Should Wages Be Tied More to Seniority or Performance?

Background

Organizations, whether profit-making, governmental or nonprofit, require human resources for their operations. Workers engage their mind, time, expertise, and intellectualism in their works; they expect to be compensated through wages, salaries, bonuses, and non-cash benefits. According to an employment agreement, an employer and employee are obliged to respect labor law in the country of operation and uphold employment-contract terms and conditions. Developing an efficient team is the role of personnel management assisted by top and line managers; it starts with human resources planning to appraisal, motivation, rewards, and ends with the termination of an employment contract.

Terms of employment vary with organizations and so do human resources practices like selection, contracting, and recruitment. One of the major functions of the human resources department is developing a compensation strategy that satisfies all the employees irrespective of their rank, an effective reward strategy should be able to trigger motivation and increase the zeal to work hard in an organization. When developing a reward strategy, the main problem that human resources managers have is to decide whether compensation should be based on seniority within the organization or performance (Harold & Michael, 1994). This report supports the argument that compensation should be gauged on employee performance and not on the seniority of employees.

Employee’s compensation and wages

Employees sell labor and their intellectualism to their employer; at the end of a certain period, the employer is expected to compensate employees for the work done; the employment contract specifies the rate of pay as well as any benefits thereon. Employment is a legal engagement where the employer engages an employee for consideration. Wages and remunerations are among the financial gains that an employee stands to benefit from his employer. According to Milkovitch and Newman, 2006, there is a difference between pays and compensation, compensation goes further than financial returns to include other tangible and non-tangible benefits that an employee receives by virtue that he or she is working for a certain employer. The tangible and non-tangible benefit includes paid leaves, insurances, loan agreement policies, and sick leaves. In most organizations, labor cost constitutes a large portion of the organization’s budget; when it comes to a company’s performance, wages that an organization pays affect the company’s competitiveness, directly and indirectly, it supports the strategic plans and actions developed within the organization. In labor-intensive industries, the cost of labor is high than in capital-intensive industries (Milkovich & Newman, 2006).

Some internationally recognized labor laws give minimal direction to the wage rate payable in certain industries; they are developed with an agreement with domestic governments after considering the nature of the industry and its benefits to the international community. If a company is in an industry regulated by international labor laws, then its human resource management has the role of enforcing the policies. Different countries after considering their economic standing have set some regulations of wage rates payable; domestic legislations are concerned with minimum wage rates, which all companies operating in the economy are expected to have. Other than defining the wage rate, legislations define the working hours and what should happen to an employee in case the hours prescribed in law have been surpassed (Chong, Keng-Boon, Binshan & Pei-Lee, 2010). When an employee gets into an organization, the salary agreed with the employer is gauged on some attributes agreed by both parties, the employer may be offering a certain payment scheme that an incoming employee has no option other than to respect or may have an open structure that allows for negotiation.

Wage rate at entry level may be gauged on current organization performance, however, external factors that contribute to the general performance in the industry should be considered, such factors include, the risk of the industry, participation of domestic and national government, and the supply of expertise required in the sector. The major aspects that are considered when gauging entry-level wages are the prevailing economic situation in the country, domestic labor laws, and international labor laws. After employee’s engagement, wages should grow with the performance of an employee; the human resource should have elaborate policies that facilitate the growth in wage rate, this is done through periodical salary reviews, performance bonuses, and promotions. Human resource management should plan their wage structure in a way that motivates the employees; motivated staff record higher performances. When payment for performance strategy is used as the basis of gauging employees’ wage growth rate, then employees will be motivated to work harder.

Wages for performance as motivators

A company with an effective wage rate system has its wages divided into two main areas:

  • the wage for employee’s performance
  • The wage for retaining the employee for their competence.

This differentiation may not be differentiated in the payslip but at the back of the employer’s minds, the difference should have been addressed accordingly. Wages have emotional and psychological effects on employees, they communicate the value that an employee has in the company as well as the willingness of the employer to retain his employees. When wages are linked to performance, employees will be willing to go out of their way to better their performance in anticipation of higher returns. When employees are aware that their employer will reward their efforts, they get motivated to work harder in anticipation of high returns. High compensation for efforts made creates a system of mutual benefit where the employee gains on one side and the employer benefits from the other.

Psychological contracts affect the attitude held by employees have towards their employer, to develop and reinforce positive attitudes, employers should aim at fulfilling their part of the contract; employees will follow suit. Psychological contracts affect the way employees relate to the company/employer. The fulfillment of employment contracts has an impact on employees’ satisfaction, commitment, and behavior of employees: since employees believe that when they are paid higher, the organization appreciates and recognizes their presence. The nature of human beings is that when one feels appreciated, he/she works harder and is more satisfied with his work; with these psychological notions, organizations should have an effective rewarding system. According to Guest, 1998, the contract that exists between an employee and employer can be summarized that the employer expects maximum efforts from the employee and the employee expects to be compensated for his efforts. When this contract has been fulfilled, then an employee can have more confidence and need to stay with his employer even longer. Pay affects the motivation and productivity of employees, as they employees are more willing to have satisfied their employees if they have been compensated effectively (Lingling, Jun, Yong & Xiaohui, 2009).

When employers compensate performance, then staff are motivated to work harder and remain loyal to their employer. According to motivational theory by Victor Vroom of Yale School of Management called Expectancy theory, employees are motivated by the benefits they get from their employer: When they get higher returns, they are likely to improve their performance to the benefit of the employer. The theory tries to relate the ways human resources can be motivated in their day-to-day duties. Motivation is the drive an individual has; it makes him persevere to attain set goals either in life or in an organization. People have different personalities and so do different things that motivate them. One motivator is not static but changes with among others age, economic status, and social status; motivation is a continuous process; attainment of one-goal leads to another goal and a different motivational system. A motivation system/process is a combination of a variable with the expected result as an increased enthusiasm and morale in one work. Expectancy theory believes that employees perform better when they realize that their efforts will be rewarded and recognized. The theory relates three relationships that can be tied to wages and compensation: Effort-performance relationship, Performance-reward relationship, and Rewards-personal goals relationship.

The effort-performance relationship is where an employee needs to be recognized when they have done something good; for example, if an employee has innovated better ways of doing things, he needs to be motivated either monetary or non-monetary. This will motivate him to work harder and innovate more alternatively, he will be a challenge to others to innovate so as they can benefit from recognitions set aside. When wages are used as the means of motivating employees, then they need to be sensitive to the performance level that an employee has; when the performance is high, then the employee expects to be paid higher. It is also expected that a company will benefit from high-performing employees thus when it pays higher wages, it can be argued that it is only paying from the position that the employee has contributed to the company. If only the outcome of a certain section can be attributed to a certain employee then his salary should be a factor of the gains that a company gets forms an employee’s efforts.

The performance-reward relationship gives a connection between a reward and performance, it reasons from the angle that if employees when appraised are rewarded accordingly, they are likely to be motivated and produce more output in anticipation of rewards. From this angle, efficient management should maintain a well-structured appraisal method that recognizes and reward performance. On the same line, there should be punishment mechanisms that ensure that those people who do not perform are warned.

In the Rewards-personal goals relationship, the focus is more on an individual. It aims at rewarding one’s talent, expertise, or professionalism that adds value to an organization. If rewarded it encourages creativity, innovation, and exploitations of one’s talent as one anticipates high reward. Employees expect to be compensated for their efforts within the organization; they have some personal goals they need to fulfill with the works of their hands. When they know that if they work for the hand they will be paid for performance, they are motivated to work harder and attain their expected personal financial benefits.

According to traditional theories of motivation (theory X and Y), Sigmund Freud in theory X believed that people are generally lazy, they hate working. In the theory, the assumption is that people only want security and if they have to work, they have to be rewarded. According to the theory, people have no internal drive to work. Motivation must be induced from an outside source; rewarding employees for their performance is seen as a motivation to work. Other than rewarding employees, to keep them in course with the expectations of a company/organization, a punishment system within the organization should be implemented. People are not to be left free and expected to produce results but must be supervised and reminded of their duties. The theory emphasizes that people given a chance cannot work, they need to be given the drive to work and be loyal to their employers; the theory suggests that to offer a good working environment, an employer must consider offering good and attractive packages to their employees. The theory seems to illustrate that if employees are continually rewarded, then they can have an ending working life: their internal drive will drive them to work harder for the organization.

Theory Y that was developed by Douglas McGregor is in contrast with Sigmund’s theory. Douglas McGregor believed that people generally are hard-working and enjoy earning a living through working hard. In this theory, the drive that people have is internal; they have a self-drive, are self-motivated, and are creative to make better ways of making their work easy. Managers in such a society only need to monitor but not control employees. Creativity and innovation are facilitated by creating a better working environment. A Reward system is seen as an additional motivator to a person performing his/ her duty. Despite the standpoint taken by theory Y, supporters of the theory believe that despite people being hard workers, they need to be fueled to increase their productivity and enhance their contribution to the welfare of their company.

Wages for performance as workforce retaining strategy

As physical assets are maintained through regular repairs and upgrading, human resources need to be maintained with effective human resources policies; maintenance of human resources is an expensive practice that needs to be planned by the employer. When employees enter an organization, they grow and develop some skills required by the employer, they understand the industry enhancing making relevant decisions, if an employer was to lose an employee after a certain working period, and then the employer loses an asset. Human resources management scholars and practitioners think that it is much cheaper to retain employees than to train others. One of the most quoted reasons why employees change employers is to look for better wages; in most cases, they go to competitors a move that can lead to loss of business and business secrets.

After an employee has started meeting his organization’s expectations, the organization needs to realize that the employee also has his targets that he wants to be met. Due to changes in different industries, it happens that good performers are more likely to change employers since they are marketable and the industry requires them. To retain a performing employee, who is seen as an asset to the organization, the human resource department must develop measures that motivate and create loyalty in him. One of the ways to retain the employee is to make the working environment as comfortable as possible and operate an effective reward system. Remuneration and reward of employees are the most effective ways of retaining employees within an organization.

When employees are retained in an organization, the employer enjoys improved business efficiency enhanced by knowledge accumulated by employees over time. Long-serving employees facilitate the maintenance of knowledge management programs: knowledge management cannot be given a single definition but it entails a combination of a number of issues and processes. Knowledge is an intangible asset unique to different businesses and can be improved with experience and information interpolation and human resource development and retention. Human beings have different talents and capabilities; however tapping this asset requires strategic operation and management; the talents need to be recognized, developed, tapped, and then put into use by the organization; for effectively putting the talents into place, companies require to have a good retention mechanism. Other than utilizing the knowledge and experience that the employees have, there is the need to use available information to grow and develop knowledge and expertise in employees. Information can be internal and external; how well the information is utilized can result in the growth of knowledge, effectiveness, and efficiency in doing business.

Information is developed over time; there is explicit knowledge and tacit knowledge. Explicit knowledge can be documented and reviewed in the future for a better decision. They are documented better ways of doing things and processes that have been attained from previous experiences. This information can be available even when an employee has left an organization; they need to be compensated for their expertise and retained in the organization, proper wages and recognition of employees’ efforts plays a major role in determining whether they will stay in an organization or not. What needs to be tapped and retained through retaining employees is tacit knowledge; this is knowledge mostly in terms of experience, knowledge, professionalism, and talent development, which an organization has managed to develop. To have an effective knowledge management system, employees need to be maintained and their intellectualism utilized accordingly. The experience may be lost due to retirement, change of jobs, and natural factors like death and sickness. To maintain this important piece of information, there is a need to have a good staff retaining mechanism, and if an employee who had an appropriate skill gets to retirement age, then they should be contracted as consultants to the firm.

For creativity and innovation, staff must be motivated to think and come up with ways that can improve the current situation in a business. The role of motivation and tapping of potential should not be left to the human resource department but line managers should have the capability of recognizing a certain idea/talent and growing it to the benefit of the organization. Other than general motivation, employees need to be given a chance to put their intellectualism into practice, they will feel more useful in the organization and plan to stay longer with the employers.

The reward for performance builds positive employees relations

Human resource management has a crucial connection in a contemporary performance management program that boosts an effective employee relations program. Employees are concerned about how well their employer pays them, they consider higher pays as a show of appreciation that they receive from their employer. The modern (contemporary) performance management program concerns itself with achieving the favorable outcomes that are evaluated on their impact and not the quantity, to facilitate the development of good relations that leads to higher performance, and then there should be a two-way concern on the employee on one side and the employer on the other. Instilling the idea in the employees as being champions and as being an important part of the organization brings about positive outcomes and among these positive outcomes is the general improvement in the performance of the organization. Money is the greatest motivator in the world; companies aim at improving their services to their employees to boost their performance, thus money through wages can be an effective method of boosting results (Henderson, 2003).

In the job market, both the private and public sectors are competing for “talents” as the basis for carrying out the recruitment of employees, developing them, and retaining those whose talent benefits the company. Putting this into consideration, any particular organization should be in a position to employ a strategy and put in place a management system that will boost the business’s performance in order for it to grow bigger than its competitors will. To attract people with talent as required by the organization, the company should consider a system that will pay for the talents acquired and developed. In order for an organization to utilize its assets optimally, it should intelligently and efficiently handle the working conditions of its employees. Employees should be allowed to participate in the process of making decisions, especially those that are related to the work they carry in order to improve the structure of the organization. When an employee has shown an improved quality, timely and effective decision making, the employee is using his intellectualism, talent, or experience: she/he thus needs to be motivated through compensation. In addition, the duties structure among the employees makes the performance of the organization much stronger. Therefore, the management needs to have an understanding of the employee characteristics for the organization to be successful.

Developing the employees of any organization, as well as building them, enriching, motivating, and enhancing them heavily relies on the organization’s leadership, authorization as well as a vision the organization is having. In general terms, the human resource management that is employed strategically will greatly assist in bringing about the improvement in the performance of the organization. Wages should reflect the performance of an employee: they should have a close linkage: since not everybody can be in the management, the juniors have their rights to be recognized and considered in salaries and wage programs effectively (Milkovich & Newman, 2006).

The relationship between performance and seniority

In some cases, there exists a difference between seniority and performance; it is not always that a performer is the most senior person in an organization: alternatively, seniority in an organization is more on leadership and organizational resources management while performance is more skewed to the outcomes from a certain assigned task. There are incidences that some performers may not have excellent people skills but by their capacity, they are high performers or have developed a high rate of expertise in certain areas. These employees need to be recognized; their efforts and inputs in the organizations need to be rewarded through adequate pays that reflect their performance. In an effectively managed organization, there is a close relationship between the level of superiority and the performance of an organization: alongside using wages as a means of motivating employees, companies should also think of having a policy that rewards employees by making them senior and holding positions in the company’s management. The danger that comes with such a policy is that the positions in an organization are minimal and can only be limited to a certain number of people say one or two.

When argued that wages should be pegged to the performance of an employee, it should not give the impression that juniors should be paid higher than their masters should, what the concept says is that there should be a close linkage between employee’s earnings, and the contribution that he/she has to the organization. The ability to attract and retain high-performing employees is to create orchestrated teams and an environment that neither the team members nor the leader can look down on the other on basis that they are earning higher: there should be relative equality in wages payable. The labor market considers the differences among the leaders and junior employees; they are willing to venture into those organizations that have minimal differences: organizations with an effective reward system are seen not to work for the good of the heads of the organizations but the good of all stakeholders.

Human resources are the greatest asset that an organization can have; without them, no business transaction can take place. It ensures that the business is run in the right way, and thus determines the current as well as the future state of the business. Great leaders or managers are those that can combine available strengths and weaknesses for the good of the organization. How well the human resources are sourced, developed, and retained in the organization is the work of management. When managing the position and growth within an organization; then management should have an elaborate method that considers and takes care of the likes of all employees ( Kleiman, 2000).

Some successful companies use wage for performance in place of the wage for superiority

In the electronic industry, Apple Inc enjoys the largest sales volume; the company adopts a freelance culture that rewards performance. The increased good performance of the company ensures that employees are motivated to innovate and develop new ways of doing business. In the late 1980s and early 1990s, the company was operating at a loss; this was at the time that it dismissed Steve Jobs from its management. The employees were aggrieved by the move and they were hesitant to adapt to new management styles as was exercised by John Scullery; the company’s products competitiveness reduced drastically and profits dropped by 16% in 1993. During that time, the management was the only one who was making a decision and had hefty pays, at the expense of junior employees. In 1996, the company reinstated Steve Jobs as one of its managers and the manager came with the reward for performance strategy. Employees were rejuvenated and were willing to develop, innovate and come with new methods of doing things. When an employee came with a strategy, he/she was given some loyalty to the innovation. The policy has created healthy competition among employees: as a result, innovation has become the order of the say in the organization. When Steve was reinstated, he only accepted to have a $1 pay per month: this was indication managers and senior members can earn less than their subordinates do and facilitate good performance (Apple Inc, 2011).

In 2008, Toyota Motor Corporation surpassed General Motors’ in sales volume, production volume, and revenue; it is the leader in the automobile industry. The company was able to assume this leading position because of the human resources policies that reward performance. Two years before assuming the number one position, the company had implemented a total quality management system and six-sigma mechanism in its operations. The management strategies advocate that employees should be rewarded for their performance (Toyota Motor Company corporate website, 2010).

Conclusion

An employment contract obliges an employer to pay employees a prescribed amount of wage, as compensation for their time, labor, intellectualism, and retention. Wages should be based on employee’s performance not on seniority because when performance is rewarded, the employer and the employee are bound to benefit; the benefits include increased motivation, offers a platform for invention and innovation, creates good human resources relations, and leads to employees’ loyalty. Remunerations should reflect the performance of an employee; good performers should enjoy higher pay. Remunerations rates influence staff motivation and commitment to their tasks, thus having an effective reward system has an overall benefit to an organization. Internationally, Apple Inc and Toyota Motor Corporation have adopted compensation for performance strategy; the approach to compensation has lead to orchestrating teams in the two organizations.

References

Apple Inc. (2011). Apple Computers Inc. Web.

Chong, A., Keng-Boon, O., Binshan, L., & Pei-Lee, T. (2010). TQM, knowledge management and collaborative commerce adoption: A literature review and research framework. Total Quality Management & Business Excellence, 21(5), 457-473.

Harold, F. & Michael, D.(1994). Motivation: theory and research. New Jersey: Routledge.

Henderson, R.(2003). Compensation Management in a Knowledge-Based World. 9th ed. Upper Saddle River, NJ: Prentice Hall.

Kleiman, S. (2000). Human Resource Management: A Tool for Competitive Advantage. Cincinnati: South-Western College Publishing.

Lingling, Z., Jun, L., Yong, S., & Xiaohui, L. (2009). Foundations of intelligent knowledge management. Human Systems Management, 28(4), 145-161.

Milkovich, T., & Newman, J. (2006). Compensation. 8th ed. New York: McGraw-Hill.

Toyota Motor Company corporate website. (2010). Toyota. Web.

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BusinessEssay. "Should Wages Be Tied More to Seniority or Performance?" December 15, 2022. https://business-essay.com/should-wages-be-tied-more-to-seniority-or-performance/.