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Ch 15 Pay levels
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Introduction
the pay level is the average wage paid to
employees.
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Pay levels within organizations
Pay levels and systems within organizations andthe rates of pay
for individual jobs are affected by:
the external labour market
the internal labour market; the value of the job;
the value of the person
internal relativities;
the financial circumstances of the organization; trade union
influence;
the minimum wage
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Determinants of pay
1. The nature of the external and internal labour
market
2. Classical economic theory
3. The labour theory of value
4. Human capital theory
5. Efficiency wages theory
6. Agency theory
7. The effort bargain
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1.The nature of the external and
internal labour market
Markets consists of buyers and seller similarly
labour market consists of buyers ( employer )
and sellers ( employees ).
And there would exist internal market(organization )and external
market (
environment )
Here company will decide the pay level byconsidering both
internal and external market.
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2. Classical econom ic theory
Classical wages theory states that the external
labour market has buyers (employers) and
sellers (employees). If the supply of labour
exceeds the demand, pay levels go down; ifthere is a scarcity of
labour and demand
exceeds the supply, pay goes up. Pay
stabilizes when demand equals supply at the
market clearing or market equilibrium wage.
This is sometimes known as theory of
equalizing differences.
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3. The labour theory of value
The value of goods and services is
determined by the amount of labour that
goes into them (Karl Marx).
It is not the market place that sets prices.
Thus the content of labour determines the
price of the labour.
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4. Human capital theory
Levels of pay are influenced by the value
of human capital in terms of the skills and
expertise people possess.
Developing and training people cost
should be considered as investment.
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5. Efficiency wages theory
Higher the wage their productivity
increases, as till will give better living and
will increase loyalty to the company.
Firms will pay more than the market rate
because they believe that high levels of
pay will contribute to increases in
productivity.
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6. Agency theory
In most firms there is a separationbetween the owners (the
principals) andthe agents (the managers). Because the
principals may not have complete controlover their agents the
latter may act inways that may not be in accordance withthe wishes
of those principals. To
overcome this problem, principals mayinstall a system of
incentives to motivateand reward acceptable behaviour.
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7. The effort bargain
Workers in effect strike a bargain on the
amount of work to be done for a wage.
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Constraints in reward choices
External pay level
policy
Labour market
Demandsupply
Product market
CompetitionProduct demand
Organization
Strategyprofitability
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Factors affecting pay levels
Individualpay
levels
Financialcircumstances
oforganization
Supply anddemand
Investment inhuman capital
policies
Trade union
pressures
Internal
relatives
Inherent valueof the job
Individualcontribution
Pay stance ofthe
organization
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Pay policy
Factors affecting pay policy
1. It can be with alignment with market
2. It can be with alignment with market and
average (median rates ).
3. It can be more than market rate.
4. Between median and upper quartile.
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Pay systems
Pay systems within organizations cover theways in which pay is
structured orunstructured and the methods used to
determine the value of jobs and therelativities between
them.
Most organizations have defined pay levelsfor jobs set out in
the form of a pay
structure, which may cover the wholeorganization, or groups of
relatedoccupations (job families).
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Tournament theory
Tournament theory explains the basis of pay
dispersion. It describes a process of
increasing the engagement of high-quality staff
by offering lucrative prizes (ie pay) for a smallnumber of
people who are promoted to higher-
level jobs, with the highest prize of all given to
the person who wins the tournament by getting
the top job
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Pay dispersion
It is used by economist an inequality within the
labour market.
Pay or wage dispersion is most commonly
expressed in terms of the ratio of the 90th and10th percentile
of the wage distribution in a
given national economy.
Pay dispersion takes place when thedifferentials between
successive levels in a
grade and pay hierarchy widen progressively
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Establishing pay rates
1. Conduct salary survey.
2. Determine worth of each job
3. Group similar jobs
4. Price each pay grade
5. Fine tune pay rates.
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Prepared by : Ms. Shirufi Daruwala
