Pay And Reward Management In Practice Management Essay

Pay And Reward Management In Practice Management Essay Introduction Before undertaking a critical analysis of collective and individual pay systems and how these systems have been affected by key socio- economic changes in Britain over the past thirty years, it is important to first define the meaning of pay, reward/ reward management, collectivism and individualism. From here the author will consider the key socio-economic factors that have influenced the change in practice and look at the development of reward management within the context of personal development. Pay, Reward, Collectivism and Individualism Pay is used to denote the wages, salaries or fees paid by employers in return for the provision of labour. (Hollinshead, Nicholls and Tailby, 1999, p. 332) The concept of reward has developed over the last twenty five years and has evolved from the concept of basic pay. Reward management involves the analysis and effective control of employee remuneration and covers salary and all benefits. It assesses the nature and extent of rewards and the way they are delivered as well as considering their effect on both the organisation and staff. (Cornwell website, 2007) Reward management therefore is a strategic pay control system, which is central both to the organisation and to the management of Human Resources within that organisation. The term Reward Management was coined by Armstrong and Murliss in 1988 and they and other scholars support the view that: Reward management is not just about money. It is also concerned with those non financial rewards which provide intrinsic or extrinsic motivation. ( Armstrong and Murliss, 1988, p.12) Collectivism or Collective Bargaining is the process of negotiation between unions and employers regarding the  terms and conditions of employment  of employees, and about the rights and responsibilities of trade unions. It is a process of rule making, leading to joint regulation. (Eurofound website, 2007). Collective Bargaining is fundamentally a representative process, in which Trade Unions, who represent the employee, negotiate with key organisational personnel i.e. managers, who represent the organisation, in order to reach agreement on the terms and conditions of employment. According to the WERS Report 2004 Inside the Workplace, collective bargaining is most prevalent in large organisations. The term Individualist, Performance Related Pay or Contingent Pay is the standard term used to describe schemes for providing financial rewards which are related to individual performance, competence, contribution or skill. (Armstrong and Stephens, 2005, p.231) Socio Economic Considerations Before delving into the detail of collectivism and individualism, it is important to look at the socio-economic changes that have taken place over the last thirty years. The rise of Thatcherism and the focus on the personal society and the concept of market forces have played a significant part in the changes to pay and reward within the workplace. The Thatcherist doctrine of the 1980s was heavily focussed on curbing the power of the Trade Unions. This she successfully achieved, but at some cost to certain elements of society. Although, still significant players, trade unions are not now as influential as they once were. For example, According to the findings of the WERS Report 2004 Inside the Workplace, the decrease in the number of Trade Union representatives (particularly within non public sector and small work places) between 1988 and 2004, has lead to a decline in collective power. Additionally, the report noted that pay issues were far less likely to be discussed in workplace consultative committees, if a Trade Representative was not present. Again, this demonstrates a move towards a new pay orthodoxy. Margaret Thatcher viewed market forces as a means to promote healthy businesses and expose the weaker ones, seeking to create an entrepreneurial society, with a focus on individual success and performance. This has been the prevalent idea since the mid 1980s and has influenced workers expectations of reward. (BCC website, 2004) The following extract from the Guardian, gives a helpful summary of the economic changes brought about under Thatcher:- The Conservative economic revolution of the 1980s casts a long shadow. It broke the power of organised labour, deregulated the economy and opened it up to global market forces. Geoffrey Howes 1981 austerity budget of public spending cuts and tax increases pitched Britain into mass unemployment and helped destroy the last vestiges of the post war welfare consensus. In 1978 there were 7.1 million employed in manufacturing, by 2008 that had fallen to 3 million. There has been no significant private investment in the de-industrialised regions. They have still not recovered their social fabric or productive economies and are now sustained by government spending. (The Guardian website, February 2010) There are four points to highlight from this quotation:- The rise of individual entrepreneurialism The reduction in the power of the Unions The break-up of large organisations, both manufacturing and other industries (coal.) In such organisations collective pay settlements were the norm, if those people are now employed at all now, it is likely they are in smaller businesses, which tend not have collective bargaining. The change from mainly an industrial, manufacturing economy to one where the service industry dominates. Over the last thirty years, the standard of living in this country has increased significantly for middle and working class workers but as a consequence, contemporary workers have far higher expectations, with regards to pay and reward and want their efforts to be individually recognised. High performance workers demand to be recognised and rewarded and thus both social and economic pressures currently exist to support individualist pay systems. The Development of Reward Management Pay management systems in Britain have changed considerably over the last thirty years and many of these changes have occurred as a result of important external and internal influences on organisations. The author has chosen to focus on the work of Armstrong (1988) to carry out this analysis, as he is a renowned scholar in the field of pay and reward in the U.K. Old Pay Systems The Early 1980s According to Armstrong and Murliss (1998), these were:- Pay based on the national going rate negotiated centrally with the main Trade Unions White collar and managerial fine pay structures, created to assist promotion increases that did not fall within the norms of income policy, were often open to abuse and resulted out of decaying job evaluation initiatives Limited Performance Related Pay or incentive schemes for office, technical, professional or managerial staff Incremental increases on fixed service-related pay were the norm Senior management Tax- effective benefits The late Enterpreneurial 1980s According to Armstrong and Murliss (1998), the entrepreneurial 1980s witnessed dramatic changes to pay systems. During this period pays role changed from being viewed as a back office function to a key management mechanism for change during the formation of the Enterprise Culture. Pay systems became dominated by performance related pay and incentive schemes. Armstrong and Murliss (1998) argue that during this period reward managements philosophy developed important features which demonstrated many similarities to Human Resource Management philosophy, including:- Treating employees as organisational assets Earning the commitment of these employees to the organisations core values and objectives Allowing staff members to achieve their full potential and to contribute fully to organisational goal achievement The Post Entrepreneurial 1990s Many of the simplistic pay models implemented in the late 1980s failed to achieve their objectives (Armstrong and Murliss, 1998) New Pay Systems The 1990s saw the adoption of a more strategically focused pay systems, which are still operational in contemporary private and public sector organisations. Armstrong and Murliss (1998) noted that the main developments to be incorporated into new pay systems in the 1990s included:- People-based pay, with emphasis on role adaptability and a move towards generic roles and job families, which focus on continual development and competence The introduction of second/ third generation performance- related pay, which focuses on improving performance rather than merely rating it Determining the value of employee inputs and outputs in Performance management i.e. development and motivation Recognising the employees as an organisational stakeholder, who is included in processes which affect their parts of the employment relationship for example pay According to the findings CIPD Survey 2004 of Performance Management, (cited in Armstrong and Stephens, 2005), 56% of the 566 respondents had some type of Performance related Pay. Armstrong and Stephens (2005) argue that many people view Performance Related Pay as a key people motivator, however they argue that non financial rewards i.e. the work undertaken and the working environment form an important part of the whole reward package. However, according to the findings of The e-research 2004 Survey of Performance Related Pay (cited in Armstrong and Stephens, 2005) the main factors for using Performance Related Pay are:- To acknowledge and reward superior performance To appeal to and maintain excellent personnel To enhance organisational performance To concentrate efforts on strategic values and results The Decline of Collectivism According to the WERS Report 2004 and Edwards (2003) the declining influence of the trade unions led to the decline of collectivism, which the WERS Report 2004 noted occurred between 1988-2004, particularly in non public sector and private organisations. The WERS Report 2004 noted that By far the most common pay determination in 2004 was unilateral pay setting by management. (WERS Report, 2004, p.19) i.e.individualism. Collective Bargaining in the Public Sector According to the WERS Report 2004, despite the decline of collective bargaining, it is still used as a means to set pay in larger organisations for example, in public sector organisations, for example, in the public administration and Utilities Industries. Collective Bargaining in the Private Sector According to the WERS Report 2004, Collective Bargaining was virtually non- existent in private sector organisations, for example, the Hotel and Restaurant Industry. In addition, the report noted that collective bargaining has not been replaced by any other single pay determination method, however mixed methods were less used and varying methods of single pay determination were used across the workplace. (WERS Report, 2004) Evidence of the Decline of Collectivism in the U.K. The decline in the use of Collective Bargaining in the U.K., as a pay determination method, over the last thirty years, is clearly illustrated in Table 1, Appendix 1. The Rise of Individualism or Performance Related Pay Some of the key reasons for the rise of individualism in pay systems in the U.K. can be summarised as follows:- The Terms and conditions of staff are increasingly important Aspiration and expectation increasingly staff want to be rewarded for doing a good job As mentioned above the socio-economic factors decline of the trade unions Increased competitive pressures Increasingly market forces constraining employers discretion Driving change (in pay and reward) is the need to strengthen the link to business performance , cost control, support for organisational change and recruitment and retention pressures ( Wright, 2007) As we have moved away from Collectivism, the last thirty years has been dominated by change and experimentation. Basic pay, which applies to the collective is supplemented and enhanced by pay systems that seek to differentiate between individuals in some way. Inconsistencies in Individualism/ Performance Related Pay From the research undertaken, it is clear that contemporary pay systems, some of the features of which are noted in brief on page 7, are determined through collective bargaining or Individualism/ Performance Related Pay, the latter of which has given rise to organisation- based pay setting, which has led to inequalities in pay in the U.K. since 1980. (Edwards, 2003) Individualism/ Performance Related Pay does not apply across the board to all categories of staff. Of particular note is the disparity in packages between managers and workers, for example, The WERS Report 2004 recorded that 45% of managers had company cars, while only 15% of workers had company cars and 38% of managers had private health care, while only 16% of workers had private health care. Performance related pay matrices, as illustrated in Appendix 2, are often used to determine pay increases in relation to performance and pay range position ( Armstrong and Stephens, 2005) Managers need to apply these systems both equally and fairly and therefore, there will need to be some form of mediation with all senior managers to ensure o harmonisation and the implementation of quotas, as not everybody can be rated, as excellent, as it would cost the organisation too much money. Decline in Popularity of Individualism/ Performance Related Pay Performance Related Pay became popular in the late 1980s, as noted earlier on pages 5-7, however, numerous reasons have lead to a decline in its popularity , for example:- Performance Related Pay has become surrounded by complaints about inconsistencies, as noted above, and (therefore) bias Managers who carry out appraisals and administer related monitoring processes often lack the necessary training Performance Related Pay assumes that performance is totally in the hands of the individual, however performance is affected by the organisation/ environment they work in The qualifying criteria for Performance Related Pay demanding and difficult to achieve ( Armstrong and Stephens, 2005) Labour Research, September 2000, reported some significant failings of Performance Related Pay in the public sector, by citing IRS Pay and Benefits Bulletin Survey, which found for example, that 75% of public PRP schemes were too insignificant to motivate staff and that 29% of public sector organisations felt PRP was too costly. According to Wright (2007), the Approach has moved on from simply collectivism and individualism to refining thoughts about individualism, taking into account staff engagement, trust and commitment. There is a need to develop management when looking at the design of reward systems. Wright (2007) cites Milsome (2005), who noted from the Reward Management Symposium (2005) that reward practices are rarely based on evidence of what produces good organisational outcomes and what does not. (Wright, 2007, p.159) Pay and Reward Today According to the CIPD (2010) Today the notion of linking pay to a wider definition of employee contribution is gaining ground. This emphasises not only performance in the sense of output (the end result that is achieved) but also the input (what the employee has contributed in a more holistic sense. (CIPD Website, 2010) It could be said that these developments demonstrate a more rounded and fairer approach to measuring individual performance. The CIPD (2010) refer to a members poll, carried out in March 2009 to gauge the effects of the economic crisis on performance management. It is significant to note 92% of the respondents believed there had been an increased level of performance management in general, 88% of the respondents felt that it was necessary to re-evaluate performance measures to replicate the more demanding work environment. With reference to rewarding performance, 63% of respondents felt that it was harder to reward good performance in the current climate and 90% of respondents felt that reward performance should include the use of increased levels of non-financial incentives. (CIPD, 2010) The results from the CIPD members poll clearly demonstrates the continued importance of performance management but it does also highlight that the current economic crisis has and is likely to continue to affect Performance Related Pay. Conclusion It is true that collectivism has declined and individualism has increased but it is not as simple as one approach replacing the other. Collectivism really started to decline in the Thatcher years with the destruction of the trade unions power and the support for individual endeavour in an attempt to improve the UKs economic performance. Thatcher was a great believer in meritocracy and open competition. This lead to the rise of the importance of the individual. Over the years we have seen this develop from being just about Pay to encompassing the wider concept of Reward (e.g. longer holidays, flexible hours, private health, etc). In the early Eighties this type of Reward was the preserve of Managers, but is now applied at many different levels. This has been strengthened in recent years as a result of two key factors: (i) two recessions within the space of 20 years where companies have struggled to find ways to retain and reward skilled employees other than the traditional financial remuneration, (ii) the changing face of the UK industry from manufacturing to services. However, Collectivism still has its place in larger public organisations and some private ones, particularly where it is very difficult to differentiate between the performance of individuals doing exactly the same lightly skilled jobs, and where the going rate for the job is still a valid concept. Although Individualism does dominate, it has itself developed again in the last 15 years where it has moved from pure Performance Related Pay to systems which are more objective in their assessment and also endeavoured to focus on staff improvement and development. Bibliography:- Armstrong, M., and Murliss, H., (1998.4th ed.) Reward Management : A Handbook of Remuneration Strategy and Practice, Kogan Page, pp.1-57 Armstrong, M., and Stephens, T., (2005) Individual contingent pay, in Employee Reward Management and Practice. London, Kogan Page, pp.231-254 BBC News, Retrieved, 2nd January 2011 from http://news.bbc.co.uk/1/hi/uk_politics/3681973.stm, Cornwell website, Retrieved 7th January 2011 from http://www.cornwell.co.uk/people_management/reward_management.asp CIPD (2010) Performance Related Pay Factsheet, Retrieved 10th January 2011 from: http://www.cipd.co.uk/shapingthefuture/_eccrsplrst.htm?IsSrchRes=1 Eurofound website, Retrieved 6th January 2011 from: Edwards, P.,( 2003 ed.) Industrial Relations, Oxford Blackwell Hollinshead, G., Nicholls, P., and Tailby, S., (1999), Pay, in Employee Relations, London: Pitman Publishing, pp.332-377 Kersley, B., Alpin, C., Forth, J., Bryson, A., Bewley, H., Dix,G., And Oxenbridge, S., (2004) Inside the Workplace, First Findings from the 2004 Workplace Employment Relations Survey ( WERS 2004) Labour Research Department (September 2000) Performance -related pay failing in the public sector, Publications Online for Amicus members The Guardian (2010), Retrieved on 2nd January 2010 from: http://www.guardian.co.uk/commentisfree/2010/feb/28/economics-conservatives-legacy-housing-election Wright, A., (2007), Through a Glass Darkly: problems and issues in reward, in Porter, C., Bingham, C., and Simmonds, D., (2008), Exploring Human Resource Management, McGraw Hill. London, pp.159-177 Appendix 1 The Decline of Collective Bargaining in the U.K. Membership % of Density % Covered by Collective Bargaining 1979 13 million 59 70 1997 7.8 30.2 33.3 2006 7.6 28.4 35.3 Constructed from data provided through the Workplace Industrial Relations (and Employee Relations) Survey series 1980-2004 and a certification Office report for 2007