The Analysis of Business Structures

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THE ANALYSIS OF BUSINESS STRUCTURES

Whether or Not the Frequency and Regulation of Employee’s Pay Matter.

ESSAY QUESTION

A lot of research in economics has examined the effects of how and how much an employee is paid by her employer. Does it also matter when (i.e. how frequently) an employee is paid? If so, should the timing of pay be regulated by governments?

Introduction

The labour market is a competitive market where firm owners devise employees’ pay in order to attract and retain staff at a minimum cost. In order to take full advantage of the sum of the principal and agent’s utility in the labour market and to reduce agency cost, the need for optimal contract arises and is vital for solving the incentive problem (Brickley et al., 2009). Pay has always been one of the vital issues in creating optimal contracts (Yeh et al., 2009).

This writing seeks to explore the employee pay, which is one of the issues encountered in the labour market. The issues to be explored are; pay dispersion, whether the frequency of pay matters as well as whether or not the timing of pay should be regulated by the government.

Empirical Evidences on the Effect of Employee Pay Dispersion

Employee pay structure characteristics (i.e. performance-based and non-performance-based pay) can encourage or discourage turnover among employees, since hourly wages, salary or incentive pay act as key motivators for most employees (Rynes et al., 2004; Downes and Choi, 2014; Brickley et al., 2009; Fama, 1991).

Equally important is the employee pay dispersion, which can also be referred to as pay variation or pay differential. To address this issue further, most researchers’ have found out that performance-based pay dispersion is generally motivating for firms and employees (Downes and Choi, 2014; Kepes et al., 2009; Shaw et al., 2002; Ding et al., 2009; Gupta et al., 2012). Furthermore, employees will react in a different manner depending on their position in the chain of command i.e. top level employee react optimistically to pay dispersion while low level employee responds pessimistically to increased pay dispersion. On the contrary, an empirical investigation carried out by Hunnes (2009) on wage dispersion shows that it is not easy to ascertain the effect of these changes on firm’s performance.

Having briefly discussed the effects of pay dispersion on employees and organisational performance, the next section seeks to explore the reason why the frequency of pay matters which is equally important in the structure of pay.

Does Frequency of Pay Matter?

The frequency of pay relates to how often employees are regularly paid by their employers for their efforts (Parsons and Van Wesep, 2013; Zhang, 2013a). According to Parsons and Van Wesep (2013) the frequency of pay should matter especially for employees who are paid less thereby encountering less savings buffer with which to smooth consumption (i.e., workers who earn less should be paid more frequently). For this reason, the frequency of pay is significantly important as a result of the regular expenditures (i.e. monthly bills) and self-control problems by employees not adhering to consumption schedule which has been pre-planned, thereby causing low savings (Parson and Van Wesep, 2013). In addition, the differences in worker’s education, financial sophistication and income are also considerable reasons why the frequency of pay matters (Parsons and Van Wesep, 2013).

Contrary to Zhang (2013a) prediction, his empirical findings show that due to complex environment faced by different people when making decisions, timing differences in workers income can be of large consequence on the household consumption pattern of workers. Corroborating this view, Stephens and Unayama (2011) and Stephens (2006) supported this notion by concluding in their study that household consumption responds to the receipt of forecasted seasonal income variation. This occurs due to time inconsistency, mental accounting and budgeting heuristics in which inexperienced individuals predict their current income into the future (Zhang, 2013a; Zhang, 2013b). Apparently, the frequency of pay matters. Zhang (2013b) also supported Parsons and Van Wesep (2013) that individuals that are time inconsistent have present-biased preferences and exhibit problems with self-control.

Furthermore, Hollensbe and Guthrie (2000) on a study of a group pay-for-performance plans, found that groups are extremely motivated in their job and will be committed to the challenging goals set by them if their pay is based on performance and frequent pay.

On the contrary, Chung et al. (2010) examined the effects of incentive pay frequency on quality measures in a physician-specific pay-for-performance (P4P) experiment and found no degree of difference in the general quality measure scores based on the frequency of pay.

Drawing on the ideas of different researchers on whether the frequency of pay matters, it is obvious that frequency of pay has some benefits. According to Parsons and Van Wesep (2013), the positive effect of the frequency of pay is more significant for workers who earn less and also, frequent pay leads to an increase in workers’ utility, reduction in the general wage the worker is eager to accept, and minimizes firm cost. Similarly, in order to avoid the huge consequence of household consumption pattern, the frequency of pay matters (Stephens, 2006; Stephens and Unayama, 2011; Zhang, 2013a). Frequency of pay can also help to avoid expected variation in the total of income received per consumption decision period (Zhang, 2013a; Zhang, 2013b). Plans with larger and enhanced frequency in bonus payment have greater motivation influence for workers (Hollensbe and Guthrie, 2000).

Despite the overall benefits in favour of the frequency of pay, some researchers have found that it also has some undesirable effects on the firm. The benefit of frequency of pay to employees might sometimes lead to a variation that is unrelated to marginal utility of the firm pay (Parsons and Van Wesep, 2013). Moreover, frequent payment has been seen to be expensive as unstable employees encounter feast-famine consumption cycle during their period of pay (Parsons and Van Wesep, 2013).

Based on the research reviewed to this point, most researchers have argued that the frequency of pay matters although limited research has been carried out on the effect of the frequency of pay. The next part seeks to explore whether or not the timing of pay should be regulated by the government in correlation to the frequency of pay.

Should the Timing of Pay be regulated by the Government or Not?

With all the benefits in alignment with the timing of pay, issues on pay still arises both on the firm level and at the national level. Most researchers are in support of the regulation of pay by the government because it has been seen to be of great benefit to the employees, has a significant impact on the compensation structure and enhance optimum contracts (Parsons and Van Wesep, 2013; Fama, 1991; Perry and Zenner, 2001). According to Parsons and Van Wesep (2013), the government of some countries are involved in the regulation of the timing of pay by specifying the minimum time between pay checks (e.g. weekly, bi-weekly, monthly etc) or by fixing a compulsory pay (e.g holiday bonuses,). However, the implementation of the frequency of pay through regulation by the government can be through fixed wage plus a bonus for the holidays, summer vacations, signing and severance (Parsons and Van Wesep, 2013). For example, the regulation of holiday bonuses and the frequency of pay are obvious in United States, Indonesian, Mexican, Greek, Sweden etc.

Regulating the timing of pay by the government has been seen as a great benefit for employees and assisting workers to help themselves (Parsons and Van Wesep, 2013; Fama, 1991; Perry and Zenner, 2001). Thus, in order to gain from enhanced timing of pay, a monitoring mechanism which is government regulation has to be provided(Parsons and Van Wesep, 2013). This notion was supported due to time-inconsistency leads to workers having the tendency to renegotiate thereby preventing optimal contracts. Furthermore, Parsons and Van Wesep (2013) observed that employees have self-control problems which will lead them to sell their future pay at a discount in order to maximize the huge short run discount rate.

Equally important is the government regulation on the frequency of bonus pay for the CEO compensation contract. The research conducted by Perry and Zenner (2001) reinforces the point that it has been observed that there is a current connection with lagged returns which is certain due to the timing when some organisations determine their bonus pay-outs and total pay. In direct correlation to this point of view, there was a positive significant impact in considering the government regulation in the timing of bonus pay

From a Contrasting perspective, it is worth mentioning that piece-rate payment has been a contentious labour issue in many developed countries. According to the research conducted in Sweden by Smucker et al. (1998), he found that this kind of pay system was highly regulated and was legally recognized only under some situations because regulation was seen as a form of inappropriate control and was considered to be associated with job strain.

Conclusion

A firm’s performance is often related to the dedication of its workers to joint values, which itself is a requirement for cooperative behaviour (Tremblay et al., 2000). Amongst some of the factors which are prone to enhance workers dedication, the awareness of fairness is significantly one of the ethics to which workers are the most insightful which includes, value and structure of pay, pay satisfaction as well as the frequency of pay.

The main findings of the above discussion according to different researchers on the frequency of pay are effectively summed up in Parsons and Van Wesep (2013) that the frequency of pay matters to workers who earns less than the educated and rich workers since the distribution of present-bias varies relying upon the job rank and educational level of attainment. Researchers are divided on whether or not timing of pay should be regulated by the government, though the majority support regulation.

References

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