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Linking Merit Pay with Competitive Strategy, Person Focus to Pay, Incentive Pay and
Team Based Pay
By Dr. G C Mohanta, BE, MSc (Engg.), MBA, PhD (Mgt.), Professor, Al-Qurmoshi
Institute of Business Management, Hyderabad, India
Linking Merit Pay with Competitive Strategy
Seniority pay does not fit well with the imperatives of competitive strategies because
employees can count on receiving the same pay raises for average and exemplary
performance.
Merit Pay
Merit pay is the increase in pay based on goals or achievements set by an employer, rather
than a pay rate based on a union contract or a defined pay scale for a position. It is also
known as pay for performance. Merit pay typically involves the supervisor meeting with the
employee to discuss the employee's work and to award an increase or a bonus based on
performance.
Elements of Merit Pay
Managers rely on objective as well as subjective performance indicators to determine whether
an employee will receive a merit increase and the amount of increase warranted.
Employees must know that their efforts in meeting production quotas or quality standards
will lead to pay raises.
Companies that use merit programs must ensure that the funds needed to fulfil these promises
to compensate employees are available.
Organisations should make adjustments to base pay according to changes in the cost of living
or inflation before awarding merit pay raise. Effective performance appraisals can ensure
effective merit pay programs.
Person Based Structures (Person Focus to Pay)
The logic underlying job-based pay structures flows from scientific management,
championed by Frederick Taylor in the 1930s. Work was broken into a series of steps and
analyzed so that the "one best way," the most efficient way to perform every element of the
job, could be specified. Strategically, Taylor's approach fit with mass production technologies
that were beginning to revolutionize way work was done. Taylorism still pervades our lives.
Not only are jobs analyzed and evaluated in terms of the "best way, but cookbooks and
software manuals specify the methods for baking cake or using a program as a series of
simple, basic steps.
In today's organizations, the work is also analyzed with an eye toward increasing
competitiveness success. Routine work (transactional) is separated from more complex (tacit)
work. More complex work requires pay systems that support continuous learning,
improvement, and flexibility. Person-based structures hold out that promise.
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Exhibit1 points out the similiarities in the logic underlying job-based versus people-based
approaches. No matter the basis for the structure, a way is needed to (1) collect and
summarise information about the work, (2) determine what is of value to the organisation, (3)
quantify the value, and (4) translate that value into an internal structure.
Person-Based Structures: Skill Plans
The majority of applications of skill-based pay have been in manufacturing, where the work
often involves teams, multi skills, and flexibility. An advantage of a skill-based plan is that
people can be deployed in a way that better matches the flow of work, thus avoiding
bottlenecks as well as idle hands.
Types of Skill Plans
Skill plans can focus on depth (specialists in corporate law, finance, or welding and
hydraulic maintenance and/or breadth (generalists with knowledge in all phases of
operations including marketing, manufacturing finance, and human resources).
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Exhibit 1: Many Ways to Create Internal Structure (From Milkovich, Newman and
Venkata Ratnam)
Skill-based structures link pay to the depth or breadth of the skills, abilities, and knowledge a person acquires
that are relevant to the work. Structures based on skill, pay individuals for all the skills for which they have
been certified regardless of whether the work they are doing requires all or just a few of those particular skills,
the wage is attached to the person. In contrast, a job-based plan pays employees for the job to which they are
assigned, regardless of the skills they possess.
Specialists: Depth
The pay structures for the elementary or high school teachers were likely based on their
knowledge as measured by education level. A typical teacher's contract specifies a series of
steps, with each step corresponding to a level of education. A bachelor's degree in education
is step 1 and is the minimum required for hiring. To advance a step to higher pay requires
additional education. Each year of seniority also is associated with a pay increase. The result
can be that two teachers may receive different pay rates for doing essentially the same job
-teaching English to high school juniors. The pay is based on the knowledge of the individual
doing the job (measured by number of college credits and years of teaching experience)
rather than on job content or output (performance of students). The presumption is that
teachers with more knowledge are more effective and more flexible, able to teach seniors,
too.
Generalist/Multiskill Based: Breadth
As with teachers, employees in a multi-skill system earn pay increases by acquiring new
knowledge, but knowledge is specific to a range of related jobs. Pay increases come with
certification of new skills, rather than with job assignments. Employees can then be assigned
to any of the jobs for which they are certified, based on the flow of work. An example from
Balzer Tool Coating makes the point. This company coats cutting tools by bombarding them
with metal ions. The coating keeps the edge sharper longer.
Originally eight different jobs were involved in the coating process. Everyone started at the
same rate, no matter the job to which the person was assigned. Employees received cross-
training in a variety of jobs, but without a specific training path or level. Different locations
started new people in different jobs. In order to put some order into its system and make
better use of its employees, Balzer moved to a skill-based plan for all its hourly workers,
including administrative and sales employees.
Its new structure includes four different levels, from fundamental to advanced. New
employees are hired into the fundamental level. Fundamental skills include familiarity with
company forms and procedures, basic product knowledge, safety, basic computer usage, and
so on.
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Once they have been certified in all the skills at the fundamental level, they receive a pay
increase of $.50 an hour and move to the basic skill level. For each additional skill-block
certification at this level, pay is increased by $.50 an hour. Basic-level employees can be
assigned to any of the tasks for which they are certified; they will be paid whatever is their
highest certification rate. The same approach is used at the intermediate and advanced levels.
A person certified at the very top of the structure, earning at least $10.50
an hour, could be assigned to any of the tasks in the structure. The advantage to Balzer is
workforce flexibility and, hence, staffing assignments that can be better matched to the work
flow. The advantage to employees is that the more they learn, the more they earn.
The system at Balzer differs from the system for teachers in that the responsibilities assigned
at Balzer can change drastically over a short period of time, whereas teachers' basic
responsibilities do not vary on a day-to-day basis. Additionally, Balzer's system is designed
to ensure that all the skills are clearly work-related. Training improves skills that the
company values. In contrast, in the school, there is no guarantee that courses taken improve
teaching skills (or students' knowledge and performance).
Purpose of the Skill-Based Structure
Skill-based structures can be evaluated using the objectives specified for an internally aligned
structure: supports the organization strategy, supports work flow, is fair to employees, and
directs their behaviour toward organization objectives.
Supports the Strategy and Objectives
The skills on which to base a structure need to be directly related to the organization's
objectives and strategy. In practice, however, the "line of sight" between changes in the
specific work skills (fundamental to advanced) required to operate the Balzer coaters and
increased shareholder returns is difficult to make clear. In some cosmic sense, we know that
these operating skills matter, but the link to the plant's performance is not clearly established
with the link to corporate goals.
Supports Work Flow
The link here is clearer. One of the main advantages of a skill-based plan is that it facilitates
matching people to a changing work flow. For example, one national hotel chain moves many
of its people to the hotel's front desk between 4 P.M. and 7 P.M., when the majority of
guests check in. After 7 P.M., these same employees move to the food and beverage service
area to match the demand for room service and dining room service. By ensuring that guests
will not have to wait long to check in or to eat, the hotel believes it can provide a high level
of service with fewer staff.
Is Fair to Employees
Employees like the potential of higher pay that comes with learning. And by encouraging
employees to take charge of their own development, skill-based plans may give them more
control over their work lives. However, favouritism and bias may play a role in determining
who gets first crack at the training necessary to become certified at higher-paying skill
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levels.
Employees complain that they are forced to pick up the slack for those who are out for
training. Additionally, the courts have not yet been asked to rule on the legality of
having two people do the same task but for different (skill-based) pay.
Motivates Behaviours toward Organisation Objectives
Person-based plans have the potential to clarify new standards and behavioural expectations.
The fluid work assignments that skill-based plans permit encourage employees to take
responsibility for the complete work process and its results, with less direction from
supervisors.
What is Skill-Based Pay?
Skill-based pay refers to a pay system in which pay increases are linked to the number or
depth of skills an employee acquires and applies and it is a means of developing broader and
deeper skills among the workforce. Such increases are in addition to, and not in lieu of,
general pay increases employees may receive. The pay increases are usually tied to three
types of skills:
• horizontal skills, which involve a broadening of skills in terms of the range of tasks,
• vertical skills, which involve acquiring skills of a higher level,
• depth skills, which involve a high level of skills in specialised areas relating to the same job.
Skill-based pay differs in the following respects from traditional pay systems which reflect
skills differences in a structure consisting of rates of pay for unskilled, semi-skilled and
skilled workers:
• Skill-based pay is a person-based and not a job-based, system. It rewards a person for what
he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum
skills, but pay progression is directly linked to skills acquisition (rather than to general pay
increases applicable to all).
• It rewards (and therefore emphasizes) a broad range of skills which makes the employee
multi-skilled and therefore flexible.
• It positively encourages skills development.
• A skill-based pay system may not necessarily reflect how well the skill is used, as this falls
within the performance component of pay. But there is nothing to prevent injecting
performance criteria into the system. In such cases the system will be more performance
oriented than a structure which merely recognizes different rates of pay for skills.
• The system needs to be underpinned by opportunities for training which is critical to the
success of the system. The traditional structure is not dependent on such opportunities.
Reasons for Skill-Based Pay
More than ever before in industrial relations history a commonality of interests in the skills of
employees have developed between employers and employees. Skills provide employees
with a measure of protection against unemployment, as well as opportunities for higher
earnings. At the same time, skills provide employers with an important means of achieving
competitiveness.
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Many countries today are seeking to advance to more technology and skill-based industries,
while others have become (or are becoming) 'post industrial' societies, in which the
application of knowledge determines productivity, performance and competitiveness.
Comparative advantage based on, for instance, cheap labour or raw materials, has declined in
importance relative to competitive advantage based on the ability to add value to a particular
resource or advantage. Such comparative advantage partly (often largely) depends on people
- their standards of literacy and education, work attitudes, value systems, skills and
motivation.
Critical today is the ability to innovate and develop clusters of competitive enterprises in
particular industries. For the more industrialized countries this means 'capturing' some of the
key industries of the next century - microelectronics, biotechnology, new materials science
industries, telecommunications, civil aviation, computers and software, robotics and machine
tools and entertainment.
An employee with skills is most flexible and productive when he develops a broad range of
skills, is able to learn the next higher skill, develop analytical skills and is also able to work in
a team. Important aspects of today's skills package include multi-skills, cognitive skills,
interpersonal and communication skills, positive work attitudes and quality consciousness.
Training is no longer only for current skill, but is also to prepare for the next stage of skills.
Thus pay systems which promote current and future skills needs are increasing in importance
among employers.
The impact of rapid technological change, the increasing globalization of product markets,
greater customer choice and the emphasis on quality necessitate a frequent updating of skills,
and flexibility to respond to rapid changes in the requirements of markets. A flexible
workforce, which is one that is multi-skilled, ensures that production is not interrupted due to
the narrow skills of workers, and that workers are themselves responsible for the quality of
products.
Introducing Skill Based Pay System
Introducing a skill-based pay system requires several steps to be taken and several issues to
be addressed:
• The skills requirements of the enterprise should be analysed;
• The availability of resources for training should be ascertained;
• The jobs to be covered by the scheme should be identified;
• The individual jobs have to be grouped into 'job families' on the basis that in each 'family'
the skills needs are similar. The skills within each job family and the tasks needed to perform
the job should be analysed.
• The above will lead to an identification of the skill blocks or levels. The skill level is the
pay grade relative to the competence to use particular skills, and the skill block is the training
input which has to be completed to the satisfaction of the certifying authority in order to gain
entitlement to the extra pay. It is not unusual for skill levels to consist of several skill blocks,
each to be acquired through training.
• Training modules have to be formulated.
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• The way in which certification is obtained that the skill has been acquired should be agreed
upon.
• The base rates for 'job families' have to be set, as well as the payments that will be made
thereafter when an employee moves upwards through the skills route.
• The criterion for extra payment is not acquisition of the skill, but its application.
• The period during which the skill should be applied before a new one is acquired should
normally be decided on, as the skill should benefit the employer who should receive a return
on the investment made.
Problems in Skill-Based Pay
There are several problems associated with the introduction of skill-based pay which should
not be underestimated. They can be extremely costly having regard to
• the extra payment involved,
• training costs,
• the fact that some skills may be paid for but used infrequently,
• the possibility that unusable skills may be acquired unless the system is properly
administered;
• the fact that it is not always easy for an employer to anticipate accurately what skills will be
needed in a few years' time.
The administration of the system is complex, both in regard to certification of skills
acquisition and payment. Therefore, unless administered properly, the costs can outweigh the
productivity and flexibility gains. Further, the employees who reach the maximum of the skill
levels can be de-motivated when extra payments, as distinct from general pay increases,
cease.
Therefore the gains from flexibility, improved quality, the elimination of some jobs and so on
depend on the employer's ability to administer the system properly, making clear also that it
is not the acquisition of any skills, but agreed skills, that fall within the scope of the scheme.
Hence the need to negotiate the system.
Factors for Success of Skill Based Pay
Some of the circumstances which contribute to the success of skill-based pay are:
• the employer's commitment to continuous training and development,
• the value attached by the employer to personal growth and encouragement of a learning
orientation,
• dismantling strong bureaucratic hierarchies and narrow job demarcations,
• participative management practices, independent and cooperative forms of work.
Appropriate Industries for Skill-Based Pay
Skill-based pay systems are most appropriate to enterprises which depend on a high level of
skills, and in which labour costs represent a relatively small portion of total costs, unlike in
labour intensive industries. Though such pay systems have been commonest in manufacturing
organisations, they are applicable to service industries as well though the objectives may
differ. In banks and airlines, for example, skill-based pay can be used to encourage people to
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work in areas where manpower is most needed at a given point of time due to customer
flows. Skill-based pay is particularly consistent with knowledge-based work.
Advantages of Skill-Based Pay
Among the advantages of skill-based pay are the following:
• It contributes to job enlargement and enrichment by breaking down narrow job
classifications.
• Flexibility is increased by encouraging the performance of multiple tasks. It enables job
rotation, and filling of temporary vacancies due, for instance, to absenteeism. It therefore
contributes to a leaner workforce.
• It enhances productivity and quality through better use of human resources.
• It facilitates technological change, which may meet with resistance in a purely job-based
system.
• The higher pay levels, continuous training, and job enlargement through the broadening of
skills, tend to reduce staff turnover.
• Elimination of unnecessary jobs can result from a workplace having broad, rather than
narrow, skills. It also reduces the need for supervision.
• Job satisfaction is engendered through employees having greater control over the planning
and implementation of their work.
• Broadening of skills leads employees to develop a better perspective of operations as a
whole.
• It is an incentive for self-development.
• It provides employment security through skills enhancement.
• It reduces the need to look to promotion to higher levels (which are always limited) as the
only way to enhance earnings, and it facilitates the planning of an employee's career
development path.
• Since the reward flows from the application of a skill and it does not reduce opportunities
for others to similarly increase their skills and earnings, there is likely to be less competition
among individuals.
• Since the pay increases on account of skills are linked to a measurable standard, the
criticism of subjectivity often associated with performance appraisals and individual-based
performance-related pay, is avoided
Person Based Structures: Competencies
As with job evaluation, there are several perspectives on what competencies are and what
they are supposed to accomplish. Are they a skill that can be learned and developed, or, are
they a trait that includes attitudes and motives? Do competencies focus on the minimum
requirements that the organization needs to stay in business, or do they focus on outstanding
performance? Are they characteristics of the organization or of the employee? Unfortunately,
the answer to all of these questions is "yes.'' A lack of consensus means that competencies
can be a number of things; consequently, they stand in danger of becoming nothing.
All approaches to creating a structure begin by looking at the work performed in the
organization. While skill and job-based systems hone in on information about specific tasks,
competencies take the opposite approach. They try to abstract the underlying, broadly
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applicable knowledge, skills, and behaviours that form the foundation for success at any
level or job in the organization. These are the core competencies. Core competencies are
often linked to mission statements that express an organization's philosophy, values,
business strategies, and plans.
Competency sets translate each core competency into action. For the core competency of
business awareness, for example, competency sets might be related to organizational
understanding, cost management, third-party relationships, and ability to identify business
opportunities.
Competency indicators are the observable behaviours that indicate the level of competency
within each set. These indicators may be used for staffing and evaluation as well as for pay
purposes.
TRW's competency model for its human resource management department, shown in
Exhibit 2, includes the four core competencies considered critical to the success of the
business. All HR employees are expected to demonstrate varying degrees of these
competencies. However, not all individuals would be expected to reach the highest level in
all competencies. Rather, the HR function should possess all levels of mastery of all
the core competencies within the HRM group. Employees would use the model as a guide
to what capacities the organization wants people to develop.
The competency indicators anchor the degree of a competency required at each level of
complexity of the work. Exhibit 3 shows five levels of competency indicators for the
competency impact and influence. These behavioural anchors make the competency more
concrete. The levels range from “uses direct persuasion" at level 1 to ''uses experts or other
third parties to influence" at level 5. Sometimes the behavioural anchors might include
scales of the intensity of action, the degree of impact of the action, its complexity, and/or
the amount of effort expended. Scaled competency indicators are similar to job analysis
questionnaires and degrees of compensable factors, discussed in previous chapters.
Defining Competencies
Competencies are trying to get at what underlies behaviours, there is a lot of fuzziness in
defining them. Early conceptions of competencies focused on five areas:
1. Skills (demonstration of expertise)
2. Knowledge (accumulated information)
3. Self-concepts (attitudes, values, self-image)
4. Traits (general disposition to behave in a certain way)
5. Motives (recurrent thoughts that drive behaviours)
As experience with competencies has grown, organizations seem to be moving away from the
vagueness of self-concepts, traits, and motives. Instead, they are placing greater emphasis on
business related descriptions of behaviours "that excellent performers exhibit much more
consistently than average performers." Competencies are becoming "a collection of
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Exibit2: TRW’s Human Resources Competencies
observable behaviours (not a single behaviour) that require no inference, assumption or
interpretation."? Exhibit 3 shows behavioural anchor for the competency: Impact and
Influence.
Purpose of the Competency-Based Structure
Do competencies help support an internally aligned structure? Using the familiar yardstick,
how well do competencies support the organization strategy and work flow, treat employees
fairly, and motivate their behaviour toward organization objectives?
Organization Strategy
The main appeal of competencies is the direct link to the organization's strategy. The process
of identifying competencies starts with the company leadership deciding what will spell
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Exhibit 3: Sample Behavioural Competency Indicators
success for the company. It resembles identifying compensable factors as part of job
evaluation.
Frito-Lay, which has used competency-based structures for over 10 years, lists four
competencies for managerial work, shown in Exhibit 4. Frito believes four are required in
managerial work: leading for results, building work-force effectiveness, leveraging technical
and business systems, and doing it the right way. The top of the exhibit shows the levels. At
the first level, exhibiting the competency affects the team. At the next level, it has an impact
across teams. And at the highest level, it has an impact on the entire location.
Competency Dimension Behaviours
Leading for results Using initiative and influence with others to drive results and
promote continuous improvement.
Building workforce Coaching individual development and building capability of
effectiveness operational, project, or cross-functional teams to achieve
business results.
Leveraging technical and Acquiring and applying a depth and/or breadth of knowledge,
business systems skills, and experience to achieve functional excellence.
Doing it the right way Modelling, teaching, and coaching company values.
Exhibit 4: Frito-Lay Managerial Competencies
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Work Flow
Competencies are chosen to ensure that all the critical needs of the organization are met.
While the skills-based plans are tightly coupled to today's work, competencies more loosely
apply to work requiring more tacit knowledge such as in managerial and professional work.
Fair to Employees
Advocates of competencies say they can empower employees to take charge of their own
development. By focusing on optimum performance rather than average performance,
competencies can help employees maintain their marketability.
Motivate Behaviour toward Organization Objectives
Competencies in effect provide guidelines for behaviour and keep people focused. They can
also provide a common basis for communicating and working together. This latter possibility
has become increasingly important as organizations go global, and as employees with widely
differing viewpoints and experiences fill leadership positions in these global organizations.
Incentive Pay and Team Based Pay
A lump sum payment (such as sales commissions) is another traditional method. It is not
added to base pay. Usually the formula and the relationship between performance and the
payment of the lump sum, are known beforehand. Sales commissions may often have little to
do with performance because factors such as product quality, brand name and price may
contribute more to sales than the ability of the salesman to convince the buyers. Appraisals
are less significant to this category since the criteria (e.g. sales figures) are statistical and no
further measurement is needed.
Another traditional method of rewarding performance is piece rates. Unless related to a
reasonable time frame within which the production should be completed, such rates would
not be related to performance.
There are several weaknesses in certain types of incentive pay such as piece rates:
• It is not often easy to agree with workers on the standard required output;
• Frequent changes may be needed in the standard output due to technology changes, and this
invariably leads to disputes;
• Factors other than individual performance affect output e.g. new work arrangements;
• Where team work is an organizational goal, individual incentives can be counter-
productive;
• Piece rates can generate conflict and be divisive. Employees often wish to lower the
standard output. Conflicts between different work groups occur when one group is dependent
on another. There is a potential for conflict when norms have to be revised.
• Piece-rates could be a disincentive to employees developing more productive work
methods.
Generally speaking, many incentive schemes are more appropriate to measurable repetitive
tasks. They are not suitable for high technology and service activities requiring information-
sharing, problem-solving and team work.
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Group Incentives and Productivity Gain-Sharing
Group incentive schemes are of three types. Gain-sharing refers to a compensation system
which divides between the employer and employees the results of improved performance
consequent upon the better use of human resources resulting in productivity gains. Sharing is
according to an agreed, pre-determined formula. A second type, namely, profit-sharing, gives
employees a share of the profits. A third type is employee stock ownership plans (ESOPS).
Sometimes bonuses are paid to individuals based on their own performance appraisal ratings.
In the case of group incentives, the criteria could be either group or enterprise performance.
The necessity for objective criteria for distribution of the performance component of pay, and
a clear relationship between what is paid and the criteria, are important.
Productivity gain-sharing is practised by the larger Japanese companies. Their system is
based on the premise that basic to successful productivity enhancement in the long term is
sharing productivity gains with employees by linking a part of earnings to productivity to
achieve such multiple goals as
• increasing labour productivity,
• improving employees' living standards,
• strengthening employee commitment,
• improving labour-management relations,
• securing flexibility in labour costs,
• maintaining corporate viability.
In the Japanese system a part of productivity gains is shared with the employees through the
collective bargaining process on whatever criteria are applied in collective negotiations, and
part through the gain-sharing system. The amount distributed in recent years through the
collective bargaining process and the gain-sharing system in manufacturing establishments
with more than four employees has been about 35% of value added.
The two mechanisms - collective bargaining and joint consultation on gain-sharing - have
supplemented each other, and have contributed to establishing a consensus on criteria for pay
increases.
The component linked to productivity is paid in the form of a bonus, which in years before
the recession, represented approximately 3-5 months' pay. About one-third of companies
employing 30 or more persons have productivity-linked schemes. The percentage has been
much higher in the larger companies.
Some companies combine productivity and merit rating. For example, a part of the increase
may be a fixed amount to guarantee a fixed payment, while the other part is linked to
productivity but distributed on a merit rating arrived at through the joint consultation system
and reviewed annually.
Distribution of the productivity bonus may be direct to individuals, or first to the department
or unit based on its performance level.
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In Japan participation of employees in formulating and monitoring formulae has enabled
them to:
• understand downturns and upswings in business cycles,
• take a long-term view of growth,
• be motivated through the opportunities offered them to influence the schemes,
• achieve a common understanding of issues important to gain-sharing, such as,
- concepts and measurement of productivity,
- the relationship between pay and productivity and past trends,
- estimates of labour costs and share,
- productivity improvement methods and targets,
- appraisal of the system.
In general, gain-sharing systems are based on a participatory approach, and can be used to
create or reinforce participatory practices. Evidence indicates that such systems
• improve coordination, term work and knowledge-sharing,
• satisfy social needs (through participation),
• focus on cost saving,
• facilitate changes (e.g. in technology) needed to improve performance which are seen as
being directly related to higher earnings;
• result in expectations by employees of better management and planning,
• result in contributions of ideas by employees.
Profit Sharing
These schemes are not related to an individual's performance, but are linked to the profits of
an enterprise, a part of which is paid as a bonus to the workers. It may be a cash payment, or
a deferred payment kept, for instance, in a special fund for a particular period. There are
numerous types of schemes in existence. It has been estimated that by 1988 about half a
million American firms were operating profit sharing schemes.
Long Term Incentives
Long term incentive plans are operated, especially for executives, both as an incentive to
improved performance and in order to reduce fixed costs. Examples of such schemes are:
• share option plans to promote convergence of stockholder/executive interests,
• bonus linked to long term performance (3-5 years) to encourage a focus on long term goals.
In the 1980s stock ownership plans (ESOPs) in U.S.A. normally included only executives,
while in Japan they usually excluded executives. A lower rate of termination of ESOPs in
Japan contrasted with a higher rate of terminations in the U.S.A.
Performance Bonus
This type of bonus can be based on individual or group performance. Where it is individual
based, the payment would depend on performance ratings. Since the 1980s there has been in
the U.S.A. an increase in union agreements substituting bonuses for traditional wage
increases.
15
In many countries performance bonuses are commonest for executive staff. It is estimated
that in the U.S.A. about 97% of the large and 86% of the medium sized companies pay such
bonuses to their executives. In Western Europe the estimate is about 70% and in Singapore
about 66%. As a percentage of base pay, the figure is highest in the U.S.A., though the
variations are also large.
Some of the criteria for the success of such bonus payments are: group over individual
performance, the existence of objective criteria for distribution, and the fact that such criteria
are capable of measurement to ensure that what is paid is related to it.

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Linking merit pay with competitive strategy, Person focus to pay, Incentive pay, Team based pay

  • 1. 1 Linking Merit Pay with Competitive Strategy, Person Focus to Pay, Incentive Pay and Team Based Pay By Dr. G C Mohanta, BE, MSc (Engg.), MBA, PhD (Mgt.), Professor, Al-Qurmoshi Institute of Business Management, Hyderabad, India Linking Merit Pay with Competitive Strategy Seniority pay does not fit well with the imperatives of competitive strategies because employees can count on receiving the same pay raises for average and exemplary performance. Merit Pay Merit pay is the increase in pay based on goals or achievements set by an employer, rather than a pay rate based on a union contract or a defined pay scale for a position. It is also known as pay for performance. Merit pay typically involves the supervisor meeting with the employee to discuss the employee's work and to award an increase or a bonus based on performance. Elements of Merit Pay Managers rely on objective as well as subjective performance indicators to determine whether an employee will receive a merit increase and the amount of increase warranted. Employees must know that their efforts in meeting production quotas or quality standards will lead to pay raises. Companies that use merit programs must ensure that the funds needed to fulfil these promises to compensate employees are available. Organisations should make adjustments to base pay according to changes in the cost of living or inflation before awarding merit pay raise. Effective performance appraisals can ensure effective merit pay programs. Person Based Structures (Person Focus to Pay) The logic underlying job-based pay structures flows from scientific management, championed by Frederick Taylor in the 1930s. Work was broken into a series of steps and analyzed so that the "one best way," the most efficient way to perform every element of the job, could be specified. Strategically, Taylor's approach fit with mass production technologies that were beginning to revolutionize way work was done. Taylorism still pervades our lives. Not only are jobs analyzed and evaluated in terms of the "best way, but cookbooks and software manuals specify the methods for baking cake or using a program as a series of simple, basic steps. In today's organizations, the work is also analyzed with an eye toward increasing competitiveness success. Routine work (transactional) is separated from more complex (tacit) work. More complex work requires pay systems that support continuous learning, improvement, and flexibility. Person-based structures hold out that promise.
  • 2. 2 Exhibit1 points out the similiarities in the logic underlying job-based versus people-based approaches. No matter the basis for the structure, a way is needed to (1) collect and summarise information about the work, (2) determine what is of value to the organisation, (3) quantify the value, and (4) translate that value into an internal structure. Person-Based Structures: Skill Plans The majority of applications of skill-based pay have been in manufacturing, where the work often involves teams, multi skills, and flexibility. An advantage of a skill-based plan is that people can be deployed in a way that better matches the flow of work, thus avoiding bottlenecks as well as idle hands. Types of Skill Plans Skill plans can focus on depth (specialists in corporate law, finance, or welding and hydraulic maintenance and/or breadth (generalists with knowledge in all phases of operations including marketing, manufacturing finance, and human resources).
  • 3. 3 Exhibit 1: Many Ways to Create Internal Structure (From Milkovich, Newman and Venkata Ratnam) Skill-based structures link pay to the depth or breadth of the skills, abilities, and knowledge a person acquires that are relevant to the work. Structures based on skill, pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of those particular skills, the wage is attached to the person. In contrast, a job-based plan pays employees for the job to which they are assigned, regardless of the skills they possess. Specialists: Depth The pay structures for the elementary or high school teachers were likely based on their knowledge as measured by education level. A typical teacher's contract specifies a series of steps, with each step corresponding to a level of education. A bachelor's degree in education is step 1 and is the minimum required for hiring. To advance a step to higher pay requires additional education. Each year of seniority also is associated with a pay increase. The result can be that two teachers may receive different pay rates for doing essentially the same job -teaching English to high school juniors. The pay is based on the knowledge of the individual doing the job (measured by number of college credits and years of teaching experience) rather than on job content or output (performance of students). The presumption is that teachers with more knowledge are more effective and more flexible, able to teach seniors, too. Generalist/Multiskill Based: Breadth As with teachers, employees in a multi-skill system earn pay increases by acquiring new knowledge, but knowledge is specific to a range of related jobs. Pay increases come with certification of new skills, rather than with job assignments. Employees can then be assigned to any of the jobs for which they are certified, based on the flow of work. An example from Balzer Tool Coating makes the point. This company coats cutting tools by bombarding them with metal ions. The coating keeps the edge sharper longer. Originally eight different jobs were involved in the coating process. Everyone started at the same rate, no matter the job to which the person was assigned. Employees received cross- training in a variety of jobs, but without a specific training path or level. Different locations started new people in different jobs. In order to put some order into its system and make better use of its employees, Balzer moved to a skill-based plan for all its hourly workers, including administrative and sales employees. Its new structure includes four different levels, from fundamental to advanced. New employees are hired into the fundamental level. Fundamental skills include familiarity with company forms and procedures, basic product knowledge, safety, basic computer usage, and so on.
  • 4. 4 Once they have been certified in all the skills at the fundamental level, they receive a pay increase of $.50 an hour and move to the basic skill level. For each additional skill-block certification at this level, pay is increased by $.50 an hour. Basic-level employees can be assigned to any of the tasks for which they are certified; they will be paid whatever is their highest certification rate. The same approach is used at the intermediate and advanced levels. A person certified at the very top of the structure, earning at least $10.50 an hour, could be assigned to any of the tasks in the structure. The advantage to Balzer is workforce flexibility and, hence, staffing assignments that can be better matched to the work flow. The advantage to employees is that the more they learn, the more they earn. The system at Balzer differs from the system for teachers in that the responsibilities assigned at Balzer can change drastically over a short period of time, whereas teachers' basic responsibilities do not vary on a day-to-day basis. Additionally, Balzer's system is designed to ensure that all the skills are clearly work-related. Training improves skills that the company values. In contrast, in the school, there is no guarantee that courses taken improve teaching skills (or students' knowledge and performance). Purpose of the Skill-Based Structure Skill-based structures can be evaluated using the objectives specified for an internally aligned structure: supports the organization strategy, supports work flow, is fair to employees, and directs their behaviour toward organization objectives. Supports the Strategy and Objectives The skills on which to base a structure need to be directly related to the organization's objectives and strategy. In practice, however, the "line of sight" between changes in the specific work skills (fundamental to advanced) required to operate the Balzer coaters and increased shareholder returns is difficult to make clear. In some cosmic sense, we know that these operating skills matter, but the link to the plant's performance is not clearly established with the link to corporate goals. Supports Work Flow The link here is clearer. One of the main advantages of a skill-based plan is that it facilitates matching people to a changing work flow. For example, one national hotel chain moves many of its people to the hotel's front desk between 4 P.M. and 7 P.M., when the majority of guests check in. After 7 P.M., these same employees move to the food and beverage service area to match the demand for room service and dining room service. By ensuring that guests will not have to wait long to check in or to eat, the hotel believes it can provide a high level of service with fewer staff. Is Fair to Employees Employees like the potential of higher pay that comes with learning. And by encouraging employees to take charge of their own development, skill-based plans may give them more control over their work lives. However, favouritism and bias may play a role in determining who gets first crack at the training necessary to become certified at higher-paying skill
  • 5. 5 levels. Employees complain that they are forced to pick up the slack for those who are out for training. Additionally, the courts have not yet been asked to rule on the legality of having two people do the same task but for different (skill-based) pay. Motivates Behaviours toward Organisation Objectives Person-based plans have the potential to clarify new standards and behavioural expectations. The fluid work assignments that skill-based plans permit encourage employees to take responsibility for the complete work process and its results, with less direction from supervisors. What is Skill-Based Pay? Skill-based pay refers to a pay system in which pay increases are linked to the number or depth of skills an employee acquires and applies and it is a means of developing broader and deeper skills among the workforce. Such increases are in addition to, and not in lieu of, general pay increases employees may receive. The pay increases are usually tied to three types of skills: • horizontal skills, which involve a broadening of skills in terms of the range of tasks, • vertical skills, which involve acquiring skills of a higher level, • depth skills, which involve a high level of skills in specialised areas relating to the same job. Skill-based pay differs in the following respects from traditional pay systems which reflect skills differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled workers: • Skill-based pay is a person-based and not a job-based, system. It rewards a person for what he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum skills, but pay progression is directly linked to skills acquisition (rather than to general pay increases applicable to all). • It rewards (and therefore emphasizes) a broad range of skills which makes the employee multi-skilled and therefore flexible. • It positively encourages skills development. • A skill-based pay system may not necessarily reflect how well the skill is used, as this falls within the performance component of pay. But there is nothing to prevent injecting performance criteria into the system. In such cases the system will be more performance oriented than a structure which merely recognizes different rates of pay for skills. • The system needs to be underpinned by opportunities for training which is critical to the success of the system. The traditional structure is not dependent on such opportunities. Reasons for Skill-Based Pay More than ever before in industrial relations history a commonality of interests in the skills of employees have developed between employers and employees. Skills provide employees with a measure of protection against unemployment, as well as opportunities for higher earnings. At the same time, skills provide employers with an important means of achieving competitiveness.
  • 6. 6 Many countries today are seeking to advance to more technology and skill-based industries, while others have become (or are becoming) 'post industrial' societies, in which the application of knowledge determines productivity, performance and competitiveness. Comparative advantage based on, for instance, cheap labour or raw materials, has declined in importance relative to competitive advantage based on the ability to add value to a particular resource or advantage. Such comparative advantage partly (often largely) depends on people - their standards of literacy and education, work attitudes, value systems, skills and motivation. Critical today is the ability to innovate and develop clusters of competitive enterprises in particular industries. For the more industrialized countries this means 'capturing' some of the key industries of the next century - microelectronics, biotechnology, new materials science industries, telecommunications, civil aviation, computers and software, robotics and machine tools and entertainment. An employee with skills is most flexible and productive when he develops a broad range of skills, is able to learn the next higher skill, develop analytical skills and is also able to work in a team. Important aspects of today's skills package include multi-skills, cognitive skills, interpersonal and communication skills, positive work attitudes and quality consciousness. Training is no longer only for current skill, but is also to prepare for the next stage of skills. Thus pay systems which promote current and future skills needs are increasing in importance among employers. The impact of rapid technological change, the increasing globalization of product markets, greater customer choice and the emphasis on quality necessitate a frequent updating of skills, and flexibility to respond to rapid changes in the requirements of markets. A flexible workforce, which is one that is multi-skilled, ensures that production is not interrupted due to the narrow skills of workers, and that workers are themselves responsible for the quality of products. Introducing Skill Based Pay System Introducing a skill-based pay system requires several steps to be taken and several issues to be addressed: • The skills requirements of the enterprise should be analysed; • The availability of resources for training should be ascertained; • The jobs to be covered by the scheme should be identified; • The individual jobs have to be grouped into 'job families' on the basis that in each 'family' the skills needs are similar. The skills within each job family and the tasks needed to perform the job should be analysed. • The above will lead to an identification of the skill blocks or levels. The skill level is the pay grade relative to the competence to use particular skills, and the skill block is the training input which has to be completed to the satisfaction of the certifying authority in order to gain entitlement to the extra pay. It is not unusual for skill levels to consist of several skill blocks, each to be acquired through training. • Training modules have to be formulated.
  • 7. 7 • The way in which certification is obtained that the skill has been acquired should be agreed upon. • The base rates for 'job families' have to be set, as well as the payments that will be made thereafter when an employee moves upwards through the skills route. • The criterion for extra payment is not acquisition of the skill, but its application. • The period during which the skill should be applied before a new one is acquired should normally be decided on, as the skill should benefit the employer who should receive a return on the investment made. Problems in Skill-Based Pay There are several problems associated with the introduction of skill-based pay which should not be underestimated. They can be extremely costly having regard to • the extra payment involved, • training costs, • the fact that some skills may be paid for but used infrequently, • the possibility that unusable skills may be acquired unless the system is properly administered; • the fact that it is not always easy for an employer to anticipate accurately what skills will be needed in a few years' time. The administration of the system is complex, both in regard to certification of skills acquisition and payment. Therefore, unless administered properly, the costs can outweigh the productivity and flexibility gains. Further, the employees who reach the maximum of the skill levels can be de-motivated when extra payments, as distinct from general pay increases, cease. Therefore the gains from flexibility, improved quality, the elimination of some jobs and so on depend on the employer's ability to administer the system properly, making clear also that it is not the acquisition of any skills, but agreed skills, that fall within the scope of the scheme. Hence the need to negotiate the system. Factors for Success of Skill Based Pay Some of the circumstances which contribute to the success of skill-based pay are: • the employer's commitment to continuous training and development, • the value attached by the employer to personal growth and encouragement of a learning orientation, • dismantling strong bureaucratic hierarchies and narrow job demarcations, • participative management practices, independent and cooperative forms of work. Appropriate Industries for Skill-Based Pay Skill-based pay systems are most appropriate to enterprises which depend on a high level of skills, and in which labour costs represent a relatively small portion of total costs, unlike in labour intensive industries. Though such pay systems have been commonest in manufacturing organisations, they are applicable to service industries as well though the objectives may differ. In banks and airlines, for example, skill-based pay can be used to encourage people to
  • 8. 8 work in areas where manpower is most needed at a given point of time due to customer flows. Skill-based pay is particularly consistent with knowledge-based work. Advantages of Skill-Based Pay Among the advantages of skill-based pay are the following: • It contributes to job enlargement and enrichment by breaking down narrow job classifications. • Flexibility is increased by encouraging the performance of multiple tasks. It enables job rotation, and filling of temporary vacancies due, for instance, to absenteeism. It therefore contributes to a leaner workforce. • It enhances productivity and quality through better use of human resources. • It facilitates technological change, which may meet with resistance in a purely job-based system. • The higher pay levels, continuous training, and job enlargement through the broadening of skills, tend to reduce staff turnover. • Elimination of unnecessary jobs can result from a workplace having broad, rather than narrow, skills. It also reduces the need for supervision. • Job satisfaction is engendered through employees having greater control over the planning and implementation of their work. • Broadening of skills leads employees to develop a better perspective of operations as a whole. • It is an incentive for self-development. • It provides employment security through skills enhancement. • It reduces the need to look to promotion to higher levels (which are always limited) as the only way to enhance earnings, and it facilitates the planning of an employee's career development path. • Since the reward flows from the application of a skill and it does not reduce opportunities for others to similarly increase their skills and earnings, there is likely to be less competition among individuals. • Since the pay increases on account of skills are linked to a measurable standard, the criticism of subjectivity often associated with performance appraisals and individual-based performance-related pay, is avoided Person Based Structures: Competencies As with job evaluation, there are several perspectives on what competencies are and what they are supposed to accomplish. Are they a skill that can be learned and developed, or, are they a trait that includes attitudes and motives? Do competencies focus on the minimum requirements that the organization needs to stay in business, or do they focus on outstanding performance? Are they characteristics of the organization or of the employee? Unfortunately, the answer to all of these questions is "yes.'' A lack of consensus means that competencies can be a number of things; consequently, they stand in danger of becoming nothing. All approaches to creating a structure begin by looking at the work performed in the organization. While skill and job-based systems hone in on information about specific tasks, competencies take the opposite approach. They try to abstract the underlying, broadly
  • 9. 9 applicable knowledge, skills, and behaviours that form the foundation for success at any level or job in the organization. These are the core competencies. Core competencies are often linked to mission statements that express an organization's philosophy, values, business strategies, and plans. Competency sets translate each core competency into action. For the core competency of business awareness, for example, competency sets might be related to organizational understanding, cost management, third-party relationships, and ability to identify business opportunities. Competency indicators are the observable behaviours that indicate the level of competency within each set. These indicators may be used for staffing and evaluation as well as for pay purposes. TRW's competency model for its human resource management department, shown in Exhibit 2, includes the four core competencies considered critical to the success of the business. All HR employees are expected to demonstrate varying degrees of these competencies. However, not all individuals would be expected to reach the highest level in all competencies. Rather, the HR function should possess all levels of mastery of all the core competencies within the HRM group. Employees would use the model as a guide to what capacities the organization wants people to develop. The competency indicators anchor the degree of a competency required at each level of complexity of the work. Exhibit 3 shows five levels of competency indicators for the competency impact and influence. These behavioural anchors make the competency more concrete. The levels range from “uses direct persuasion" at level 1 to ''uses experts or other third parties to influence" at level 5. Sometimes the behavioural anchors might include scales of the intensity of action, the degree of impact of the action, its complexity, and/or the amount of effort expended. Scaled competency indicators are similar to job analysis questionnaires and degrees of compensable factors, discussed in previous chapters. Defining Competencies Competencies are trying to get at what underlies behaviours, there is a lot of fuzziness in defining them. Early conceptions of competencies focused on five areas: 1. Skills (demonstration of expertise) 2. Knowledge (accumulated information) 3. Self-concepts (attitudes, values, self-image) 4. Traits (general disposition to behave in a certain way) 5. Motives (recurrent thoughts that drive behaviours) As experience with competencies has grown, organizations seem to be moving away from the vagueness of self-concepts, traits, and motives. Instead, they are placing greater emphasis on business related descriptions of behaviours "that excellent performers exhibit much more consistently than average performers." Competencies are becoming "a collection of
  • 10. 10 Exibit2: TRW’s Human Resources Competencies observable behaviours (not a single behaviour) that require no inference, assumption or interpretation."? Exhibit 3 shows behavioural anchor for the competency: Impact and Influence. Purpose of the Competency-Based Structure Do competencies help support an internally aligned structure? Using the familiar yardstick, how well do competencies support the organization strategy and work flow, treat employees fairly, and motivate their behaviour toward organization objectives? Organization Strategy The main appeal of competencies is the direct link to the organization's strategy. The process of identifying competencies starts with the company leadership deciding what will spell
  • 11. 11 Exhibit 3: Sample Behavioural Competency Indicators success for the company. It resembles identifying compensable factors as part of job evaluation. Frito-Lay, which has used competency-based structures for over 10 years, lists four competencies for managerial work, shown in Exhibit 4. Frito believes four are required in managerial work: leading for results, building work-force effectiveness, leveraging technical and business systems, and doing it the right way. The top of the exhibit shows the levels. At the first level, exhibiting the competency affects the team. At the next level, it has an impact across teams. And at the highest level, it has an impact on the entire location. Competency Dimension Behaviours Leading for results Using initiative and influence with others to drive results and promote continuous improvement. Building workforce Coaching individual development and building capability of effectiveness operational, project, or cross-functional teams to achieve business results. Leveraging technical and Acquiring and applying a depth and/or breadth of knowledge, business systems skills, and experience to achieve functional excellence. Doing it the right way Modelling, teaching, and coaching company values. Exhibit 4: Frito-Lay Managerial Competencies
  • 12. 12 Work Flow Competencies are chosen to ensure that all the critical needs of the organization are met. While the skills-based plans are tightly coupled to today's work, competencies more loosely apply to work requiring more tacit knowledge such as in managerial and professional work. Fair to Employees Advocates of competencies say they can empower employees to take charge of their own development. By focusing on optimum performance rather than average performance, competencies can help employees maintain their marketability. Motivate Behaviour toward Organization Objectives Competencies in effect provide guidelines for behaviour and keep people focused. They can also provide a common basis for communicating and working together. This latter possibility has become increasingly important as organizations go global, and as employees with widely differing viewpoints and experiences fill leadership positions in these global organizations. Incentive Pay and Team Based Pay A lump sum payment (such as sales commissions) is another traditional method. It is not added to base pay. Usually the formula and the relationship between performance and the payment of the lump sum, are known beforehand. Sales commissions may often have little to do with performance because factors such as product quality, brand name and price may contribute more to sales than the ability of the salesman to convince the buyers. Appraisals are less significant to this category since the criteria (e.g. sales figures) are statistical and no further measurement is needed. Another traditional method of rewarding performance is piece rates. Unless related to a reasonable time frame within which the production should be completed, such rates would not be related to performance. There are several weaknesses in certain types of incentive pay such as piece rates: • It is not often easy to agree with workers on the standard required output; • Frequent changes may be needed in the standard output due to technology changes, and this invariably leads to disputes; • Factors other than individual performance affect output e.g. new work arrangements; • Where team work is an organizational goal, individual incentives can be counter- productive; • Piece rates can generate conflict and be divisive. Employees often wish to lower the standard output. Conflicts between different work groups occur when one group is dependent on another. There is a potential for conflict when norms have to be revised. • Piece-rates could be a disincentive to employees developing more productive work methods. Generally speaking, many incentive schemes are more appropriate to measurable repetitive tasks. They are not suitable for high technology and service activities requiring information- sharing, problem-solving and team work.
  • 13. 13 Group Incentives and Productivity Gain-Sharing Group incentive schemes are of three types. Gain-sharing refers to a compensation system which divides between the employer and employees the results of improved performance consequent upon the better use of human resources resulting in productivity gains. Sharing is according to an agreed, pre-determined formula. A second type, namely, profit-sharing, gives employees a share of the profits. A third type is employee stock ownership plans (ESOPS). Sometimes bonuses are paid to individuals based on their own performance appraisal ratings. In the case of group incentives, the criteria could be either group or enterprise performance. The necessity for objective criteria for distribution of the performance component of pay, and a clear relationship between what is paid and the criteria, are important. Productivity gain-sharing is practised by the larger Japanese companies. Their system is based on the premise that basic to successful productivity enhancement in the long term is sharing productivity gains with employees by linking a part of earnings to productivity to achieve such multiple goals as • increasing labour productivity, • improving employees' living standards, • strengthening employee commitment, • improving labour-management relations, • securing flexibility in labour costs, • maintaining corporate viability. In the Japanese system a part of productivity gains is shared with the employees through the collective bargaining process on whatever criteria are applied in collective negotiations, and part through the gain-sharing system. The amount distributed in recent years through the collective bargaining process and the gain-sharing system in manufacturing establishments with more than four employees has been about 35% of value added. The two mechanisms - collective bargaining and joint consultation on gain-sharing - have supplemented each other, and have contributed to establishing a consensus on criteria for pay increases. The component linked to productivity is paid in the form of a bonus, which in years before the recession, represented approximately 3-5 months' pay. About one-third of companies employing 30 or more persons have productivity-linked schemes. The percentage has been much higher in the larger companies. Some companies combine productivity and merit rating. For example, a part of the increase may be a fixed amount to guarantee a fixed payment, while the other part is linked to productivity but distributed on a merit rating arrived at through the joint consultation system and reviewed annually. Distribution of the productivity bonus may be direct to individuals, or first to the department or unit based on its performance level.
  • 14. 14 In Japan participation of employees in formulating and monitoring formulae has enabled them to: • understand downturns and upswings in business cycles, • take a long-term view of growth, • be motivated through the opportunities offered them to influence the schemes, • achieve a common understanding of issues important to gain-sharing, such as, - concepts and measurement of productivity, - the relationship between pay and productivity and past trends, - estimates of labour costs and share, - productivity improvement methods and targets, - appraisal of the system. In general, gain-sharing systems are based on a participatory approach, and can be used to create or reinforce participatory practices. Evidence indicates that such systems • improve coordination, term work and knowledge-sharing, • satisfy social needs (through participation), • focus on cost saving, • facilitate changes (e.g. in technology) needed to improve performance which are seen as being directly related to higher earnings; • result in expectations by employees of better management and planning, • result in contributions of ideas by employees. Profit Sharing These schemes are not related to an individual's performance, but are linked to the profits of an enterprise, a part of which is paid as a bonus to the workers. It may be a cash payment, or a deferred payment kept, for instance, in a special fund for a particular period. There are numerous types of schemes in existence. It has been estimated that by 1988 about half a million American firms were operating profit sharing schemes. Long Term Incentives Long term incentive plans are operated, especially for executives, both as an incentive to improved performance and in order to reduce fixed costs. Examples of such schemes are: • share option plans to promote convergence of stockholder/executive interests, • bonus linked to long term performance (3-5 years) to encourage a focus on long term goals. In the 1980s stock ownership plans (ESOPs) in U.S.A. normally included only executives, while in Japan they usually excluded executives. A lower rate of termination of ESOPs in Japan contrasted with a higher rate of terminations in the U.S.A. Performance Bonus This type of bonus can be based on individual or group performance. Where it is individual based, the payment would depend on performance ratings. Since the 1980s there has been in the U.S.A. an increase in union agreements substituting bonuses for traditional wage increases.
  • 15. 15 In many countries performance bonuses are commonest for executive staff. It is estimated that in the U.S.A. about 97% of the large and 86% of the medium sized companies pay such bonuses to their executives. In Western Europe the estimate is about 70% and in Singapore about 66%. As a percentage of base pay, the figure is highest in the U.S.A., though the variations are also large. Some of the criteria for the success of such bonus payments are: group over individual performance, the existence of objective criteria for distribution, and the fact that such criteria are capable of measurement to ensure that what is paid is related to it.