In the broadest sense, the purpose of a wage and salary administration program is to create order where there is the potential for a whole lot of chaos.
A poorly administered wage and salary program has the potential for creating chaos in a company’s workplace by generating discontent among employees. It also has the potential for creating the kind of chaos companies must endure when they run afoul of pay-related laws, rules and regulations enforced and administered by numerous state and federal agencies.
Perhaps the best way to figure out what the goals of a good wage and salary administration program should be is to look at some of the things that will be happening if an effective one is in place. In an effective wage and salary administration program:
- employees will perceive their pay to be equitable;
- the pay program will provide incentives for employees;
- the people in the best position to make decisions about employees’ pay increases will actually make those decisions;
- the owners of the company will be protected against paying employees too much;
- the pay program will be as easy as possible to administer;
- the pay program will be as easy as possible for employees to understand; and
- the pay program will ensure that the company is complying with government regulations pertaining to employee compensation.
Perception of equity. A company’s pay program should be “equitable” to employees in several ways. First, employees should feel that they are being paid fairly in relation to what others in the company, doing the same job, are being paid. In addition, they should feel they are being fairly paid in relation to what others in the company, doing different jobs, are being paid.
Furthermore, employees need to feel they are being paid fairly in relation to those who work for other companies in the same locale. See the discussion of “internal” and “external” equity at ¶23,545 .
Incentives. A good pay program will provide incentives for employees. What does this mean? It means that the program should provide meaningful financial incentives for high performers. In other words, a company’s high performers should know that their high performance will bring them significantly greater financial rewards than for those who turn in “average” performances.
Pay program decisionmaking. To as great an extent as is practical, first-line supervisors ought to be the ones making decisions about the pay of those who work for them. This is a big help in getting employees to feel that they are being equitably paid. Feeling that your pay is being determined by someone who doesn’t really know who you are, what you do, or how well you do it can be frustrating.
Ownership protection against excessive compensation. Companies that “fly-by-the-seat-of-their-pants” when it comes to establishing pay policies and administering a pay program invariably pay employees doing some jobs too much. There is no better insurance that this doesn’t happen than a pay program that defines jobs, establishes their worth in relation to each other, and then puts them in pay grades with an eye on what the going market rate for the jobs are.
Easy administration. A good compensation program can be very complex, both in its construction and in the way it is administered. But pay programs do cost money to run. Portions of them need to be constantly reviewed and constantly refined.
Consequently, pay programs should be designed to be as easy to administer as possible to keep costs down and to facilitate needed adjustments.
Easy to understand. A good pay program is as easy to understand as possible, and it ought to make sense. Pay programs that are not easy to understand will breed suspicion among employees that things are not being handled honestly.
What does “easy to understand” mean? A good example of a pay program element that should be easy to understand is the reason why some jobs are paid more than others. In short, employees should be able to tell why things are the way they are.
Compliance with governmental regulations. There are a lot of laws that regulate employee compensation policies. For example, the Fair Labor Standards Act establishes a minimum wage level and sets out when overtime pay must be paid to employees. The Equal Pay Act addresses the issue of sex discrimination in compensation policies. And Title VII of the Civil Rights Act of 1964 addresses the issue of pay discrimination based on such factors as race, color, religion, sex and national origin. These federal laws are just a few of the federal and state laws that regulate employee compensation. A good wage and salary administration program will ensure that these laws are complied with.
Reposted with permission from Wolters Kluwer.
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