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Pay is necessary to encourage work effort in a business. If pay is accepted as being insufficient to ensure that workers are motivated to work to their full potential, then other non-financial methods need to be considered. If managers can promote motivation without adding to the pay bill, then unit costs should fall and competitiveness increase.

Payment or financial reward systemsEdit

The most common payment systems are:

  • hourly or time wage rate
  • piece rate
  • salary
  • commission
  • performance-related pay and bonuses
  • profit sharing
  • fringe benefits


Hourly wage rateEdit

Hourly wage rate is the payment to a worker made for each hour worked. By this, the wage level is determined on how many hours did the employee work by multiplying it with the rate per hour and they are usually paid weekly.This method provides some security to the workers, but it is not connected to the level of productivity of the workers.


Piece rateEdit

Piece rate is the payment to a worker for each unit produced. The rate is fixed for the production of each unit, and the workers' wages therefore depend on the quantity of output produced.

The advantages and disadvantages of piece rate.
Advantages Disadvantages
Greater effort and faster working are encouraged. Requires output to be measurable and standardised.

The labour cost for each unit is determined in

advance and this helps to set a price for the product.

May lead to falling quality and safety levels as

workers rush to complete units.

Workers may be satisfied for a certain pay level and

will therefore not be motivated to produce more than

a certain level.

Provides a little security over pay level.

Workers are discouraged from accepting

change at work as this might result in loss of pay.


SalaryEdit

Salary is the annual income that is usually pais on a monthly basis. It is the most common form of payment for proffesional, supervisory and management staff in a business. The salary level is fixed each year and it is not dependent on the number of hours worked (time rate) or the number of unites produced (piece rate). Every job grades have different salary band per year, obviously. The higher grades will receive higher salaries, while for the lower grades will receive lower salaries. This table below shows an example of different job grades with different salary band per year.

Job Grade Salary band per year
Regional heads $50,000 - $75,900
Departmental heads $30,000 - $49,900
Office managers $20,000 - $29,000
Secretaries $10,000 - $19,900
Junior clerical staff $5,000 - $9,900

The advantages and disadvantages of salary
Advantages Disadvantages
Gives security income.

Income is not related to effort levels of

productivity.

Gives status. May lead to complacency of the salary earner.

Aids in costing (for company), to prevent

salary to vary each year.

Regular appraisal me be needed to assess

whether an individual should move up a salary band.

Suitable for jobs where output is not measurable.

Suitable for management position where staff

are expected to put in extra time to complete a

task or assignment.

CommissionEdit

Commission is the payment to a sales person for each sale made. Commissions can make up 100% of the total income, reducing security as there is no flat-rate payment if nothing is sold during a partiular period. It has almost the same advantages and disadvantages as piece rates. However, what's different is that it has a potential drawback, which is the risk that sales staff could try too hard to convince a customer to buy and put so much pressure on them that they have a bad view for the whole company. Teamwork is not encouraged with commission-based pay.


Performance-related pay (PRP)Edit

Performance-related pay is a bonus scheme to reward staff for above-average work performance. It is usually a form of a bonus payable in addition to the basic salary. It is widely used for those workers whose output is not measurable in quantitative terms. PRP requires the following procedure:

  • Regular target setting, establishing specific objectives for the individual.
  • Annual ratings of the worker's performance against the pre-set targets.
  • Paying each worker a bonus according to the degree to which the targets have been exceeded.

The aim of PRP is to provide further financial incentives and to encourage staff to meet agreed targets.

The advantages and disadvantages of PRP
Advantages Disadvantages
Staff will be motivated to improve performance.

Can fail to motivate if staff are not driven by the

need to earn additional financial rewards.

Target setting will help worked find their purpose

and direction to the work of an individual.

Team spirit can be damaged by competitiveness.

Annual appraisal offer the opportunity for

feedback but it tends to occur only once a year.

Favoritism can harm manager-subordinate relationship.
May lead to increased control over staff by managers.


Profit sharingEdit

Profit sharing is a bonus for staff based on the profits of the business, usually paid as a proportion of basic salary. The profit is shared to the workers, not just the shareholder. 

The advantages and disadvantages of profit sharing
Advantages Disadvantages

Potential conflict between owners and workers is

reduced because everyone now desire higher profits.

Reward offered is not closely related to individual effort.

Higher worker effort levels and a greater

preparedness to accept cost reduction.

Schemes can be costly to set up and operate.

The business will likely to attract better recruits

drawn by the chance of sharing profits.

Small profit shares paid at the end of the financial

year are unlikely to promote motvation throughout the year.

The scheme does not add to business costs,

unlike a normal increase in pay levels, as the

bonuses are paid out of profits.

Profit-sharing schemes will reduce profits

available to be paid to owners and to be reinvested in the business.

If workers are successfully motivated, then the

schemes could lead to an increase in overall business profitability.

Worker share-ownership schemes can

increase the total number of shares issued.


Fringe BenefitsEdit

Fringe benefits are the non-cash forms of reward, such as:

  • company cars
  • free insurance and pension schemes
  • private health insurance
  • discounts on company products
  • low interest rate loans


There are also Non-financial methods of motivation . It is recognised that money alone will not create motivation of employees.

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