In the early human resource direction ( HRM ) theoretical account developed by Fombrun et al. , ( 1984 ) the HR policy consists four key constituents, which are choice, assessment, development and wagess. Besides, the Harvard theoretical account of four HR policy countries offered by Beer et Al. ( 1984 ) consist human resource flow, wages system, employee influence, work system. Furthermore, wages is identified as a cardinal lever in Storey ‘s theoretical account of HRM ( Storey, 1992 ) . Therefore, it is critical that administrations should develop wage and wages systems suitably, that reward workers reasonably in footings of their public presentation.

In order to research the internal and external factors that influence the design of wage and wages system, foremost, it is necessary to reexamine the definition and types of wages and wage. In wage system, pay degree, wage construction, and pay signifier are cardinal elements. Then, with apprehension of some cardinal motive theories, it is easier to place the factors affect in wage and wages system design. The external factors are demand and supply and the cleavage of the labor market, the authorities intercession and the regional monetary value degree. The internal factors are employers themselves and the nature of occupations. It is deserving observing that besides pay, extrinsic wagess should co-occur with fiscal wagess.

Definitions and Types of Reward

Reward is one of the four HRM policy countries in both HRM theoretical accounts developed by Fombrun et al. , ( 1984 ) and Beer et al. , ( 1984 ) . Storey ( 1992 ) references in his theoretical account that wages is a cardinal lever in pull offing human resources. The wages system in managerial context emphasizes a aspect of the employment relationship, which constitutes an economic exchange. Simply, the employees take a certain sum of plants from employers and do net income for them, in return, having payment and wages. John Bratton ( 2003 ) defined wages as: ‘reward refers to all of the pecuniary, non-monetary and psychological payments that an organisation provides for its employees in exchange for the work they perform ‘ .

These wagess can take assorted signifiers. Administrations can supply intrinsic and extrinsic wages for employees. Intrinsic wages is a psychological satisfaction and personal fulfillment derived from set abouting his or her paid work, and fulfilling ‘higher-level ‘ demands for personal regard and self-development. ( Kessler, 2005 ; Bratton, 2003 ) For illustration, the intrinsic wages could be developing and calling development chances, deriving regard and acknowledgment, occupation satisfaction, high quality of working life, flexible on the job clip for employees and etc. Extrinsic wages refers to pecuniary payment that satisfy the basic demands of employees for endurance, security and acknowledgment and non-monetary payment in the pretense of rewards or other benefit ( Kessler, 2005 ) . In footings of extrinsic wages, sometimes, called ‘compensation ‘ in America, it has the signifiers of wage, pension or other indirect paid benefit, such as wellness coverage, life insurance and societal public assistance plans. Bratton ( 2003 ) argued that the wages system constitutes of both intrinsic and extrinsic wagess, in which, the pecuniary and fiscal component being called wage system.

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Pay, the fiscal aspect of wages, is an of import signifier in wages system ; after all, it is the chief ground why people work. In a wage system design, the basically compensation policy issues are pay degree, wage construction, and pay signifier ( Guthrie, 2007 ) . Pay degree refers to pay place of an administration compared with other rivals in labour market. In a word, it refers to ‘how much ‘ employees are paid. Administrations can dawdle, take, or fit the market. Pay construction refers to a model within which an administration sets different wage degrees for occupations or groups of occupations. In some administrations, it presents as wage classs. Pay signifiers are methods of honoring people for their attempts to the administration and influence employee motive and public presentation.

There are two types of pay-fixed wage and variable wage. Fixed wage is contractual compensation that on a regular basis paid and does non vary harmonizing to public presentation or consequences achieved. Variable wage is contingent on public presentation or consequences with variable sum and normally discretional. Fixed sum is to run into employees ‘ demand for income stableness, while the variable wage is to honor and excite great parts. The fixed wage may be paid in different signifiers, such as basic wage, compensatory allowance, dearness allowance and house rent allowance. It is deserving clear uping that although costliness allowance varies with the monetary value index, it is a portion of fixed wage as it is non linked to public presentation. Besides, the variable wage can be paid in the signifiers of fillip, inducement, overtime, committee, and it can be linked to different public presentation indexs set by the administrations.

Base wage is fixed wage paid to employees for specific occupation duties. Normally, employee base wage is determined with a scope of signifiers when hired. For illustration: clip based wage, service or senior status based wage, position place based wage, etc. Notwithstanding, employee ‘s base wage can be changed through his/her calling in many ways. For illustration, alterations in occupation, no affair publicity, demotion or sidelong transportation. Because whatever publicity or demotion is accompanied with alterations in responsibility assignment and occupation duties, alterations in occupation will take to establish wage alterations. And, likewise, basal wage can besides be changed through adjust wages based on their calling ladder system. In order to set up the degree of base wage, there are two methods- market pricing and occupation rating. Market pricing is based on the ‘going monetary value ‘ for a certain occupation in the labor market, and occupation rating is a systematic procedure to set up wage construction. ( Armstrong, 1998 )

On the contrary, ‘variable wage is defined purely as wage which does non go a lasting portion of base wage. ‘ ( Armstrong, 1999 ) In today ‘s concern universe, variable wage is an progressively popular method of compensation used by employers for its flexibleness. Furthermore, ‘variable wage facilitates employee- administration partnership by associating the lucks of both parties ‘ ( Schuster and Zingheim, 1992 ) . Variable wage is sometimes referred to public presentation wage. Performance wage has assorted signifiers as: 1 ) performance-related wage bound up payment to public presentation. 2 ) Incentive wage refers to payments linked with the accomplishment of prior-set marks. 3 ) Commission is normally offered to gross revenues people. 4 ) Team wages is to wagess to single employees for their squad work.5 ) Merit wage is payments offered to separating past public presentation. 6 ) Skill-based wage is offered to employees with accomplishments and can utilize efficaciously. 7 ) Administration public presentation wage is payment to employees based on the administration ‘s net income. ( Bratton and Gold, 2003 )

In add-on to establish wage or public presentation wage, some employee benefits paid indirectly are besides included in the entire wages bundle, such as pension, wellness coverage, life insurance and societal public assistance plans.

Financial wages seemingly influences extrinsic motive, while non-financial wages enhances intrinsic motive. Non-financial wagess have the signifiers of liberty, civilized intervention, employer committedness, challenge, trust, and etc. ( Ryan and Pointon, 2007 ) . Extrinsic wagess can sometimes be more effectual than pecuniary wagess because they are straight related to employees ‘ accomplishment and are less likely to be considered as unjust. Intrinsic wagess are more likely to impact employees in a longer-term because they are built-in.

Theoretical Foundations

Reward system is designed to actuate employees public presentation to run into the employer ‘s strategic mark. Therefore, it is important to understand the implicit in theories on wages so that we can understand why wagess are effectual and how to plan a wages system to run into both the employers ‘ and employees ‘ demand.

In footings of economic sciences and managerial context, the Agency Theory explains the bureau quandary arise under conditions of asymmetric and uncomplete information when a principal ( proprietors or directors who delegate duties ) hires an agent ( directors or employees who manage steadfast assets for proprietors or other principals ) to, persumably, prosecute its interets, such as the job of struggle of interst or possible moral jeopardy ( Eisenhardt, 1989 ) . Assorted mechanisms may be used to aline the involvements of the agent with those of the principal, in which, associating payment to public presentation is most effectual manner.

Wage is consider as a ‘hygiene factor ‘ in footings of psychoogy. That is, if you have it, you may non be happy, but if you do non hold it, you will decidedly be unhappy. In Federick Herzberg ‘s motivator-hygiene theory, he argued that hygiene factors would non actuate employees to exercise attempt, but merely forestall them from being dissatisfied. Besides, intrinsic wages is besides of import in his motivator-hygiene Theory. he stated that people are motivated by the grade that a occupation is challeging and the extend to which a occupation shows acknowledgment. ( Roath and Schutt, ? ? ? ) This theory implies that the motive through acknowledgment and self- fulfilment should co-occur with run intoing economic demands.

Victor Vroom ( 1964 ) argued in his Expectancy Theory that people tend to exhibit those work behaviours lead to most valued wagess and results. He see the perfomance-reward relationship and the reward- personal growing relationship are cardinal componets in this theory every bit related to wagess. Therefore, the theory implies the importance of performance- wages nexus and that the wages should be attractive plenty for maximising employees ‘ public presentation. Furthermore, Robbins and Judge ( 2007 ) suggest in Reinforcement Theory that a wagess system is prevailing in making the coveted behaviour.

Adams ( 1965 ) asserted in Equity Theory that people seek to keep equity both internal, comparing inputs they bring to the occupation and the results they receive from the administration ; and external, comparing to those around him, called referents. Obviously, if wage allotment is perceived to be just, therefore, the wages motive is sustained. However, if employees consider themselves underpaid, they will seek justness, in consequence, the work motive is disrupt. On the other manus, if employees consider themselves overpaid, the inefficiency job occurs. This theory implicates that the internal and external tenseness do be in wage equity ( Kessler, 2005 ) , accordingly, the wages system leader should supervise internal wage construction and place in the labor market for consistence.

These motivational theories contribute to better apprehension of how wagess motivate employees. And, it is evidently that that intrinsic wagess are every bit important as extrinsic wagess.

The External Factors

Labour market monetary value

Smith ( 1983 ) defined labour markets is an country that employers enrolling labour force and employees seeking employment. Double labor market theory originate the impression of primary and secondary labor market. In the primary labor market, it is common that occupations are characterized by high wages, stableness of employment, good working conditions and good calling chances. And the workers in this sector are good qualified, with accomplishments and extremely productiveness. On the other manus, in the secondary labor market, occupations are in low wages, hapless working conditions, deficiency of any chances and high turnover. Apparently, the workers working in secondary sector are frequently including adult females, adolescents and cultural minorities, because the workers are confined to the secondary labor market by unequal instruction, abode, preparation and accomplishments and favoritism. ( Craig et al. , 1982 )

For houses, it is necessary to see about which place the administration is in this market or industry and which labour market the employees are recruited from. For illustration, if an administration is in a prima place in its market or industry, the wage degree in this administration should besides be in a relevant high degree than other merchandise and labour market rivals. The ‘efficiency pay hypothesis ‘ ( Akerlof and Yellen, 1986 ) explained why pay above-market pay may better house effectivity. First, since workers want to keep employment with their employer if they can pay above-market, it is less possible the workers will hold public presentation jobs. Second, above-market wage will assist by cut downing turnover. Third, employees may better their public presentation out of a sense of equity. Fourth, administrations utilizing above-market wage degree may bask an advantage in footings of pulling more gifted appliers. ( Guthrie, 2007 )

If the administration recruits people from primary labor market, the wage of them should hold differentiation with those who are recruited form secondary sector. The implicit in principle is Equity Theory developed by Adam ( … ) , which implicates that people seek to keep equity both internal and external. It is merely when employees consider the wage is equity in their head, the wage and wages system motive is sustained. Besides, the overview wage degree in an industry or a part should be taken into history when design a wage and wages system. Therefore, the administration could break plan a wages system as a comparative promotion in enlisting or public presentation motive.

Supply and demand of labour market

The equilibrium in the labor market is other factor that affects pay degree. As talked above, labour market is a market like any other merchandise market, including supply and demand — employees and employers. Therefore, in some classical pay theory, Supply and Demand Theory can besides use to pay, in labour market. The premise of classical pay theory is that the supply of labor is fixed, and so as the demand ( at least in the short term ) . Hence, supply and demand are assumed to meet in an equilibrium monetary value for a certain type of labor, which is the wage rate ( Wootton, 1962 ) . In consequence, administrations should be concern of supply and demand alterations in labor market to alter their wage degree consequently. However, Wootton besides pointed out that the accomplishment of equilibrium point of supply and demand in labour market has proved hard in pattern.


Robinson ( 1970 ) developed administered theoretical account and supply the kernel of this theoretical account as ‘the action of directions in all the companies and of the authorities and the trade brotherhoods together determine who gets employed where, and on what footings and conditions ‘ . In fact, the wage finding in the company now seems to have intercessions of authorities and establishments instead than the economic theory. Government is an of import histrion in wage system as employers of an of import portion of the state ‘s labor market, and moreover, wage affects the macro-economic environment. The ground is that the wage degree can act upon the circulation of money in the national economic system, the degree of ingestion and demand, the degree of rising prices, work stoppages. ( Smith, 1983 ) The accent on intercession has become concerned with societal facets of labor markets, justness, and equity. For illustration, lower limit pay statute law, equal wage and pay control programmes. In add-on, authorities can act upon pay puting procedure indirectly through actions impacting supply and demand of labour market.

Through consecutive wage policies, the authoritiess have influenced wages system non merely for their ain employees in public sector, but besides in private sector. The administrations should obey the regulations in a state as they runing in this state. Therefore, when design wage and wages system, one should see about relevant statute laws in the operating state.

Regional monetary value degree

The primary ground why employees work is because wage is the beginning of their life. Pay means, for employees, buying power, criterion of life, equity or relativity and position ‘ ( Smith, 1983 ) . In some state, the authoritiess puting the minimal pay statute law is to protect the basic life criterion for low pay workers. The administration should take life cost and monetary value degree in to account when design the wage and wages system. For illustration, in premise that a company sets two similar places both in UK and India, evidently, the wage for these two places will non be the same. In this instance, it does non intend unfairness, for the living criterion and life cost in UK is much higher than it in India. Harmonizing to CIA information, the GDP- per capital ( buying power para ) in India is 3,400 dollars in 2010, while that in UK is 35,100 dollars in 2010. If the administration set the wage degree of the place harmonizing to the monetary value degree in UK and use it in the same place in India, it could be internal unfairness harmonizing to Equity Theory, which means the employee will see the wage is far more than his/her input harmonizing to the populating criterion. Therefore, this wages system has met the demands of the employees but loses motive and frailty versa. In effect, the wage degree should fit the regional monetary value degree when design wage system.

Internal Factors


It is evidently that there is a relationship between wages and company public presentation. The wages system should be designed sensible in a concern with policy and schemes so that can pull, retain and actuate employees to prosecute the same aims as the companies. However, for many companies, wages system, particularly wage system, represents a big component of cost added in cost of production in many companies. In ensuing, the wages system, including wage and other benefits can be a major factor in finding of profitableness. Therefore, the quandary between trailing maximal net income and actuate employees ‘ and organizational public presentation exists in wages system design. It is common to happen that an administration transcripts pay and reward construction from other houses. The ground for this phenomenon is that direction ‘s tidal bore to stay its fight in pulling and retaining people. However, inevitable, the constructions fit in one administration may non suit for the other. Therefore, for wage and wages system design, it is necessary to see about a company ‘s capableness on the cost of labor. True, pay above market monetary value is a good manner to retain and actuate employees. However, if this cost is non within the company ‘s capableness, the company will lose net income in a long tally. Additionally, for some companies, it will take to shortage and a barbarous circle. Furthermore, the company should take its industry and concern scheme into history. For illustration, investing fiscal bank or adviser companies chiefly use variable wage construction, while manufactory companies chiefly use basal wage construction. Consequently, wage and wages system should be low-cost to a company in a first topographic point and fits its industry and concern scheme.


‘The nexus between wage and occupation, defined as a stable constellation of organisational undertakings and duties, has traditionally been the edifice block of rating constructions. ‘ ( Kessler, 2005 ) Kessler argued that wage determined by the occupation place in some sort of rating hierarchy, which grouped by occupation worth. In set uping occupation worth, a differentiation should be drawn between external equity and internal equity. ( Evans, 2003 )

External occupation deserving depends on province of the outside stations in the labor market. Organisations would wish to see about the supply and demand of this occupation in the labor market, the ‘going rate ‘ for similar occupations as a mention, through a graduated table of beginnings including study studies from relevant administrations, wage studies undertaken by advisers. ( Kessler, 2005 )

In footings of set uping internal occupation worth, the principal mechanism is occupation analysis and occupation rating. Job analysis is defined by Bratton and Gold ( 2003 ) as ‘the systematic procedure of roll uping and measuring information about the undertakings, duties and the context of a specific occupation. ‘ Job analysis contains the information of the nature of a specific occupation, more specifically, the major undertakings, the results that are expected, and the relationships to other occupations. ( Milkovitch and Newman, 2002 ) For occupation analysis, the two stairss of it are roll uping informations and utilizing the information to develop occupation descriptions, occupation specifications and occupation public presentation criterions.

Job rating can be defined as ‘a systematic procedure designed to find the comparative worth of occupations within a individual work administration. ‘ ( Bratton and Gold, 2003 ) occupation rating aims to accomplish internal equity by puting a hierarchy of occupations in the administration, which is used to apportion wage rates to occupations. After garnering informations, choosing paying factors, measuring the occupation, the terminal merchandise is a hierarchy of occupations grouping related to their value for the administration. And the last measure in occupation rating procedure is assign wage to this hierarchy, merely, monetary value the wage construction. Job rating provides the footing for a ranked wage system which is just, and meets equal wage demands. Significantly, the proper usage of an analytical occupation rating strategy will support and cut down the hazard of equal wage claims.

In consequence, apportioning wage construction, should establish on occupation analysis and occupation rating. The wage would be related to the nature of the occupation, the demand of accomplishment, attempt, duty, the on the job conditions, attempts and cognition.


Reward system is of import in countries of Human Resource Management. Reward refers to all the fiscal and non-monetary payment provided to employees for their attempts to administrations. In general, there are two signifiers of wages, including intrinsic and extrinsic. Intrinsic wages is a psychological satisfaction and personal fulfillment of employees, normally being the signifiers of non-financial acknowledgment, e.g. liberty, civilized intervention, employer committedness, challenge, trust, and etc. wage is prevailing signifier of extrinsic wages, besides other benefits such as pension, wellness insurance and so on. Pay has the signifiers of base wage ( fixed wage ) , public presentation wage ( variable wage ) and indirect wage. Base wage related to occupation duties and the degree of base wage could be established by marketing pricing and occupation rating. Performance wage bound up payments to public presentation. In footings of planing a wage system, pay degree, wage construction, and pay signifier are cardinal constituents in wage system.

Wage degrees are determined by many factors. First, wage degrees are determined by internal and external markets, as market monetary value can act upon the degree of basal wage. Since labor market is similar as other merchandise market, harmonizing to Supply and Demand Theory, supply and demand is assumed to meet in an equilibrium monetary value in a certain occupation market, which is the wage rate. Concentrating on external fight, administrations would pay equal or exceed market pricing to pull and retain more gifted employees. Above-market wage is under the principle of effectual pay theory, which implicates that high degree of wage will better employee public presentation and in ensuing, addition productiveness. Second, authorities intervene wage degree by direct statute law and indirect control. Such as minimal pay statute law, equal wage. Third, pay degree should establish on the regional monetary value degree to run into the basic populating criterion of employees. Fourth, within the occupation rating strategy, puting wage degree should be see about the nature of the occupation, the demand of accomplishment, attempt, duty, the on the job conditions, attempts and cognition.

In footings of apportioning wage construction, occupation analysis and occupation rating strategies will group occupations in a scaling hierarchy and assign wage to this hierarchy, which related to pay construction. Job rating provides the footing for a ranked wage system which is just, and meets equal wage demands.

The concern type of an administration and concern scheme will find the wage signifier. For illustration, investing fiscal bank or adviser companies chiefly use variable wage construction, while manufactory companies chiefly use basal wage construction. Particularly, incentive constructions related to organizational public presentation are used for directors in big houses to actuate and aline the involvements of bureaus with those of the stockholders, harmonizing to Agency Theory.

Harmonizing to Herzberg ‘s motivator-hygiene theory, extrinsic wagess can sometimes be more effectual and lasts in a longer-term because they are built-in. In a wages system, the motive through non-financial wages should co-occur with run intoing economic demands.


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