job difficulty, there are various steps in the job ranking method.

To obtain job information.

To select and classify jobs.

To find compensable factors.

To rank jobs.

To combine ratings.

Although the ranking method suffers from a limitation i.e. it is unable to quantify the value of a job relative to another. This method is based suited for small firms which find it expensive to develop a more efficient system.

Step3. Group similar jobs into pay grades

Once the HR manager completes the job evaluation process, the job must be classified into different pay grades. Usually, a pay grade consists of jobs having similar difficulty level. Then, the jobs are assigned pay rates and hence the HR managers are able to ensure fairness in the organization.

Step4. Price each pay grade- wage curves

Each pay grade is assigned a pay rate according to the wage curve. A wage curve denotes the relationship between the worth of the job and the wage page for the corresponding job. A wage curve helps to establish relationship between:

1. The value of job as determine by the job evaluation techniques and

2. The current average pay rates for a corresponding job grade.

In order to draw a wage curve, one needs to find the average pay for each of the pay grades in an organization. Then one can plot pay rates for each pay grade then fit a line called wage line through the plotted line.

Step5. Fine tune pay rates

This involves developing pay ranges and modifying out of line pay rates.

Developing pay ranges

A pay grade consists of different jobs of different pay grades. So in order to make convenient, a pay range is developed by the HR manager, it shows different levels of a pay grade based upon years of service. It helps to attract experience, higher paid employees. It also helps to differentiate between employees within the same grade based on performance.

Compensating managers

The compensation of the top executives of a company consists of four basic elements:

Base pay

Short term incentive

Long term incentives

Executive benefits and perks

The base pay of a person includes the fixed salary as well as any guaranteed bonuses like "15 per cent of pay at the end of four fiscal quarters regardless of the company's profit".

Short term incentives include cash or stock bonuses for achieving short term goals, for example, yearly increase in sales revenue. The motive of the long term incentives of a company is to encourage the executives to take necessary actions needed to raise the value of company's stock and also include things like stock options (it generally provides executives the right to own stock at specific price for specific period). Finally, apart from executives benefits and perks, there are other supplemental earnings like pension plan, life insurance and health insurance or co insurance.

Compensating professional employees

To decide compensation of professional employees like engineers and scientists is an challenge to a company because they involve in highly analytical jobs which needs creativity and problem solving ability. Here the job compensable factors are not easily computed as the economic impact of their results is only indirectly related to their actual efforts. For example, the success of an engineer invention depends on many factors, like how well the firms market it.

Most of the companies are using market pricing approach as the price professional jobs and hence establish the value for bench mark jobs. They then develop a salary structure. Each professional discipline (like engineering or R & D) usually ends up having 4 to 6 grades level, each with a broad salary range. Through this approach, an employer can attract competitive professionals.

Competency based pay

In the present scenario, employers base their job pay rate according to the required competencies of the job "title and tenure have been replaced with performance and competencies". This second approach is known as competency based pay.

What is competency based pay?

It means that companies base its pay for the employees range, depth and type of skills not on the job title. The competency based pay helps in cost cutting as an employee in class one job who could do class two work and gets paid as a class two workers, not a class one. The competency based pay usage one or both of two basic types of pay program: pay for knowledge or skill based pay. Pay for knowledge plan compensates employee based on their knowledge and skills needed for the organization- for example, a hotel may pay its waiter higher pay once he/ she learns the menu. While in the companies having skill based pay, an employee can earn more after developing organizationally relevant skills- Microsoft increase the payment of the programmers as they hone their skills of writing new programs.