Traditional Bases for Pay:
Seniority and Merit
Jayendra Rimal
Seniority and Longevity Pay
 This type of pay rewards employees with increase in base
pay according to the length of service.
 This type of pay rewards employees for acquiring and
refining their skills as indicated by seniority.
 Organizations assume that employees become valuable
with time and may choose to leave if they do not have an
idea that their pay will progress over time.
 In unionized organizations where collective bargaining is
undertaken, seniority usually is a criterion when transfer
or promotion are considered.
 Seniority is usually prevalent in government jobs as it
essentially provides automatic pay increase and
performance assessment tends to be subjective rather
than objective.
Seniority and Longevity Pay, contd…
 This type of pay is opposed by the private sector (unlike
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government) as they have to face increasingly competitive
markets.
Other influences like technology and skill deficit is forcing
companies to have strategic orientation towards compensation.
Seniority pay rewards job tenure through permanent increase in
base pay but employees also reach maximum pay rates for their
jobs over a certain period of time.
Longevity rewards employees who have consumed all grades and
have reached the maximum pay limit. It could be as a percentage
of base pay, flat amount or step increase. This is use as an
incentive.
Advantages of tenure based pay are that employees perceive
they are treated fairly.
For employers it facilitates administration of pay. Employers are
less likely to offend employees by showing favoritism because
seniority is an objective measure.
Merit Pay
 This assumes that compensation over time should be
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determined by differences in job performance.
This rewards excellent performance, motivates for
future performance and help retain valued employees.
This type of practice is prevalent in the private sector.
Based on subjective and objective appraisals by
evaluating how well workers perform relative to set
standards.
For it to succeed, employees must know that meeting
standards will result in pay raise.
Job requirements must be realistic and employees must
have the required skills.
In addition to commitment from top management, jobs
must be designed in such a manner that performance can
be measured accurately vis-à-vis set standards.
Performance Appraisal
 As effective performance appraisals drive effective pay
programs, there has to be a clear link between them.
 It is also important that appraisals are administered successfully
while professional skills should used in designing and implementing
them.
 Some performance appraisal plans:
 Trait system asks raters to evaluate traits such as quality of work,
quantity of work, appearance, dependability, cooperation, initiative,
judgment, leadership, creativity etc.
 Comparison system evaluates an employee’s performance against the
performance of other employees through various methods. e.g.
comparison system, forced distribution and paired comparison.
 Behavioral system rate objective job performance behaviors, e.g.
critical incident, BARS and behavioral observation scales (BOS).
 Goal oriented system – possibly the most effective performance
appraisal method as supervisors and employees determine objectives
that the employee is supposed to meet.
Essentials of Pay-for-Performance
(From Management Techniques by Michael Armstrong)
 It should fit the culture of the organization
 The reward is clearly linked to the effort
 The reward follows the accomplishment which generated it
 Employees can influence performance by changing behaviors
 Employees are clear about targets and performance standards
 They can track performance against these targets/standards
 Fair means are available for measuring performance
 The reward is closely linked to and proportionate to the effort
 Employees expect that high performance will lead to rewards
 The PFP is carried out through a easily understood formula
 Provisions should exist to amend the formula when required
 Constraints are built into the scheme whereby employees cannot
receive inflated rewards not related to performance
 The scheme is properly designed installed and maintained
 Employees are involved in the development and operation of
scheme
Strengthening the Pay-for-Performance Link
 Link performance appraisal to business goals
 Analyze jobs
 Communicate
 Establish effective appraisals
 Empower employees
 Differentiate among performers
Limitations of Merit Pay Programs
 Failure to differentiate among performers
 Poor performance measures
 Supervisors’ biased rating of employee performance
 Lack of open communication between management and
employees
 Undesirable social structures
 Factors other than merit
 Undesirable competition
 Little motivational value
Any questions?