There are 3 requisites of a sound primary compensation structure. They are:
1. Internal Equity.
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2 External Competitiveness.
3. Performance-based payment.
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Requisites
1. Internal Equity:
Internal equity means that there should be a proper relationship between the wages for the various positions within the organisation. Job evaluation is the corner-stone of a formal wage and salary programme.
i. Job Evaluation and Merit Rating:
Job Evaluation: Job evaluation or job rating is a systematic procedure for measuring the basis of their common factors such as skill, training, effort, responsibility and job conditions.
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The relative job values are thus converted into definite wage rates by assigning the money rate of pay to each job according to a definite system on scale.
ii. Merits of Job Evaluation:
1. Management will have better control over labour costs since pay for each job is consistent with its value to the company.
2 Workers doing a similar type of work will receive similar pay. This will also control labour cost and can improve employee morale.
3. Since job evaluation shows the relative worth of jobs, it provides a basis for establishing a sequence for promotion through merit rating.
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4. It provides a means for justifying different rates of pay for different jobs.
5. It provides a basis for setting rates of pay on new jobs.
6. It can provide for incentive wages.
According to Knowles and Thomson, job-evaluation is useful in eliminating the following discrepancies of a wage payment system:
(i) Payment of high wages and salaries to persons who hold jobs and positions not requiring greater skill, effort and responsibility;
(ii) Paying beginners less than they are entitled to receive in terms of what is required of them;
(iii) Giving a raise to persons whose performance does not justify the raise;
(iv) Deciding rates of pay on the basis of seniority rather than ability;
(v) Payment of widely varied wages for the same or closely related jobs and positions; and
(vi) Payment of unequal wages and salaries on the basis of race, sex, religion or political differences.
2. External Competitiveness:
Once the internal equity has been established through job evaluation, the next step is to make a comparison with other firms in the industry.
To achieve external alignment, the management must first know the average rates of wages for the jobs. Here, it should be noted that it is not always easy to compare the wage rates of two firms because of some significant difficulties. They are:
(i) The content of the jobs that have the same title may differ considerably.
(ii) The wage payment methods may differ.
(iii) Employees with the same jobs may have different degrees of regularity of employment, so that even if wage rates are identical, annual earnings are not.
(iv) The costs of living in different geographic locations may be different.
Though it is difficult to make a comparison, still, the organisation should make a comparison. It is only then that they can fix their wage level at the average rate prevailing in the industry or they may decide on a higher or lower wage level for itself.
3. Performance based Payment:
Finally, the organisation has to decide whether all individuals in jobs of the same level should be paid the same pay or not. There are four approaches to determine the individual pay:
(i) Single Rates:
When employee performance is almost similar, single rates are paid to employees on jobs e.g., clerks in office jobs.
(ii) The Informal Approach:
Under this method, individual pay decisions are made on an informal basis without any guides or controls.
(iii) The Automatic Approach:
Under this method, both the amount of the pay increase and the period of review are usually predetermined. Individual merit has no consideration.
(iv) Merit Approach:
Under this method, individual performance and output are important basis for compensating employees. Merit rating system assumes that performance can be observed with reasonable accuracy.