Economic Evaluation Of Pay And Performance For Wage Effectiveness: An Essay.

Table 1: Dispute Applications

Discuss about the case study Pay and Performance for Effectiveness of Wage.

Payment to the labors is an effective tool to influence the performance of the workers. Higher pay motivates the workers to perform well and contributing higher output to the organization. This paper will focus on describing effectiveness of pay for the performance initiatives of the workers in order to generate higher production. A consultant of Fair Work Commission, Australia should examine the pay and performance structure of the workers. The paper will provide brief background of this government agency of Australia. Moreover, it will illustrate the economic concepts of labor supply; efficiency wage theory; pay-performance structure; general labor demand and supply. This paper will also relate these key concepts to a specific firm and will try to identify how these concepts can be encountered while implementing Pay Performance Structure. In this report, the recommendation will be provided to influence the performance of the workers through effective pay structure.

The operations of the Fair Work Commission commenced on July, 2009 created by Fair Work Act 2009. Fair Work Commission is an autonomous body of Australian government that has power and authority to control and implement provisions regarding the minimum wages and status of employment in the nation. As of July 14, 2016 the Fair Work Commission listed on its website, the functions of this organization also include facilitating good faith; enterprise bargaining; resolving the workplace disputes; dealing unfair termination of labors etc. The Fair Work Act 2009 emphasizes to regulate industrial relations in Australia by creating more national system. Each states of this country hand over some of their industrial relations powersto the Commonwealth. If a state decides to hand over their powers to national industrial system, then all the employees of that state will be covered by the FWA, 2009. As of July 14, 2016 the Fair Work Commission listed on its website dispute applications arising from awards; agreements and contracts fell by 13.6% in 2014-2015. However, the disputes arising from lack of general protections and unlawful dismissal of workers have increased by 17.5% in 2014-15("Fair Work Commission" 2015).

Table 1: Dispute Applications

Type of application	50% of matters				90% of matters
	2011–12	2012–13	2013–14	2014–15	2011–12	2012–13	2013–14	2014–15
s.739 – Application to deal with a dispute – lodgment to first conference (days)	15	15	17	16	38	38

Source:"Fair Work Commission" 2015

Table 2: General Protections Disputes due to Dismissal

	50% of matters				90% of matters
	2011–12	2012–13	2013–14	2014–15	2011–12	2012–13	2013–14	2014–15
Lodgment to first conference (days)	26	29	29	31	48	56	59	62
Lodgment to finalization (days)1	35	41	41	37	97	111	106	97

Source:"Fair Work Commission" 2015

In this section, theoretical ideas would be forwarded in order to explain the relationship between pay and the performance of the workers. Economic theories of labor supply and efficiency wage will be discussed.

Figure 1: Labor Supply Curve

Source: Created by Author

The labor supply is determined in terms of wage. According to general theory of labor supply, the more is the wage rate the more workers will be willing to join the labor force. As a result of this, the labor supply will increase. Even if the number of labors is not increased, labor supply will increase in terms of effort put by the workers, who are getting higher wage. Moreover, with higher pay, number of working hours might be increased (Jon ad Segrave 2016). Therefore, it indicates positive relationship between the payment and labor supply. Hence, the labor supply curve will be upward sloping. The following diagram can represent the labor supply curve.

However, there is another consequence of wage hike. Some workers might not prefer to work once they attain a certain level of wage for their work. If wage rate is increased beyond that level, effort of the workers will not increase and because of this, labor supply will not change. In fact, supply of labor starts to decline after a certain rate of wage, as workers prefer leisure to wage. Such labor supply curve is backward bending (Panos, Polycarpou and Polycarpou 2015). The following diagram represents this scenario.

Figure 2: Backward Bending Supply Curve

Source: Created by Author

The backward bending supply curve can be explained with the help of indifference curve and budget constraint analysis. The workers have two choices; work and leisure. The effect of change in wage rate on labor supply is ambiguous in nature. The effects can be decomposed into two parts: income effect and substitution effect. Substitution effect indicates that as cost of leisure (Wage rate) increases, workers substitute their leisure and prefer to work more. This will increase the labor supply. Hence, this substitution effect is unambiguous and reflects positive effects on labor supply due to rise in wage rate. The income effect indicates that, if leisure is a normal good, then significant increase in income due to increase in wage will lead to increase in leisure as well. This is because; as workers would not like to work after he has achieved a certain wage and prefer leisure to working. This has negative impact on the supply of labor.

Table 2: General Protections Disputes due to Dismissal

Figure 3: Income Effect and Substitution Effect

Source: Created by Author

When wage increases the relative income of the people also increases. Therefore, budget line representing wage will shift from W₁ to W₂. Therefore, shift from A to B presents income effect and indicates that due to income effect the people work less (negative impact). However, substitution effect is represented by shifting from B to C, i.e. people would work more (positive impact). The Red curve represent backward bending labor supply curve.

The demand for labor is negatively related to the wage rate. It is believed that, as the wage is increasing, the cost to the firm will be increased. Therefore, the employers will reduce the number of workers hired. Due to imposition of minimum wage, the demand for labors reduces and this will increase the unemployment of the economy (Jonathan and West 2015). The demand curve can be presented in the following diagram.

Figure 4: Labor Demand Curve

Source: Created by Author

The efficiency wage is the wage rate that is above the market clearing wage rate. Paying the employee a high price, will raise the productivity of the labor. This is because; premium wage will increase the loyalty of the labors and reduce shirking. Hence, even if the company’s cost is increasing, they will get higher productivity from their workers in return. This will minimize per unit cost of the firm. In the same way, the wage below the market-clearing rate will lead to employee dissatisfaction and more shirking. This will in turn result into high rate of turnover.

The best-known efficiency model is the shirking model, propagated by Shapiro and Sliglitz (Taylor and Taylor 2010).According to this model, high wage can prevent workers from shirking. High wage also increases the costs of shirking, as firm will monitor strictly and penalize the workers if found shirking at the workplace. High wage rate is also associated with the high chance of job loss. If one firm gives premium wage, then other firms will start to follow same trend, as a result of this getting a job will become tough for the people. This will induce them not to shirk in the work. Hence, high wage will lead to better performance of the workers.

Other theories have stated that high relative wage to the workers extract the feelings of gratitude from the labors that ultimately lead to high effort levels. Employees reciprocate their loyalty and high performance when the firm offer premium wage to them. This is perceived as gift in exchange. This makes the job attractive than other available jobs. Weiss have opined that low wage firm can only attract the low-ability workers and high-wage firm can attract the high-ability workers. Therefore, efficiency wage models claim that performance of the workers is positively related to the pay structure. Cost of losing a job falls if there is any unemployment benefits (Hamid and Kar 2015). In spite of high penalty for shirking, presence of unemployment benefit can reduce the effort put by the workers.

B.1: Labor Supply and Demand Theory

However, efficiency wage can be offered according to the effort of the workers. This implies that existing workers will increase their working hours (increasing the labor supply); they will remain focused on work and will shirk less, in order to get higher wage than market clearing wage. Therefore, higher pay influences the performance positively. 

From the above discussion, it has been made cleared that; high wage has significant positive impact on the performance of the labor.

The firm can pay an hourly wage to the worker that is known as input-based pay. A firm can also pay workers based on some measure of their performance that is output-based pay. The pay, which is output based, motivate the workers to put more effort. The firms also retain the workers by attracting the base salary. The output based pay structure is combination of base payment and incentive. However, people cannot put effort too much as it causes physical pain; stress etc. when a salary structure is a combination of input based and output based pay, then this is known as mixed salary structure. There are different types of performance pay, such as, incentive pay; merit pay; profit sharing; long-term incentive and performance bonus. Performance can be evaluated based on five properties. These are quantitative measures of performance evaluation. The five ideas are as follows:

Rating method: Using this method, the management can rate the performance of the employees based on attendance, daily achievement of job target, dependability and initiative. This method is easy and less costly.

Field review: Personnel from HR department of the organization can use this appraisal method to assess employee’s performance.

Comparative assessment: Application of this method has two processes such as ranking based on merit and rating an employee compared to another employee. Rater uses the formula N*(N-1)/2

360-degree feedback: Management collects data on performance of each employee from the stakeholders and peer group.

Self-evaluation: A set of objective and descriptive appraisal questions for each employee is prepared. Manager checks employee’s personal feedback with manager’s own evaluation. Manager takes decision about improvement of employee’s performance based on comparative assessment. 

The qualitative measure of performance evaluation can be useful to evaluate the performance for certain disadvantages of the quantitative measures. For example, in rating methods, ratersmay have biasness towards some employees. Moreover, disadvantage of field review is that, it may not be effective as the work environment is unfamiliar to the HR personnel. Moreover, the personnel may fail to review actual behavior of the employee by observing a few hours. In case of 360-degree feedback, receiving data from different source may have different views, based on which judgment can be difficult. However, quantitative analysis is much fairer than the personal and qualitative analysis, because it ignores the personal judgement and biasedness in most of the case.

B.2: Efficiency Wage Theory

When performance is evaluated and payment is given to the workers based on their performance, then they are more motivated to put effort in their work, in regard to earn more. Therefore, the supply of the labors in terms of working hour or effort will increase when the effort and performance is recognized by the management. Relatively high wage, i.e. basic pay along with bonuses, will lead to high supply of labors. Similarly, if the high performing labor is not getting higher return, then they will eventually lower their effort. This will lead to decline in labor supply and their efforts. More labors enter the workforce knowing that their effort will be recognized and they will receive extra payment for that. So, depending on the pay structure, labor supply varies.

Pay Structure of Singapore Airlines: This Airline is a reputed competitive commercial aviation business that offers high quality services to the customers. The company considers their employees as assets. SIA provides heavy training to its employees and invests $70 million annually in order to put each of its employees through rigorous training. Hence, hiring cost of this company is too high. As a result of this, the company wants their employees to perform best in the competitive market and monitor strictly on their performance.

The cost-leadership strategy of this company induces it to offer lower price to the employees.  However, they offer incentive or bonuses up to 50% of the worker’s salary(Harvard Business Review 2010). Therefore, the efficiency wage is provided to the employees; and hence it is performance-based. However, it is evident that due to some external factors, like SARS Crisis in 2003, Singapore Airlines felt to reduce number of its employees(Radioaustralia.net.au 2012). This represents lack of demand for labor in this firm.

Moreover, it has introduced variable component of wage package that would be given according to the performance of the employees. This indicates that SIA kept its basic pay at a lower level. At present also, the pay structure is performance based; however, the high percentage of bonus earning encourages the workers to give their best and improve their performance. Hence, wage offered by SIA and performance of its workers are significantly positively related.

Pay Performance Structure of Fair Work Commission, Australia:Fair Work commission of Australia have increased the minimum wage by 2.5% in 2015("Minimum Wage To Be Increased By 2.5Pc, Fair Work Commission Announces" 2015). This is believed that the rise in the minimum wage will motivate the low-level workers to put more effort to improve their performance. However, the problem related to this rise in minimum wage is that increase in minimum wage lead to job losses. This can be understood by applying the theories of labor demand and labor supply. Due to rise in minimum wage, the employers will reduce their demand for labor and workers will like to put more effort because of the high wage. Therefore, the gap between demand and supply of labor would tend to rise. The Small and medium enterprises will be affected by this measure as this might lead to job loss and business closures. Therefore, high pay structure tends to decline the performance of these firms. The more than rise in the minimum wage on the 2016 angered the influential employers and the stated that this might force them to shed workers(Toscano 2016). Unemployment will be created when the wage is set above the market-clearing wage, therefore, it verifies that the theory of efficiency that accepts the fact that high wage increases cost of job-loss. However, employees who are retained will put their best to improve the performance. This will help the company to improve its aggregate performance.

In this organization input based pay structure is applied based on performance of the employees. Paying daily or monthly wage is applicable under input based method. Fair Work Commission gives incentive to worker with the increase in sale. According to share value of the organization in the market, shareholders can be paid accordingly. Shareholders would get more dividends if the share value increases in the market. These are parts of output based payment, which is applicable in Fair Wok Commission.

It is recommended that the Fair Work Commission of Australia should control the dismissal of workers that is expected to rise due to rise in the minimum wage. Moreover, it has to check that even if the company wants to offer efficiency wage due to their own interest, they must not shed labors unreasonably, as this will hamper the employment scenario of the nation and lead to social unrest. FWC must implement policy to prohibit unlawful labor termination. This is important because; high wage is necessary for improving the performance level but this should not increase unemployment level in the economy. It is also suggested that FWC can implement performance-based wage instead of raising the basic wage for all employees. This will enhance the workers’ productivity.

Conclusion

The report has evaluated effective pay for initiating high performance to generate high outputs. It has been evident that high wage is crucial for improving performance but it also increases the unemployment level. It can be concluded that economies theories can be effectively applied by the FWC to monitor the activity of the firms in terms of employment and to take proper measures to avoid disputes among the employers and employees.

References

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