Define Pay. What are its importance and objectives.

We can define pay as Compensation, discharge or performance of an obligation or 

reimbursement, by giving over something that is of satisfactory value to its recipient, such 

as money.

Importance of Pay:  

Pay represents by far the most important and contentious element in the employment 

relationship, and is of equal interest to the employer, employee and government -

1.     to the employer because it represents a significant part of his costs, is increasingly important

2.     to his employees' performance and to competitiveness, and affects his ability to recruit and

3.     retain a labour force of quality;

4.     to the employee because it is fundamental to his standard of living and is a measure of the

5.     value of his services or performance;

6.     to the government because it affects aspects of macro-economic stability such as

employment, inflation, purchasing power and socio-economic development in general.

While the basic wage or pay is the main component of compensation, fringe benefits and cash and  non-cash benefits influence the level of wages or pay because the employer is concerned more about  labour costs than wage rates per se. The tendency now is towards an increasing mix of fringe  benefits, which therefore have an important impact on pay levels. In industrialized countries, and  sometimes in countries with high personal tax rates, the non-pay element of executive compensation  has substantially increased in recent years.

Objectives of Pay

Pay determination may have one or more objectives, which may often be in conflict with each other.  The objectives can be classified under four broad headings.

The first is equity, which may take several forms. They include income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power), the concept of equal pay for work of equal value. Even pay differentials based on differences in skills or contribution are all related to the concept of equity.

A second objective is efficiency, which is often closely related to equity because the two concepts are not antithetic. Efficiency objectives are reflected in attempts to link a part of wages to productivity or profit, group or individual performance, acquisition and application of skills and so on. Arrangements to achieve efficiency may be seen also as being equitable (if they fairly reward performance) or inequitable (if the reward is viewed as unfair).

A third objective is macro-economic stability through high employment levels and low inflation, for instance. An inordinately high minimum wage would have an adverse impact on levels of employment, though at what level this consequence would occur is a matter of much debate. Though pay and pay policies are only one of the factors which impinge on macro-economic stability, they do contribute to (or impede) balanced and sustainable economic development.

A fourth objective is the efficient allocation of labour in the labour market. This implies that employees would move to wherever they receive a net gain; such movement may be from one  geographical location to another, or from one job to another (within or outside an enterprise). Such movement is caused by the provision or availability of financial incentives. For example, workers    may move from a labour surplus or low wage area to a high wage area. They may acquire new skills to benefit from the higher wages paid for skills. When an employer's wages are below market rates employee turnover increases. When it is above market rates the employer attracts job applicants.

When employees move from declining to growing industries, an efficient allocation of labour due to structural changes takes place.