Pay and the Total Reward System as a Source of Competitive Advantage for Firms

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HR Management Part 1
MT Essay Assignment 2012
Student Name: Daniel McCarthy
Student Number: 09387269
Essay Title: Why pay and the total reward system can be a source of competitive advantage for firms. Word Count: 2,762

Q.4 Why is pay such a contentious issue for organisations?
How can work organisations ensure that they have an equitable approachto pay in the current economic environment? Why pay and the total reward system can be a source of competitive advantage for firms. Gunnigle et al (2006) states that pay refers to the ‘basic wage or salary that an employee receives’.‘It is a way of gaining understanding, acceptance and commitment of what people can do to help make a company a success’ (Zingheim and Schuster, 2000).’ It is a complex, multi faceted issue that serves as both a tangible and intangible motivator offering both intrinsic and extrinsic rewards’. (Gunnigleet al 2006). Pay is a much debated topic in human resource literature, with many contrasting views in the research findings. This essay will firstly examine what I believe are the main contentious issues faced by organisations today with regards to pay; namely cost, culture and motivation. Each of these issues will be examined in depth, drawing from relevant and prominent authors on the subject matter. In the second half of the essay I will discuss the options available to organizations with regards to ensuring that they have an equitable approach to pay in the current economic environment. Here I will draw on the recent literature with regards to alternative methods of reward whilst also looking in detail also at the total reward system which organisations should adopt given contemporary global economic trends. Finally I will draw my conclusions with regards to how best firms can deal with the issue of pay structure in the current economic environment. Cost

According to an Irish Business and Employers Confederation (IBEC) HR update report from autumn 2012 ‘pay and benefitstypically represent a significant proportion of business costs with base pay generally being the most costly reward element’. The report goes on further to say that’ 69% of organisations will freeze pay in 2012, 1% will decrease and only 30% expect to see an increase’ (IBEC HR Update Autumn 2012). Noe et al (2009) state that some companies spend ‘40% or more of their revenue on paying employees’ and as a result of this ‘managers must weigh the importance of cost of pay to arrive at a structure for compensation and levels of pay for different jobs’. However, according to Torrington et al (2011) in setting base pay employers ‘enjoy rather less freedom when making this decision than is the case when deciding how the total package should be made up’. This according to Torrington et al (2011) is as a result of minimum wage restrictions and the need to remain competitive. In the current economic climate many firms believe that cutting costs is the only method for them to remain a viable entity. According to Pfeffer (1998) ‘labour rates are a convenient target for managers who want to make an impact’ as they are highly visible. They also appear to be’ a company’s most malleable financial variable’. This need to restrain labour costs is a particularly hot topic of debate in the public sector as governments;none more so than in Ireland have cut their expenditure in the aftermath of the recession and subsequent sovereign debt crisis in an attempt to reduce the public debt. In Ireland, wages and salaries for public sector workers comprise of 70% of the national income. In order to get the country’s finances into a stable condition with particular interest being put on the inefficiencies within the public sector, the Croke Park Agreement was set up between the Irish government and various public sector unions. According to the implementation body as of March 2012 headcount has been reduced by 28,000 and the annual pay bill has been reduced by 3.1Bn euro...
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