Question

Human capital theory has been advanced as a rationale underlying seniority pay. Merit pay plans appear to be the most common form of compensation in the United States. Although widely used, these systems are not suitable for all kinds of jobs. Pay-for-knowledge pay is becoming more prevalent in organizations today. However, pay-for knowledge pay programs are not always an appropriate basis for compensation. Discuss the conditions under which, and provide examples for, ideal positions for each base of pay. In your discussion also provide examples of positions which would not be a good fit for each base of pay as well. Be sure to provide your rationale.

Answer 1

There is increasingly change in the compensation programs as a result of competition and strategic efforts for retaining high quality talent and drive performance of employees motivating them and creating a competitive advantage for the company.

There are some advantages and disadvantges of the compensation programs like Seniority and longevity based programs and Merit pay plans. The Pay for knowledge is becoming more prevalent but it may not be suitable for organisations with bigger size as it may be difficult to differentiate roles and performance. It may require considerable efforts for managing and measuring the performance. It cannot be implemented as standard practice and may create differences and dissatisfaction among team members based on the compensation. It can be suitable where the team work is not involved and an employee is paid more for consultancy, knowledge, expertise and research and development related work to benefit the business goals. It may be imlemented in conditions where employees need to encourage to learn specific skills for upgradation of their work and position.

Merit Pay Plans are ideal for conditions where a person is working individually and is handling multiple responsibilities. The merit pay system should not be partial and should follow rules so that mistrust and unfair competition is not built in employees. The merit pay plan should be communicated to employees so that they are clear on their performance based compensation and have clear expectations.

Seniority based pay programs are based on the experience, knowledge and skills gained by employees over a period of time and to increase stability in the organisation and to retain employees. It increases sense of just and fair pay systems and encourage teams to assume responsibilities based on their tenure and increased pay. It can be combined with incentives for exceptional performance to encourage the employees to give above average performance.