2014

A Critical Evaluation Of Effects Of Shift From Job Based Pay To Individual Based Pay

Group 10 Ananyo Bhattacharya 13PGDMHR03 Disha Aggarwal Kritika Sobti Vaneet Kaur 13PGDMHR17 13PGDMHR22 13PGDMHR56

Abstract
Purpose This project aims at analyzing the two basic strategies of Pay structures Job based Pay and Person based pay. The research aims to study the impact and effectiveness of both the types of the structures. However the focus of the project is to bring out basically a few key points which follow or proceed a Job based as well as a Person based structure which can help the reader analyse the effects of pay decision of Employers. This research is based on the already conducted and published reports which are widely cited in the industry and hence form a strong foundation for credible and effective analysis of facts and figures. However, particular attention has been given to include research only from credible sources such as Society for Human Resource Management, Society for Industrial & Organizational Psychology, Central Executive Board, Council for Leadership and the likes in order to ensure quality of content and hence provide true and fair recommendations. Objective To study the critical evaluation of effects of shift from job based pay to individual based pay. Scope To study of the strategies and suggestion of a scheme based on the groups analysis of the two structures Job based structure is basically looked at only from the point of view of the companys implementation. Person based structure which can further be elaborated in to Skill based and Competency based structure have been looked at from both theoretical and company based view. The findings from this projects, after going through various publications reveal that there is a trend of shift from Job based to Person based pay owing to the change in the Employee perception and attitude and the same has been recommended by our group. The research paper can be useful for the purpose of understanding of pros and cons of the pay structure a company adopts and can help HR professionals be sensitive towards the same and improve upon the factors which are relevant to their organizations.

Introduction
As the environment is becoming competitive the importance of attracting and retaining talent is being increasingly felt by organizations. As compensation is one of the most important factors that play a role in attracting, retaining and motivating talent, the organizations are trying to develop innovative compensation structures, which not only attract the right kind of talent but also motivate them to perform better. One such shift can be seen in the area of compensation management is the shift from Job based pay to Skill based pay. The compensation decisions made by any organization can be classified into four broad categories: pay level, pay structures, individual differences in pay, and benefits. In this article we are focusing on the pay structure as it represents the main difference between a traditional job-based pay system and a skill-based pay (SBP) system.

In the traditional job-based compensation system, the pay structure consisted of job families defined for pay purposes and a number of grades or steps in the structure and pay differentials between them. Whereas in a skill-based pay structure, differences in pay are associated with predefined skill-blocks required of the incumbent within a specific work unit. The differences in base pay between individuals under the Skill Based Pay are not due to the job or position assigned to them, rather due to the differences in the skill level acquired by the person. Under job-based pay, individuals are promoted they automatically get rewarded for taking these jobs even before demonstrating their ability to perform the required work. On the other hand, in skill-based pay, people get paid according to their worth to the organization and not on the basis of the job they hold. The efficacy of designing organizations around job structures is challenged. A number of factors suggest that a competency-based approach often is more appropriate than a job based approach. Especially as the global competitive environment is large with various complex organizations, focus on competency based approach has gained importance. These changes in the environment leading to changes in the focus of compensation system have a multitude of effects on the overall organization. This article will look at the impact of the shift from job based pay to individual/ competency or skill based pay.

Literature Review
A study by (Rajiv D. Banker, Seok-Young Lee, Gordon Potter and Dhinu Srinivasan, 1996) investigated how contingency factors such as competitive intensity, customer profile, and behaviorbased control influenced the effectiveness of an outcome-based incentive plan supporting a customerfocused service strategy. The positive impact of outcome-based incentives on sales, customer satisfaction and profit increased with intensity of competition and proportion of upscale customers and decreased with level of supervisory monitoring. This study by (Eric A. Fong and Henry L. Tosi, 2007) examines the moderating effects of conscientiousness on the relationships between agency controls and effort and agency controls and task performance. Results show that less conscientious individuals appear to increase effort through incentive alignment and monitoring, whereas conscientious individuals do not shirk with or without agency controls. Furthermore, results show that less conscientious individuals increase task performance through incentive alignment, but not through monitoring. Also, incentive alignment may be more effective than monitoring when attempting to align principal and agent interests. A study by (Charlie O. Trevor, Greg Reilly and Barry Gerhart, 2012)examined that pay dispersion in interdependent work settings is virtually universally argued to be detrimental to performance. We contend, however, that these arguments often confound inequality with inequity, thereby overestimating inequity concerns. Consequently, we adopt a sorting (attraction and retention) perspective to differentiate between pay dispersion that is used to secure valued employee inputs and pay dispersion that is not so used. We find that the former is positively related to interdependent team performance, the latter has no effect or is detrimental, and the approach itself helps to reconcile the pay dispersion literature's disparate results. Milkovich and Newman (2008) defined skilled-based structure link pay to the depth or breadth of the skills, abilities, and knowledge a person acquires that is relevant to the work. Such additions are done apart from the general pay increase an employee may receive. The pay increases are usually tied to three types of skills:

 Horizontal skills, which involve a broadening of skills in terms of the range of tasks Vertical skills, which involve acquiring skills of a higher level Depth skills, which involve a high level of skills in specialised areas relating to the same job. In contrast, a job-based plan pays employees for the job to which they are assigned, regardless of the skills they possess. (Milkovich and Newman, 2008). Skill-based pay is a person-based and not a jobbased, system. It rewards a person for what he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum skills, but pay progression is directly linked to skills acquisition (rather than to general pay increases applicable to all). A management researcher at the University of Arkansas found that such plans are more successful and sustainable in manufacturing facilities than in service organizations. The research also revealed that support among supervisors and employees for the innovative plans consistently predicts their success and survival. With skill-based pay plans, the goal is to have all workers know all jobs so that they can move from job to job as needed. Employees are given a pay increase for learning and demonstrating proficiency in a new skill, regardless of whether they actually use that skill on the job. In a manufacturing environment, these skills may be as simple as training all employees to operate a forklift or punch press, but usually the skills are tied to specific processes and technology within an individual manufacturing plant. For example, in the pharmaceutical industry, a company may train workers to perform processing tasks such as capsule and tablet production and packaging tasks such as labeling and materials handling, as well as warehousing and quality control tasks. Many companies have adopted skill-based pay plans based on the assumption that they are ideally suited for organizations that emphasize technical innovations. The researchers findings, however, did not support this assumption. Companies seeking new and different types of business or those focusing on technical innovations frequently need to modify the definition, training, assessment, maintenance and compensation of skills necessary within their organizations. Because skill-based pay plans require considerable investment in all of the areas, frequent modifications would be too expensive, Gupta said. Also, skill-based pay structures necessitate precise specification of skills, which is more feasible when production processes vary minimally, are well understood and are easily separated into components. This helps explain the plans success in a manufacturing environment. The success of skill-based plans depends on significant improvements in workforce productivity and membership behaviors. The fit between the pay plan and the facility's climate/culture moderates the relationship between workforce productivity and the pay plan's success. Practical implications The results indicate that skill-based pay plans are superior for achieving several organizational and employee outcomes. A study (Gerald E. Ledford, Jr and Herbert G. Heneman III, June 2011) published by Society for Human Resource Management talks about the various ways in which Skill based pay can be implemented and basically categories the SBP into three types Type A, Type B and Type C. Type A deals with depth oriented skills such as Deeper employee expertise, Type B deals with Greater employee capability and flexibility, broader perspective, Type C deals with Critical skills bonuses. Therefore this tells us about the three different ways in which the increments in a Skill based pay (Person based Pay) can be aligned for greater ambit of coverage in the

organization. This type of increment administration has been found to be particularly distinct and exhaustive in terms of coverage of Employee perspectives. A study by Dale W. Shimko, MA talks about important facts about the pay structures present in the current organization such as how Job based pay model may offer consistency and the perception of fairness, but it can have unintended, counterproductive results. However, a competency-based pay structure requires practices to commit to ongoing staff training and can entail higher costs. In practice, merit-pay systems often fail to create a link between pay and job performance. But, Competency-based pay is a compensation model that focuses on paying the person rather than paying for the job. It's intended to motivate staff to develop knowledge and skills that contribute to the practice's success.

A study by (Azman Ismail, Hasan Al-Banna Mohamed and Norashikin Sahol Hamid, Nov 2011) National Defence University of Malaysia talks about the link of person based pay with the Job satisfaction in order to analyse the effectiveness of such a structure. This study tells us that the variables- Participation in pay system and adequacy of pay leads to a greater Job satisfaction. In addition, interactional justice acts as a mediating variable on the relationship between the performances based pay and job satisfaction. In this sense, this study confirms that interactional justice does act as a mediating variable in the pay system models of the studied organizations which included Malaysian private institutions of higher learning. This hence established the fact that Performance based pay and Job satisfaction are positively correlated to each other and therefore help the organization improve on its engagement levels.

Research Objectives
The objective of this research paper is to find out: a) The reasons for transition from job-based pay to individual-based pay b) The impact of this shift on the organization and its employees c) The advantages and disadvantages of skill-based pay.

Methodology
The methodology used for the research is literature review. For this, we read 15 research paper related to the transition from job-based to skill based pay in different industries, the advantages and disadvantages of both and its effect on the employees and work culture. The research articles chosen concentrated on different aspects of the transition and the implications it had, were critically analysed. So the critical evaluation of the job-based pay and individual-pay was done by our group and the necessary justifications for the shift to the incentive-based pay from job-based pay were provided by our group. The basic limitation of this research approach is the unavailability of recent articles and many papers in this regard.

Findings
Traditional pay systems for non-executive staff have generally been characterized by standardization across and within sectors (e.g., government, particular industries) and within enterprises. So long as employers were competing mainly in domestic markets which were protected from foreign competition - in some cases leading to monopolies - the effects of standardization on considerations such as performance, recruitment and retention of good staff, etc. were less felt. Indeed, standardization, while being equitable from the point of view of employees, benefitted employers as well by reducing competition based on labour costs. Disadvantages of traditional job-based pay: If the employees are not interested in promotions, there is little incentives for them to learn new skills Employees performances are not evaluated. So the High performers gets frustrated and demotivated to see their other colleagues get the same pay without the similar level of performance This system also contributes to sometimes contentious office politics because employees feel the only way to get ahead is to work their way up the company ladder Job-based pay structures can increase a companys operating costs, which is another disadvantage. For example, any company may have to hire a consulting firm to conduct compensation audits. They may also have to revise the pay grades every year, which requires more administrative staff Employees who are not rewarded for their job performance may quit because they feel that their contributions are not valuable to the company. Hence increase in turnover rates for the companies

So there is the introduction of the individual skill-based pay. Skill-based pay refers to a pay system in which pay increases are linked to the number or depth of skills an employee acquires and applies and it is a means of developing broader and deeper skills among the workforce. Such increases are in addition to, and not in lieu of, general pay increases employees may receive. Also, skill-based pay structures necessitate precise specification of skills,
which is more feasible when production processes vary minimally, are well understood and are easily separated into components. This helps explain the plans success in a manufacturing environment. Recently, companies seeking new and different types of business or those focusing on technical innovations frequently need to modify the definition, training, assessment, maintenance and compensation of skills necessary within their organizations. Because skill-based pay plans require considerable investment in all of the areas, frequent modifications would be too expensive. Skill-based pay differs in the following respects from traditional pay systems which reflect skills differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled workers: It rewards (and therefore emphasizes) a broad range of skills which makes the employee multi-skilled and therefore flexible.

 It positively encourages skills development. A skill-based pay system may not necessarily reflect how well the skill is used, as this falls within the performance component of pay. But there is nothing to prevent injecting performance criteria into the system. In such cases the system will be more performance- oriented than a structure which merely recognizes different rates of pay for skills.

Conclusion and Recommendation:

Nowadays the younger workforce (Gen Y) in the organisations is more ambitious and energetic. So they need a reward for their efforts put in a particular job and they get satisfaction from a job only if their performances are rewarded or they are given promotion. Moreover, organisations nowadays have also become competitive to sustain in the challenging business environment. So they have involved pay according to the performance being given by the employees. This helps them to retain the high performers and lay off the low performers. Also, a pay-for- performance plan is an excellent way to focus your employees actions on the areas that need attention. They are a tool that can be used to shine a spotlight on key company priorities and business drivers. Also employees realize that performing their job well helps the company do well, but the companys success can be too far removed from the daily activity of the employee to be a motivating factor. A pay-for- performance plan can bring the interests of the employee closer to the interest of the company. Moreover, Businesses are always in search of fresh new talent and a performance-related pay can help to encourage new talent to join your business.

Pay-for-performance plan also mitigate financial risk for the company. Since these plans are tied to performance, they are effective cost control mechanisms. In addition, pay-for-performance payouts are not added to base pay, and thus dont generate the compound growth of fixed-costs that base pay increases do.

References
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