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Effect of Market on Pay Rates and Structures

Info: 5427 words (22 pages) Dissertation
Published: 11th Dec 2019

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Tagged: Economics

Executive Summary

This assignment is based on two parts. Part A is focused on what is happening in the market of pay rates and structures. How management decide to pay to their employees and factors affecting the pay systems? Part A is mainly discussed on the factors that affecting to the pay rates in organisations. The role of management to deciding the pay structure and the system, they should follow to decide the pay rates. It consists of many illustration and examples in the way of case studies. It includes an overview of the scope in reward management, a description of the factors of pay rates coming in this context. The careful review and analysis are performed on deciding the pay rates, the conclusions are judged with suitable references and examples.

In part B of this assignment, the topic of dismissal is discussed. The types of dismissals procedure and the methods of managing the dismissals in organisations. In this assignment, we discuss the need of the dismissals and how to manage it properly. The is supported with literature reviews and case studies. What is the affect of the dismissals on the employers as well as employees and how society is affected by this? This part will discuss on fair dismissals and the legal aspects of the dismissal process.

Part A

Do you think “management freedom of action in deciding relative pay rates is constrained by the product market, the labour market, collective bargaining, technology and the internal labour market ” Discuss and debate. What factors should management consider in your opinion? Substantiate with many examples.


The skills of managers had explained that there are several ways of connecting different types of efforts and rewards relying on what is being occurred and by which method. There are many varieties of pay distribution structure. Payment by outcome plans of different types, system then connect time-related encouragement to achievement criteria group and individual schemes, bonus plans relates to plan outcome. Sometimes payment systems are determined to work in some conditions but not in all. Sometimes, management's experience with the payment system is not planned in a proper method to show which payments are suitable for which situations, its objectives?

The management indicate to some of the characteristics in choosing proper payment systems such as- product market, labour market, trade unions, technology and the expectations and manners of workplace. There are further factors which also need to be considered by the management while deciding or modifying the pay system. Each factor is present in every situation, but differs in their application depending on the time and situation. The management should organise systematically the payment systems and would require a method of calculating the differences applied in these factors.

The management's experience need a process of designating payment schemes in such a manner that it should match with the conditions. Although, there is no specific criteria or any particular system designed, which can provide management to classify payment systems, especially to help at the time of choosing payment system. Also there is no particular format or method which is available to suit unusual or unpredicted situations. It has been said that when basic necessities are satisfied, like food, shelter, clothing, then other higher needs comes further. Therefore employees expect from the management to redefine their jobs, so that their jobs can be enlarged and they get work promotions, which could enlarge their range of skills. There is need for training to enlarge the skills of employees, which they expect more from the management's side to be classified as continuous process. Management have to deal with all these problems. Firstly, they have to classify the schemes and motivate the workers. Secondly, they have to add the procedure that provides them opportunity of the design of organisation. Thirdly, to add the aims of the managers which they would need to set themselves. Consequently, there are many other factors while discussing the pay rates by the management.

Pay Structure

The time, management selects the pay rate for their workers, they have to choose how they will reward them. The system's transparency is the basic key to make certain that everyone knows the system of their payment calculation and on what basis they are receiving their bonouses or enhancements.

What is Pay Structures?

According to Armstrong and Brown, Definition: “Pay structure gives a structure for managing base pay and other aspects of reward”

Some main types of pay structures are

  • Traditional graded structures
  • Broadbanded structures
  • Graded pay structures
  • Job families
  • Mixed model ( broadbanded and job family)
  • Pay spines
  • Individual job structures

In many organisations, there is lack of formal pay structures and they use ‘spot rates' for different jobs or people. There is no scope of progress in pays, just what they think at that time the pay should satisfy minimum needs for the workers & that will be the pay of that worker. For example, Thistle Hotels acquired a market-driven spot rate approach. According to the authors, in the UK ,there are great numbers of organisations with less than 100 employees have no formal pay structure, just what they think at the time of the appointment of the employees, they are worth, that will be the pay structure of them. But in other big organisations, they use the formal structure of pay which

  • Appoint pay scales grouped into grades.
  • Progress the actions for pay progression.
  • Specify the criteria on which individuals or jobs can shift between grades, bands or levels.

Factors Affecting Pay Rates

Managers freedom of action make manager more flexibility in determining an employee's pay rate within a specified salary range. With this flexibility comes accountability, however, requiring managers to apply sound judgment using a set of established pay factors to justify an employee's rate of pay.

Salaries are “managed” normally around market rates depending on departmental needs, the work unit's needs, and budget availability or constraints. Applicant and employee situations may make one or more of these factors more important in determining the pay rate. Managers may also consult with Human Resource staff experienced in applying pay factors as a resource when making pay decisions.

There are primary pay factors to consider when making a pay decision in career. Those pay factors are described below.Pay decisions should be made fairly taking into consideration all of the following.

There are several things and issues which management to kept in mind because these issues are important and core issues could make a impact on management in terms of relative these core issues are under.

On first stage we need to discuss these issue then after that recommendations could be make easily

1) Labour market:

In labour market, labour organization is usually showed as a complication for adjustment. But responses of unions are aggressive opposition to acceptance or even explicit cooperation. There are three main characteristic responsible for this kind of events. These are mention in the below diagram.

A) Strength of labour movement:

In industry, the labours an aggressive attitude on wages tends to be associated with relatively strong unions. As expected, the small or week unions are less aggressive. The large or powerful unions are more responsible because they are greatly participation in discussion and decision making at the national level. On the other hand in the developing countries this kind of formality is totally different. Only a few unions have strong labour movement and among this the aggressive attitude is common.

B) Economic Cycle:

In the developing as well as industrial nations, the depression is reduces aggressive attitude of labour regularly.

C) Political institutions:

The nature of the political command is only associated with how governments handle labour relations. More important things are that behaviour of labour unions towards the nature of political party and how these unions are connected with these parties. The workers' cooperation is related to those things which encourage the business to invest. The current sacrifices will ultimately relate to future gains or profits. (Booth, A. (1995), The Economics of the Trade Union, Cambridge, CUP.)

Case Study: Labour Market Outcomes and Trade Reforms: The Case of India*

The Policy Reforms of 1991

In 1991, modifying labour laws to enhance flexibility in labour markets was envisaged as part of the economic reform program that commence. However, the lack of harmony and political instability has postponed industrial relations reforms. A handful of changes have been initiated in recent years. For instance, as part of the restructure of unprofitable public-sector enterprises, a voluntary retirement system was institute by the government to reduce their workforce. In 2002, the government decided to modify the Industrial Disputes Act of 1947 allow companies to lay off employees without seeking its permission, if they employ less than 1,000 workers. This change is likely to impact 95 percent of Indian enterprises, provide employers with greater freedom in their labour decisions and improve labour market flexibility.

Labour Markets: Regulations and Rigidities

The informal sectors of the economy, which account for the bulk of employment, have remained outside the scope of labour laws and labour-market Institutions. Furthermore, the informal nature of employment contracts, the illiteracy of the workers, and the surplus labour in the rural economy have condemned attempts to unionize these workers. In India, Most labour laws are applicable to the organized sector. The organized sector offers what can be called “good” jobs and failure of the sector to draw out labour from unorganized sectors leads to a general decline in employment conditions.

Labour Market Rigidity

India's labour market is ranked 45th labour market flexibility in the GCR 1998. Rigidities include rigidities in the deployment of human resources, in work practices, and in wages. While India is a labour surplus economy, wages are often set at above market clearing levels, particularly in the organized sector. The downward demands on wages are mitigate by labour market imperfection such as the existence of monopolistic trade unions and minimum wages guaranteed by law. These conditions apply especially to the public sector. The government fixes minimum wages for workers in the unorganized sector. However, constitutional minimum wages have been largely ineffective in influencing wages in unorganized sectors due to weak enforcement, irregular revisions, and lack of proper indexation to cost of living.

In an economy where state-sponsored social security is nearly absent and where “good jobs” are unusual, employment security in the organized sector is of apparent value. The issue is not simply one of removing rigidities; it is also one of concurrently ensuring the economic and social security of the workers. While labour market flexibility will make possible readjustment and restructuring, it must be accompany by some kind of insurance and social security to the huge unorganized labour force in the country. Employment provided under the “Jawaharlal Rodger Yolanda” — a form of unemployment benefit where the government provides employment through labour-intensive infrastructure projects.

(Pushan Dutt, Department of Economics, University of Alberta, 2005.)

2) Product Market:

A full understanding of how product market regulation affect labour market out comes requires a systematic measurement of the channels through which these regulations affect equilibrium outcomes in various economic environments. In this framework, job insecurity generates a perverse effect on workers incentives, which shifts up the real wages schedule and may yield employment losses. Product market regulation and redundancy payments contribute to reducing labour turnover, thus easing the workers incentive constraint. Consequently, and against conventional wisdom, regulations may have a positive impact on employment, and a substitution effect may emerge across deregulation policies. Moreover, in some cases a complementarily arise between regulation in product and labour markets, both interacting to ensure more stable labour regulation.(oxford journals, industrial and corporate change, 2006)

Product market reforms can give significant economy advantages. All organisation for economic development (OECD) countries rely essentially on competition in product markets to organize product. The advantages of competitive markets over command and control system is generally recognized. It is regularly difficult to provide experiential evidence of the effect of incremental changes in the intensity of competition for aggregate economic performance. This is partly because product market competition is only one among many factors influencing key aggregate performance indicators, such as productivity and employment. OECD has a rational connection between strong competition in markets for goods and services and better productivity and employment outcomes.( Product Market Regulation and Market Work: A Benchmark Analysis, Lei Fang and Richard Rogerson, NBER Working Paper, February 2007)

Case Study:

BT- telecommunications company increase marketing response rates by 100 percent.


BT needed to identify customers' propensity to purchase and then calculate their likely competitive value once they become customers, to obtain the greatest value from its marketing budget. After creating accurate customers profiles, BT planned to develop new product targeted to specific customers groups.


BT selected PASW Modeller (one type of software) to analyze data and build exploratory models for its “business highway” campaign, which was aimed at small business customers. A higher response rates to marketing campaigns, increase product revenues, and an even greater market share for the company.


1) Improved direct mail campaign response rate by 100 percent.

2) Provided sales and marketing with a targeted “best prospects” list the once peaceful telecommunication industry has turned competitive. To retain its customers, gain new customers, and maximize sales, the company needed facts about exactly who was buying its products and services. To identify these customers, the company established a customer and campaign analysis team, headed by Senior Consultant Stephen O'Brien, within its business connections division. The team's first assignment was to model customer profiles for BT's Business Highway product, which provides small business customers with three telephone numbers, one standard and two digital, on a single line. The launch included a major direct mail campaign and national media coverage. (http://www. Financial times.co.uk, 2007)

3) Collective Bargaining:

Collective bargaining is specifically an industrial relations instrument or device for employment relationship. In collective bargaining, the union always has a combined interest for the benefit of several employees. Where collective bargaining is not for one employer but for several, cooperative interests become a characteristic for both parties to the bargaining process. Further, in labour relations involve the public interest on pay which can impact on

need to be satisfied, such as the subsistence of the freedom of association and a labour law system. The nature of the relationship between the parties in collective bargaining distinguish prices. (Sriyan de Silva, Collective Bargaining Negotiations, 199, INTERNATIONAL LABOUR ORGANISATION)

Governments are interfere in collective bargaining because the negotiations are of interest to those away from the parties themselves. In collective bargaining certain essential conditions the negotiations from normal commercial negotiations in which the buyer may be in a stronger position as he could take his business elsewhere. In the employment relationship the employer is a buyer of services and the employee the seller, and the latter may have the more powerful authorize in the form of trade union action. (Blau, F.D. and Kahn, L.M. 1996: International Differences in Male Wage Inequality: Institutions versus Market Forces, Journal of Political Economy, 104, 4, 791-837.)

The ILO Right to Organize and Collective Bargaining Convention (No. 98), 1949 describes collective bargaining as: "Voluntary negotiation between employers or employers' organizations and workers' organizations, with a view to the regulation of terms and conditions of employment by collective agreements."( ILO, Collective Bargaining Convention, 1949)

According to Marginson and Sisson. There are several essential characteristics of collective bargaining, all of which cannot be reflected in a single definition or description of the process:

  1. It is not corresponding to collective agreements because collective bargaining refers to the process, and collective agreements to the possible result of bargaining.
  2. It is a method used by trade unions to develop the terms and conditions of employment of their members.
  3. It seeks to restore the imbalanced bargaining position between employer and employee.
  4. Where collective bargaining impinges on government policy.
  5. Where it leads to an agreement, it modifies the individual contract of employment because it does not create the employer-employee relationship.

(Marginson, P. and Sisson, K. 1998: European Collective Bargaining: a Virtual Prospect?, Journal of Common Market Studies Vol 36, 4, 505-28.)

Case Study: Bargaining Power for Farmers, or The More Things Change…

Richard A. Levins is Professor and Extension Agricultural Economist in the Department of Applied Economics at the University of Minnesota.

Since the closing of the frontier in the last quarter of the 19th Century, the encounter with an increasingly dominant urban-industrial society has emerged as the major force in American agricultural development.The dramatic impact of this encounter during the last two decades has contributed to a crisis in social organization in both urban and rural areas.This crisis has resulted in intense concern by farmers and farm organizations over agriculture's changing role in the national economy. “Bargaining power for farmers” has turned into one of the leading issues in current agricultural policy discussion.

The milk holding action by the National Farmers Organization (NFO) in March 1967 dramatized, both to the general public and the national political leadership, the seriousness of the efforts some farmers were willing to make in order to achieve greater bargaining power in the marketplace.

In response to this new evidence of rural unrest Secretary of Agriculture Freeman took to the country for a series of “shirtsleeve” conferences with largely hostile farm audiences across the Midwest.Task force studies and meetings with farm producers and marketing organizations to explore the interest and economic consequences of strengthening the power of farmers to bargain about terms of sale and market prices were conducted by USDA during the fall of 1967. In his January 1968 State of the Union Address and his February 27 Agricultural Message, President Johnson recommended that Congress give serious attention to legislation “to help farmers bargain more effectively for fair prices.”

The issue of bargaining power for farmers is not new in the history of agricultural policy discussion. Farmers have long used organization as a means of improving their political and economic bargaining power.The National Grange, oldest of U.S. farm organizations (founded 1867), grew rapidly in response to the long period of rural distress in the 1870s.The Farmers Alliance Movement in the 1880s represented a second major attempt by farmers to organize themselves, an effort that led to the formation of the Populist Party in 1891.The Farmers Union, organized in 1902, drew heavily on the old Farmers Alliance-Populist movement for its leadership and support. In contrast to earlier political efforts, however, the Farmers Union placed major emphasis on achieving economic power through cooperative marketing. The most dramatic effort by farmers to achieve direct marketing power occurred during the 1920s. Farmer cooperative associations achieved protection from antitrust action through the Clayton Antitrust Act (1914) and the Capper-Volstead Act (1922). Under the leadership of Aaron Sapiro of California, national commodity cooperatives for wheat, cotton, tobacco, peanuts, and many other crops were formed.The objective was to obtain control over a sufficient portion of the entire crop to become a dominant factor in the market. Control of producer deliveries were to be achieved by means of long-term contracts with members. (http://www.choicesmagazine.org/2002-4/2002-4-02.pdf)

4) Technology:

Technology also plays an important part in terms of pay rise or relative pay rate because now a days technologies like work process engineering has minimise the labour role also because in the past labourer do so many things with hand but now a days those things could be easily done by the help of technology has some how overtaken the place of labour work .So management also bare in mind that if they are going increase relative pay or they going to invest in technological side they can save a lot of money while investing in technology. So technology also plays important role in terms of pay rise .

5) Internal labour market:

Internal labour market also plays an important part on relative pay rates because now a days even though free capital market concept but all of this some countries at present they protect internal labour market .Because now a days internal labour market peoples enjoyed more benefits instead of peoples who came from some where else .Internal labour market also gives management some so management they believes internal labour market is bit more expensive then international labour market.

6) Financial Resources Available:

Generally , it is HR staff for how much the salary will be paid to workers but there is also the responsibility of the manager as well to promote their workers. Often, when manager want to promote their staff the financial of the organization will become the challenge for the manager. Therefore manager should be aware of budget resources of all decision will be made. They have to weigh the available budget that company has against with the other factors for the best solutions. Managers should insight of the competencies and how HR used to recruit, hire, evaluate, develop, and pay their staff. The manager probably get help form consulting with HR staff for more information. Before promote any staff for more pay that is the duty of manger to make sure that the company have the budget available for that position for the promising a pay rise, which means if no fund available that is no point for manager to post or advertise for a higher position to their staff. As a managers that is necessary to work with all level position in the organization such as subordinates, upper management and most important is cousulting with HR for get the information as much as possible to decide what range of performance will be the most required for employee in each section to move from one level to another. As the employee , they have right to use their new ability or their specific competence they gain for a increase pay. Normally, if the employees who have the higher-level skills which not needed for the work the skills they have will be not considered for higher paid. Employees must be able to use their new competencies within the work unit to qualify for a pay increase. Managers must make sure that they have a plan and are allocating pay raises fairly and equitably rather than haphazardly or under changing “rules” for different employees.

7) Appropriate Market Rate:

As managers, it is crucial to understand of market labor value of particular job for making decisions about the salary. Sometimes market rate not fixed all the time therefore the manager can justify paying higher rate on some case. Managers should be aware of the competencies and skills that already listed as minimum qualifications for the job. Managers should ask HR to establish a higher Market Reference Rate that exceeds the established market rate (if verified by market conditions). HR regularly monitors market rates for certain jobs but can do special reviews at the request of managers in situations like these. Generally, management should not pay too high than the established market rate for new employees for the task that only worth for certain amount. Hence, management have to study and always updated the established market rate for each position and level that will be promoted. The best way for manager to update is to consult closely with the HR offices for market salary information.

8) Internal Pay Alignment:

Manager should attempt to equalize the pay amount of the worker at the same level, same task , same job and performing in the same unit as much as possible The manager have to make sure that the person who will be paid more than the others, will be justified by more than one factors not only the years of services. When the manager becomes aware of any possible unjustified pay inequities among peers, these inequities should be investigated and resolved or justified to maintain fair treatment and to avoid legal problems based on possible discrimination or equal employment issues. The HR office is available to assist with reviews of internal pay equity issues. Fair salary offer for new employee should be consider with the existing employee's salary and benefit package compare with the market rate. The manager may decide to make some salary adjustments. Or the manager may decide that this is not an important factor compared to other pay factors, and may not need to make any adjustments. Managers might again consult with HR staff for help in analyzing differences in pay and benefit package comparisons.

For more example, a chosen experienced applicant may be coming from another state with a comparable salary but where the cost for family health insurance was significantly less than the company rates. The manager may decide to add a proportionate increase to the salary offer to make up for the applicant's increased insurance costs. In another example, a chosen experienced applicant may be coming to us from another state with a much higher salary (above the market rate for this position). The manager decides to offer the company standard market rate salary and considers this a fair offer since the cost of living in the company area is significantly less than in the applicant's former state.

9) Required Competencies:

That is the managers duty to make sure that the staff or an applicant has the minimum qualifications of the job. Qualifications are the competencies such as the knowledge, skills, abilities and traits which is determine and employee's perform. These things are the factors of how applicants are hired and staff appraisals. Hence, it is very crucial that the competencies is expected for each person to categories their level in a particular job. Manager should make sure that any pay rates accurately reflect an employee's competency level and the correct associated market rate.

Moreover, managers have to make sure that a current staff have the minimum skills which required of the job. In filling a vacant position, the manager should consider on the level before posting and lists minimum and preferred qualifications. Also the pay range for the job at the suitable contributing, journey or advanced level. The duties and responsibilities for the job also counted for recruit employee. An applicant who only has the minimum qualification is not possible to qualify for a higher-level job therefore they can not be paid at higher level. Manager must check that the duties, responsibilities and ability are consistently applied to the correct levels. Basically, the more education and experience a person has got , the higher the level of competencies. Managers should be aware that employees' or applicants' years of experience do not always equate with levels of competencies, however. This means that two individuals working in the same class may have equal years of experience, but be at a different competency levels therefore different pay rate.

Case Study:

Pay strategy at Eastern Power plc

Prior to Eastern Power plc becoming a privatized electricity supply company, pay awards were across-the-board annual pay increases and personal progression through salary grades until the maximum of the grade was reached. Annual pay awards were based on cost of living indexes nationally negotiated between the employers and trade unions on an industry-wide basis. With the formation of independent and competing electricity supply companies, the pay system was identified by senior management at Eastern Power as an important means of demonstrating the company's new, more autonomous, market-driven nature. Furthermore, it provided a tangible mechanism for reinforcing the cultural change required of individuals accustomed to working in a large public utility.

Performance-related pay was introduced with no real preparation of the workforce and minimal, if any, training of line managers about either its intended purpose or application. During the first two years of operating PRP , the reported employee and managerial experience was far from positive. Complaints of inequitable treatment grew, many managers were uncomfortable with their increased discretion and pay decisions were frequently viewed as unfair, subjective and over-dependent on personal managerial preferences. Line management reported feeling unclear about what was expected from them in the new organization, which was reflected in the difficulty they had in setting clear and measurable targets for the employees for whom they were responsible.

At Eastern Power plc, moving to performance-based pay strengthened the power and influence of line managers in the employment relationship but it also increased their supervisory responsibilities, accountability and emphasized the importance of demonstrating fairness and consistency in their decision-making. In a rapidly changing organizational context, it may well provide an immediate means of ‘signalling a changed organizational climate' but clarifying mutual expectations of the wage/effort bargain at the level of the individual remains of paramount importance in the employment relationship. The process of achieving the desired alignment is widely recognized as complex and ‘reward management can be seen as indicative of the contradictions that exist within the discipline labelled human resource management'(Kelly and Monks, 1998:113). In part this is due to the very tangible nature of pay compared with many other human resourcing strategies. The contradictions observed in rewards policies certainly provide plentiful illustrations of a dilemma long identified in strategic human resourcing: how to elicit organizational commitment through the development of employee potential( Walton, 1985) while optimizing the use of human resources just as any other economic factor ( Storey, 1992 ).

Source: http://www.unison.org.uk/acrobat/B871.pdf

(John Leopold Lynette Harris Tony Watson , The strategic Managing of Human Resources, Prentice Hall ,2005 p 211-220)

Case study:

Smart company

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