Payment Systems

Payment systems

The search for a way to motivate, reward and even control labour has led managers to devise a variety of payment systems.

Time-rate payment systems
These are simple payment systems where the workforce receives a basic wage or salary. Workers are rewarded for the amount of time they spend at work, and for most workers in Britain this is the average working week of thirty-six hours. In addition, holidays with pay are usually included. The system is very common in many jobs from teachers to bank workers and shopkeepers. It provides a simple method of calculating payment for employees, whether they are paid hourly, weekly, or monthly. It also overcomes difficulties that might arise when trying to work out the exact value of an employee’s work, for example a doctor. From the employee’s point of view such a system guarantees income.

Overtime
There are instances where employers operate a time rate system, but also offer overtime payments when individuals work for more than their normal number of hours per week. Overtime payment systems are common in the construction industry, for example.


Piece-rate payment systems
In manufacturing industries the most common method of payment is some form of payment by results, or a productivity related scheme. In some instances this can simply be payment to the worker for each item he or she makes/produces. This system was very common in the soft fruit industry where workers would be paid by the weight of each basket of strawberries or raspberries they picked. It is also felt to offer the greatest incentives to employees to maximise their output – the more they produce the more they get paid. However, a system that only offers piece-rate payments may result in little or no income for employees, because of breakdowns in machinery or other unplanned stoppages.

Piece rates plus a basic or fixed pay element
To avoid the problems mentioned above, some employers calculate pay using a system made up of two elements. Firstly, they will pay a basic or fixed-rate wage calculated on a time rate basis, and then to this they will add a variable, piece-rate element, calculated on output.

Commission payments
When looking to establish payment systems for a sales force, it is very common to base this too on a flat-rate wage supplemented by some form of commission based on sales volume or value achieved. In some organisations the greatest part of the wage received by the sales force comes in the form of commission paid. This has led to complaints that such workers may use pressure tactics in order to achieve sales – and maintain their own income levels.

Fringe benefits and non-financial payments
This covers any payments other than wages and salaries that an employer might make. They include private medical insurance, subsidised meals, company cars or loan and mortgage facilities. Since the 1960s fringe benefits have increased in importance, particularly in the managerial and professional sectors.

Bonuses
Another common production payment system is one that operates with a flat rate of pay that is then supplemented by a bonus directly related to the output
each worker, or group of workers, achieves. Such bonuses might be related to setting targets for:

• volume of output,
• quality standards achieved,
• reductions of wastage,
• improved machine use,
• reduction in the loss of working days through workplace accidents. (This last example is very common in the North Sea oil industry.)

Incentives to professionals
It is generally accepted that professional employees, for example dentists, doctors and other health service specialists, receive a basic salary from their employing health authority, but can enhance this by undertaking private patient work for which they receive payment on an individual case basis. There has also been an increase in ‘no win no fee’ legal cases in recent years. Based on a system devised in the USA, and particularly common in civil law suits for damage claims, the client only pays the lawyer a fee if the outcome of the case is in his favour. The percentage rate of the fee will be set out and agreed before the legal action is started.

Contract employment
It is becoming more and more common for employers to hire staff on a contract basis. This may be for the completion of a job or project, for example the building of a new stretch of dual carriageway, or may be for a fixed time period of, say, one university academic year. The employer can make substantial savings using a contract basis for employment – it is unlikely that he will offer paid holidays, pay for days lost through sickness, maternity pay or a company pension scheme. From the employee’s point of view the rate of pay is often higher than for those on permanent contracts. But there is a high degree of uncertainty and risk of loss of income when the contract ends.

Profit-sharing schemes
Although not widespread in Britain, there has been a move in recent years for employers to use systems that include a share of pre-tax profits as part of the payment made to the workforce. Some employers feel that this system is likely to increase the commitment from the workforce, not only in terms of output, but also in overall terms to the organisation itself. However, others are less enthusiastic and feel that the relationship between daily output and annual profit-share payments is too remote to be an effective motivator.

Reason for Preparing Budgets (2006 Past Paper)

Why are Budgets prepared? Remember there are different types of budgets.


Monitoring and control – comparison of actual performance with the budget

Allows the firm to take corrective action, eg increase production to meet forecast sales

Allows managers to organise resources

Sets targets for management and employees to reach

Individual managers/departments can be allocated budgets so that control is tighter

Cash budgets highlights periods when a negative bank balance is expected so finance can be arranged in advance

Forecasting cash surpluses allows a firm to invest money in assets

Allows managers to identify problems

Offer solutions

Plan for the future

Describe the advantages and disadvantages to an organisation of a structured decision making model (2005)

Again, here is a solution to a question that students struggle with. I think it is best to think about the decision being a Product Decision ie something that relates to whether or not we should launch/update/modify/alter/recall/drop products.

So with that in mind, think about the Cadbury's Fuse video. What would affect them as decision makers?

Time consuming to gather and analyse information – if a solution is needed quickly the structured model may slow down the process

Can be expensive to evaluate if the decision was a success or not.

Not always possible to gather sufficient information of quality

May stifle creativity - structured decisions leave no room for brainstorming or idea generation at times

Government legislation may interfere with the decision or change the effect of the decision.

Sometimes difficult to come up with alternative solutions – the best solution for the organisation may not suit the decision maker personally

Sometimes difficult to realise all the consequences of different solutions

Technology may be expensive or unavailable which can limit decisions.

No rash decisions made as time is taken to analyse the information

Information is gathered in quantity and of quality

Time taken to develop alternative solutions

Unmotivated workers may not perform as they were expected to, thus diluting the effect of the decision. They may not even agree with the decision.

Competitors may move the goalposts by making decisions of their own which counteract yours.

Quality Systems and how to improve quality

Benchmarking
Copying the best techniques used by other organisations
Products/services taken apart and re-engineered.
Can result in a better product than the original.
However if it takes time, competition may have moved on from what was the original best practice.

Quality Circles
Small groups of employees from different departments and at different levels of management who meet to discuss and solve quality issues.
Improves the workforces motivation as they feel more valued as their opinions are taken into consideration.
Suggestions are made to management for approval

Quality assurance
Products are checked at various stages during production
Unacceptable products are discarded

TQM (Total Quality Management)
No errors tolerated
Treat everyone in the production chain as a customer therefore creating a Quality Chain.
Based on Kaizen philosophy (Continuous improvement)
All staff involved and committed to ensuring high quality (unlike Quality Circles where only small groups are targeted)
Work processes scrutinised
Constant strive to make processes more efficient and reduce waste
Focus on teamwork
Training provided

BSI
A national standard for certain products
When a business meets the standard its product can carry the BS Kitemark
Other quality standard symbols also exist (Lion marks on eggs)

Recruitment
Quality staff need to be appointed
Staff with appropriate qualifications, skills and qualities must be appointed

Training
Quality training must be provided regularly

Materials and Equipment
Good quality materials must be purchased
Equipment must be maintained regularly

Workplace Legislation

Health and Safety at Work Act 1974
States employees’ and employers’ duties with regard to health and safety
Employers have a duty to take responsible care of their own health and safety as well as that of their employees

Office, Shops and Railway Premises Act 1963
States regulations which must be met by employers regarding working temperatures, toilet and washing facilities, first aid, space requirements, cleanliness

Equal Pay Act 1970
States that all employees should receive the same pay when work of equal value is undertaken

Race Relations Act 1976
Unlawful to discriminate on the grounds of race, colour, religion or ethnic origin regarding recruitment, training, promotion, conditions of service

Sex Discrimination Act 1975
Unlawful to discriminate on the grounds of sex or marital status regarding recruitment, promotion, training, conditions of service
Victimisation and sexual harassment are unlawful

Employment Rights Act 1996
States duties and rights of employer and employee
Includes the right to a written Contract of Employment within 2 months of starting work
The right to an itemised pay slip
Rights of employees regarding Sunday working
Rights of employees regarding maternity and termination of
employment

Data Protection Act 1998
Data must be obtained fairly and lawfully
The organisation must register the purpose for which the information is held
They must keep records for no longer than necessary
The information must be up to date and accurate
Employees have a right to request to see information held about them and have it changed if incorrect
The information should not be used for any other purpose than that for which it was collected
They must take appropriate security measures to keep the information safe

Sources of Finance

Leasing
Renting of vehicles or equipment
More expensive in the long term than buying the asset
Asset is replaced when obsolete
Spread payments

Share issue
Dividends have to be paid to shareholders
Loss of control possible
Can generate large amounts of money/capital

Debentures
A long term loan to plcs
Debenture holders receive fixed interest
Debenture holders receive the money lent back

Venture Capital (think Dragons' Den)
Venture capitalists lend money when banks think it is too risky
Large amounts lent but interest is high
Part ownership often needed in exchange for finance

Hire purchase
A deposit is required and the rest of the price is paid in instalments
Ownership remains with the finance company until the last instalment
is made

Mortgage
A large sum of money borrowed from a bank or building society to
purchase property
Monthly repayments required (interest)
Long term borrowing eg 25 years

Grants
Some of the money paid by eg Local Authority or Government
No need to repay a grant
May be given if organisation is creating jobs in an area of high
unemployment etc

Sale of asset (Divestment)
Equipment or property which is no longer required is sold off to raise
cash

Retained profits
Profits made are not distributed to the owners but kept back for
reinvestment

Costs and Benefits of Staff Training

People are an organisations greatest resource. But they have to know how to do their job. Skills have to be updated and renewed via training, which can be on-the job or off-the job.

But like everything there are costs and benefits. So again, taking this from the 2005 Higher solutions here are some short answers for your study!

Costs
Financial costs of courses
Working time is lost
Quality of work may be slower/poorer quality when staff are training
Resistance to the benefits of training

Benefits
Increased competence
Improves flexibility of staff
Increased motivation of staff
Increased production levels
Easier to introduce change
Image of organisation improves