Seniority Versus Performance Based Pay Systems
Seniority Versus Performance Pay SystemsSeniority-based pay systems are those in which the primary basis for pay increases is the employee’s tenure. It should be noted that seniority-based pay systems can take into account performance, but the main factor is tenure. Some benefits of seniority-based pay include loyalty, retention, and stability of all staff members, regardless of performance levels. Performance-based pay systems consider performance as the primary basis for pay increases. As with seniority-based pay systems, other factors, like tenure, can be accounted for in a performance-based system, but employee performance, however conceptualized by the organization, is the impetus in determining pay raises. Performance-based pay systems can actually lead to a climate in which all employees are working hard to achieve maximum performance. While this certainly sounds like an ideal option, there are several downfalls, such as the potential for high turnover rates as average and lower performing employees can get discouraged when they regularly fail to receive merit increases. A common analogy used to help conceptualize this is the tournament analogy. The ‘winners’ are the high performers who often receive increases, and the ‘losers’ are the average and low performers who are being passed over for increases. As you would expect, those who consistently lose the tournament are likely to stop playing the game, i.e. quitting.
What Factors Can Alter This Process?
- Pay System Communication
- Pay Dispersion
Practical ImplicationsWhen choosing the emphasis for the pay system of any job within your organization, be sure to:
- Determine what kind of balance you would like to find between a pay system that encourages only the high performers to stay, and one that is inviting to the entire workforce.
- Remember that, while it may sound like a good idea to weed out the low and average performers and only retain the high performers, this can lead to an ongoing cycle of high turnover and its associated costs. Mentoring, training, and other forms of coaching should be utilized to try to raise the performance level of the lower performers.
- Ensure that, regardless of pay system, a high level of pay system communication is present to reduce the likelihood of employee discontent and associated union organization.
DeGarmoThis was a summary of the research and practice implications from: Shaw, J. D., & Gupta, N. (2007). Pay system characteristics and quit patterns of good, average, and poor performers. Personnel Psychology, 60, 903-928.