New day, new way, new pay? HR Management

This discussion indicates that early PBR mechanisms, discussed above, were in some respects aiming at the wrong target. By concentrating simplistically on the cash nexus they avoided more complex motivators which determine the effort side of the bargain. The realisation amongst managers and academics that the application of greater levels of effort could be achieved more effectively by the application of methods other than money led to the development of a wider discussion.

By the 1980s it had become clear that the traditional (old pay) systems were not effectively delivering in terms of key organisational goals. The developing HRM rhetoric and the more apparent interest in business performance led HR managers to reassess the role of reward management in the delivery of organisational efficiency. As White and Drucker (2000) note, these developments have been escorted by broader economic and social changes which challenged the belief in traditional personnel practices.

Within this process of change, reward management underwent a metamorphosis of major proportions in that it was no longer simply about rewarding people for previous attainment but became linked to future performance. According to Armstrong (2002), reward is now ‘about how people are rewarded in accordance with their value to the organisation’ (2002: 3) and as such can no longer be seen as the mere administration of set procedures and policies.

From this perspective the development of HRM has led to an evaluation of reward systems in an attempt to link them more effectively to organisational strategies (fitting in with notions of strategic HRM). Reward strategies, then, are viewed as a key organisational contribution and a central element in the work of HR functionaries. As we can note from the models and maps of HRM (see Chapter ), reward systems are seen as one of the four key policy choices (Beer et al., 1984) out of which organizations can aim to develop commitment, competence, congruence and cost-effectiveness, while Storey (1992) indicates reward management as one of the points of difference between personnel and HRM.

The old mechanisms, including graded spines based on job evaluation, are considered inappropriate in modern business. Rewards, or more precisely reward strategies, are seen as techniques which organisations can apply in order to secure various behaviours and values. Millward et al. (2000) note that in 1990 the major influence which determined pay settlements in organisations where collective bargaining was not dominant was individual employee performance (2000: 207); by 1998 the focus had shifted, with the main influence in this group of respondents being economic factors and more recognition of limits set by higher authority (2000: 211).

These changes have not resulted in reward systems which are any easier for workers to understand or that are less complex than their predecessors. That reward management developed in a manner which encouraged this occupation of a position of central importance has various causes. As we noted above, control of costs is at the heart of managerial responsibilities and, within that, control of the labour costs is fundamental to organisational performance.

Further, we have suggested that reward systems form part of the employees’ notion of organizational justice and as such underlie a sense of loyalty. This simple statement needs unpacking in terms of the manner in which policy and practice have developed as a result of these changes. In the 1990s, US writers (Lawler, 1990; Schuster and Zingheim, 1992) offered concepts they labelled ‘new pay’ as a prism through which we can view these changes.

The central idea is intended to signify the realisation that reward strategies have to relate to organisational culture, values, aims and strategies, which in turn must take into account the challenges of a modern economy. As Schuster and Zingheim (1992) note, the rudimentary elements of ‘new pay’ include an acknowledgement that employees form a core ingredient in the recipe for organisational success. They suggest that the change cannot be one of rhetoric (from reward to compensation) alone but must also be demonstrated in the design of ‘total compensation’ packages which consistently reward required actions and attitudes.

They indicate that a key element in such a total compensation package is variable pay, suggesting that pay remains a crucial mechanism for sending messages to employees in regard to the managerially desired effort levels. In this light, reward strategy needs to be integrated within wider organisational and managerial processes rather than being viewed as a ‘bolt-on’ optional extra. This whole package approach means that all elements (base, variable and indirect rewards) need to support each rather than compete for supremacy.

Base pay remains the foundation of the policy and should be set in line with organisational and societal norms in order to ensure ‘felt justice’ across the organisation. Alongside this element, however, the organisation may develop variable elements which do not become permanent, remaining subject to criteria related to either individual or organisational performance. These variable elements can therefore go down as well as up, addressing the issue of wage rigidity which adds damaging costs in periods of downturn.

There are a number of means by which this variable element can be determined but they are often grouped under the generic term performance-related pay (PRP), indicating that the measurement of such performance may be based on the individual, the team or the organisation. In this section we begin with consideration of the organisational element commonly called profit-related pay. The underlying idea in the introduction of such a variable element was that employees would identify more readily with organisational goals where part of their compensation package was linked to ‘profits’.

In simple terms, when the organisation did well they would share in the gain and, therefore, would share the suffering in bad times. This may work where employees can be encouraged to swap a percentage of their base pay for this variable element but many organisations introduced these schemes as additional to existing compensation levels (see Kellaway, 1993). Current research looking at these schemes indicates two main findings:

  • They have some positive impact on performance.
  • Employees can view the rewards as unrelated to individual performance. (Source: Freeman, 2001)

The second point is reason enough to move towards systems which apparently reward individual performance more directly. This has been achieved by the introduction of schemes which are based on modern job evaluation and grading schemes within which the compensation increases the variable element rather than the base as in the past. Modern organisations focus such grading schemes within notions of competencies.

In this world-view competency can be defined as an underlying characteristic of an individual which is causally related to effective or superior performance in a job.(Mitrani et al., 1993: 5)
From this we could suggest a list of competencies which would include:

  • leadership
  • communication skills
  • presentation skills
  • interpersonal skills
  • workflow management
  • adaptability
  • customer service. (Adapted from Gooch and Cornelius, 2001)

Competence-based payment (CBP) schemes have grown alongside the interest in variable compensation. HR functionaries have expended significant time and energy in the development of ‘competence frameworks’ which link pay to the achievement of specific behaviours, attitudes and the attainment of required competencies. This differs from traditional ‘pay-by-skill’ in that it is applied across the organisation to all workers (rather than just the traditional skills) and the required ‘competencies’ are somewhat broader than the definition of ‘skill(s)’.

This breadth of definition allows the application and adaptation of traditional job evaluation schemes by taking into account current changes in the organisation of work and the utilisation of new technology. Thus job evaluation techniques were rescued from decline by becoming more flexible, broader in coverage nd applicable to modern multi-skilled workers (Pritchard and Murlis, 1992). Hastings and Dixon (1995) suggest that CBP systems can take three major forms in which the attainment of indicated competencies is:

  • the basis for progression within scales;
  • the basis upon which the scales are founded; or
  • the basis both for progression and for the scale.

Whichever system is applied, a main advantage lies in the versatility available for organizations to set their own ‘characteristic set of knowledge, skills, abilities and motivations’. In recent debates much of the attention has turned to discussion of a contract which is unwritten and yet seen as being equal in relation to influence as any written terms and conditions. The psychological contract is seen to underpin all reward and performance management systems in that it conceptualises the wage/effort bargain for a new generation of workers and owners.

In the following section we consider the formation of the contract and identify the ‘agreed’ terms (if such they can be called) forming the basis from which human resource managers seek to develop performance norms, organizational values and note the psychological contract as a mechanism in the continuing strategy to encourage ‘men [sic] to take work seriously when they know that it is a joke’ (Anthony, 1977: 5).


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