Business Studies | Creating a Business

Wages

Salaries and wages

Most employees in the UK receive their payments in the form of salaries or wages. Salaries are expressed in annual terms (E.G production manager earns £30,000 a year) and are normally paid monthly. Salaried employees are not normally required to work a set number of hours per week though their contract of employment may state a minimum number of hours.

On the other hand, wages are usually paid weekly and employees are required to be at work for a specified number of hours. Employees are normally paid a higher rate (knows as overtime) for any additional hours worked.

Fringe Benefits

These are sometimes referred to as ‘perks’. Fringe benefits are those extras an employee receives as a park of their reward package. Examples include the following

-         A company car

-         Luncheon vouchers

-         Private health insurance

-         Employers’ contributions to pension schemes

-         Discounts for company products

Firms tend to use fringe benefits to encourage employee loyalty and to reduce the proportion of employees leaving the firm. A danger of the widespread use of fringe benefits are that costs can increase quickly, reducing profitability.

Performance related pay

Performance related pay has become more widely used over recent years and has developed along with employee appraisal systems. Performance related pay is only paid to those employees who meet or exceed some agreed targets. Under performance related pay, employees are paid for their contribution to the organisation, rather than their status within it.

A number of large-scale manufacturers such as Cadburys and Nissan, and public sector industries, for example the NHS, introduced performance related pay schemes during the early 1990’s. A recent survey indicated that 68% of private sector businesses in the UK have introduced Performance related pay for some or all of their non-manual employees, thought the rate at which performance related pay is being introduced is slowing.

Criticisms of price related pay

- A number of criticisms of performance related pay have been put forward:

Many employees perceive performance related pay as fundamentally unfair. This is particularly true of those working in the services sector where employee performance is difficult to measure. Employees fear that they might be discriminated against because they do not get on with the manager conducting their appraisal interview. This can result in their performance worsening, not improving.

- A majority of businesses operating performance related pay systems do not put sufficient funds into the scheme. Typically, the operation of a performance related pay scheme adds 3-4% to a businesses wage bill. This only allows employees to enjoy relatively small performance awards, which may be inadequate to change employee performance.

Development in performance related pay

Increasing numbers of firms are implementing a system knows as variable pay. Companies such as Levi-Strauss in America and Unilever in Britain recognise that company performance often depends upon the achievements of the few.

Variable pay is really a development of performance related pay. It is similar in that it rewards employee performance, but there are differences. Performance related pay operates according to a formula used throughout the company. Variable pay is far more flexible and the potential rewards for star employees are greater. The Bank Of England, for example, retains 10% of its pay budget to reward good performers amongst their employees.