Determine the methods of Making Payments
The work itself is a major determinant of whether to pay for time or output. The work characteristics to consider include:
- Measurability of output.
- The relationship between effort and output.
- The degree of standardization.
- Requirements for quality as well as quantity.
- Competitive conditions, which make it imperative that unit labour costs be definitely known and fixed before production.
Thus, depending on the work characteristics, choice of payment method can be decided. However, some of the common methods of making payments are:
- Payment by times.
- Payment by piece.
- Payment by results as depicted in following figure:
Payment By Time: According to Heery and Noon, “time rate is an of pay based on the amount of time that the employee spends at work”. Under this method (PBT), the compensation is determined on the basis of time worked, which may be hourly, daily, weekly, monthly or any other time period. This system does not take into account the output of the employees during this time. The wage is calculated as:
Wages = Time spent by the worker x Rate of wage according to time
This system is most suitable when it is possible to :
- Measure output.
- Divide output units.
- Efficiency is important than speed.
- Employee is under training.
- Very simple method of compensation payment.
- Certainty of amount of compensation payment.
- Results in high quality of output, as this method is not tied quantity of output.
- Better utilization of resources, as this method is not tied with speed.
- This method is not suitable for artistic work.
- Fosters collaborative working relationship between employees as well employee’s performance same nature of work get paid same compensations.
- Ensure proper health of employees.
- There is no incentive for efficient employees as performance is not a compensation payment criterion.
- There may be misuse of time by employee since compensation is guaranteed.
- Requires close supervision.
- Results in lack of competitiveness.
Payment By Piece Rate: Under this method (PBP), employees are paid compensation according to the quantity of output during a given time. The compensation is calculated as:
Compensations = Units of output x Rare per unit
This system is most suitable when:
- Work is of standard nature.
- Work is measurable.
- High pressure to produce more.
- Employee is fully trained.
- Encourages employees to work more.
- Increase in production.
- Efficient utilization of time.
- Less supervision is required.
- Self-justified method.
- Performance is the criteria of compensation payment.
- Decrease in cost manufacturing.
- Easy and simple to understand and practice.
Payment By Result: As the competition increase and the conditions become more stiff, organizations recognize that the best results in the shape of outcomes were, not obtained under the time-based system and with the object of controlling labor costs, commended the practice of compensation employees in according with the result they produce.
Payment by results is an approach to compensation system management that integrates strategy, people, resources, process and measurements to improve decision-making. Transparency and accountability. The approach focuses on achieving outcomes, implementing performance measurement, learning and changing and reporting performance. The aim of payment by results is to provide a transparent; rules based system for paying compensation. It rewards efficiency, supports work goals and encourages activity for fostering efficiency. This system ensure a fair and consistent basis for compensation payment rather than reliant principally on time-based payments.
The system of payment by results has emerged primarily due to the following factors:
- The customers want low prices and quick delivery.
- The organizations want large profits and repeat orders.
- The employees want high compensation and gainful employment.
- Seeks to develop employee commitment and productivity.
- Payment method is transparent and credible.
- Compensation can be easily calculated and paid
- Often the compensation is not in communication with work, outcomes.
- It poses difficulties in jobs where are difficult to measure.
- Setting job objectives is difficulty as work world is dynamic in nature rather than being static.
Paying higher fixed compensation under an employment contract where the organization pays time-based compensation is only one way in which organization might tackle work voidance in suitable where effort is difficult to monitor. An alternative is to offer a piece rate which allows the employee to decide how much to work and thus how much to get paid. Economics view piecework as a means of inducing greater effort by equating the marginal value of an extra unit of output with the marginal cost of producing it. Both economist and sociologists point to the usage of piecework when monitoring the employees have about employee productivity when monitoring effort is difficult or costly. Sociologists, on the other hand, tend to view piecework and other forms of pay for performance as a mechanism for managerial control when management cannot provide adequate supervision. Either way one might anticipate a lesser need for monitoring when piecework is in place since, as Marx said, the superintendence of labour becomes to a great extent superfluous.
Hence the compensation level, structure and systems decision involves the following design:
- Conduct job analysis on all jobs.
- Conduct job evaluation on all jobs.
- Develop job descriptions on all jobs.
- Select benchmark jobs.
- Find “best fit” line.
- Decide on the number of compensation structures.
- Develop compensation policy line.
- Place all “compensation structure jobs” in compensation structure.
- Group jobs into compensation grades.
- Implement and evaluate.