In deciding what to pay employees, and how to pay them, management must make some
strategic decisions. Will the organization lead, match, or lag the market in pay? How will
individual contributions be recognized? There are many ways to pay employees. The
process of initially setting pay levels entails balancing internal equity, the worth of the
job to the organization, and external equity, the external competitiveness of an
organization's pay relative to pay elsewhere in its industry. The best pay system pays the
job what it is worth while also paying competitively relative to the labor market. Some
organizations prefer to be pay leaders by paying above the market, while some may lag
the market because they cannot afford to pay market rates, or they are willing to bear the
cost of paying below market. Pay is often the highest single operating cost of an
organization, which means that paying too can make the organization's products or
services too expensive. It's a strategic decision an organization must make, with clear
trade-offs.
A variable pay program is a pay plan that bases a portion of an employee's pay on some
individual and/or organizational measure of performance. Earnings therefore fluctuate up
and down with the measure of performance. Variable pay plans have long been used for
compensating salespeople and executives. Recently they have begun to be applied to all
employees. A number of organizations, business firms as well school districts and other
government agencies, are moving away from paying people based solely on credentials
or length of service and toward using variable pay programs. Low performer ...