Remuneration in HRM: An Overview of Pay for Contribution Strategy

By Rusky Ahamed

Introduction

Traditionally, Human resource management remuneration strategies have always depended on "Pay by Position." Employee compensation is determined by the level of their position or job title under this method. However this method fails to take into account the individuals with distinct skills, knowledge, and experience, which could result in pay gaps and low employee engagement & motivation.

A better approach to remuneration is "Pay for Contribution," which aligns compensation with the individual's value to the organization. Individual performance, talents, abilities, and ability to contribute to and grow with the business are all taken into consideration by this strategy (Armstrong, 2007).

Figure 1:Pay for Contribution
(Kumar & Pillutla, 2021)

Importance of Pay for Contribution Strategy

According to Stahl, Björkman, and Farndale (2017), Pay for Contribution, which emphasizes individual contributions to the success of the company rather than job title or position, is more effective in advancing organizational goals. This strategy encourages workers to perform better and be more productive, which can boost earnings and enhance employee satisfaction and retention.

(GreggU, 2022)

Skill-Based Pay

Skill-based pay is one practical application of the Pay for Contribution approach. This approach rewards employees according to their specific skills, competencies, and expertise essential to perform their jobs. Skill-based pay can motivate employees to gain new skills and acquire additional knowledge to bring greater value to their roles (Milkovich & Newman, 2018). Furthermore, it can help companies in keeping important and valuable employees and attract skilled workers who are more likely to appreciate the recognition of their unique skills.

Figure 2: Benefits of Skill Based Pay
(Echtelt, 2023)

Effectively Implementing Pay for Contribution Strategy

However, implementing Pay for Contribution effectively requires managers to provide regular feedback and facilitate regular discussions about employee performance, growth, and development. This approach is more complex than a traditional approach, and it needs more time, resources, and expertise to review employee performance and allocate appropriate compensation (Stahl, et al., 2017).

Figure 3: Implementing a Skill Based Pay Strategy
(Echtelt, 2023)

Conclusion

Pay for Contribution is a powerful alternative to the traditional remuneration approach of Pay by Position. It aligns compensation with employee contributions to the organization and encourages them to develop their skills, knowledge, and performance. Organizations that adopt a Pay for Contribution approach can gain a competitive advantage in today's swiftly developing business environment.

References

• Armstrong, M., 2007. A Handbook of EMPLOYEE REWARD MANAGEMENT AND PRACTICE. 2nd ed. Philadelphia: Kogan Page Limited.

• Echtelt, R. v., 2023. Defining and implementing skill-based pay strategies in the knowledge economy. [Online] Available at: https://www.ag5.com/defining-and-implementing-skill-based-pay-strategies-in-the-knowledge-economy/[Accessed 19 03 2024].

• GreggU, 2022. Total Rewards in Talent Management. [Online] Available at: https://www.youtube.com/watch?v=_m5HFoAL2vM[Accessed 19 03 2024].

• Kumar, N. & Pillutla, M., 2021. Pay for Performance: When Does It Fail?. [Online] Available at: https://mbrjournal.com/2021/01/21/pay-for-performance-when-does-it-fail/#:~:text=First%2C%20that%20pay%20for%20performance,motivation%20can%20actually%20decrease%20performance.[Accessed 19 03 2024].

• Milkovich, G. T. & Newman, J. M., 2018. Compensation. s.l.:McGraw-Hill Education.

• Stahl, G. K., Björkman, I. & Farndale, E., 2017. Handbook of Research in Global Talent Management. 2012 ed. s.l.:Edward Elgar Publishing.