“What are the factors at play in determining the pay and conditions of London train drivers, top company executives and investment bankers, and how large differences in pay have impact on employee morale and employee relations.”

The study is divided into two parts based on the following issues:

(1) What are the factors at play which determine the pay and conditions of    London underground train drivers Top company executives Investment Bankers

(2) To what extent may large differences in pay within an organisation impact upon employee morale and employee relations? If so what can be done to address the issue?

1.Introduction: From our basic knowledge, we know that for a job, there are different factors that help in determining the salaries and bonuses of an employee, job criteria and other work related issues. Similarly, to determine the pay and conditions of the London underground train driver, top company executive and investment bankers, there would be pay determining components/factors. However, since the above mentioned three jobs are different and unique, there pay determining factors too would be different. For the purpose of the study, Dunlop model has been considered. Now we will be having a close look at each of these pay determining factors one by one:

1/13 | P a g e

Inputs

Transformation

Outputs

Actors (Employers, Employees, State) Contexts (Technological, Market, Power) Ideology

   


Bargaining Conciliation Arbitration Legislation Judgements

Rules

Input

General Environment Figure: Dunlop System Model from Employee Relations Management, (Kumar and Singh, 2011) During 1950s, John T. Dunlop developed a framework named “The Dunlop Model” and has made remarkable contribution to the Industrial Relations (Kumar and Singh, 2011). Dunlop explained that industrial relation operates within a system and therefore, it has to interact with the environment, which involves actors, environmental context and ideology (Kumar and Singh, 2011). The system is composed of three sets of actors namely: the managers and the workers along with their representatives respectively and finally the State along with their agencies that is linked to the workplace. However, the environmental context is composed of technological issues, market related factors and the power used by the actors. Besides, all the parties involved are governed by an ideology that combines the total system (Kumar and Singh, 2011). However the procedure is affected depending on the behaviors executed by the input factors. And also the outcome, for example, compensation packages, is dependent on the input and transformation phases that helps to understand the system (Kumar and Singh, 2011; Rose, 2008). 1.1.London underground train drivers: From the study it has been found that the basic pay of an underground train driver is around £ 45,000 annually (telegraph, 2012). However, though the pay may be high, there are several
2/13 | P a g e

important components that actually influence and help to set the pay of these drivers. Below is a brief discussion of those pay influencing factors:  Inflation: One of the studies reveals that the pay and condition of London underground train drivers depend on inflation (guardian, 2011). If the Retail Prices Index (RPI) inflation goes up, then the train drivers will see increase in salary by almost 20% (guardian, 2011).  Stressful job: One of the reasons why these train drivers claim higher compensation is that the job requires maximum focus on the job and they need to work day and night, which indicates the job is quite different from others (telegraph, 2012).  Training: Another important pay determining factors at play has been the qualified train driver after getting properly trained (Ballinger, 2002). It has been found that an underground train driver in London, who is qualified or have better understanding about the functioning of train, claims double compensation than those who are not trained (Ballinger, 2002).  Technology: A study revealed that increase in the use of technology to make the operating of train faster has influenced the pay of train drivers (telegraph, 2012).  Customer satisfaction: It has been found that customer satisfaction can help a London underground train driver to earn extra bonus, if the customers are satisfied with the service they receive (telegraph, 2012). So from the above discussions, it is quite clear that there are several factors that play a vital role in the pay determination of the London underground train drivers. Even it has been found that customers, to some extent, can also influence the bonuses earned by the train drivers. 1.2.Top Company Executive: There are different factors that help to determine the pay issues and the conditions related of the Top Company Executives (TCEs). Some important factors considered worldwide in determining their compensation structure and other conditions are summarized here:

3/13 | P a g e



Shareholders and TCE pay: One of the important factors that have been seen determining the pay of a top chief executive is the presence of outside shareholders. From a study it has been found that the pay of a CEO is low if the company possesses higher number of outside shareholders (Hengartner and Ruigrok, 2011). However, the opposite is also true if the company has lower number of outside shareholders. However the scenario is quiet different in China and it seems such combinations are insignificant there (Li et al. 2007).



Compensation committee and the compensation of the CEO: The compensation of a CEO of a company seems to vary depending upon the presence of compensation committee in the company. The relationship between the two is positive and a survey revealed that presence of such committee raises the pay of a CEO up to 29% (Hengartner and Ruigrok, 2011). However, pay does not rise if such committee is absent in the company (Hengartner and Ruigrok, 2011).



Presence of independent directors and the TCE pay: Another essential TCE’s pay determining factor is the presence of independent directors in the company. Study revealed that pay of TCE declines if independent directors exist as they exert more power over CEO (Hengartner and Ruigrok, 2011). On the contrary, this factor hardly plays a role in determining the pay packages of the TCE residing in China (Li et al. 2007).



TCE with a celebrity status and the pay of TCE: A TCE who is a renowned person or very well recognized as a celebrity seems to claim a higher pay than other CEOs. From a survey it has been found that CEO with a celebrity status claims 50% higher salary than the CEOs without celebrity status (Hengartner and Ruigrok, 2011).



TCE holding the position of Chairman and the pay of TCE: Along with the position of a CEO, if, he/she holds the position of the Chairman of the board of directors, then the CEO has more power over the board members and in the operations of the company and claims huge compensation. Experts say that pay of CEOs with such dual power increases by 24% (Hengartner and Ruigrok, 2011). On the contrary, unlike US and many other developed countries, pay of TCE of China based companies

4/13 | P a g e

seems to depend on issues like globalization rather than taking advantage of weak variables discussed above (Li et al. 2007).  TCE tenure, performance and TCE pay: Length of service seems to be an important variable that affects the pay of a TCE. The more the tenure of a CEO in a firm, the higher is the pay (Shin, 2008). However a study in china revealed that along with tenure, performance has also to be considered for higher pay to TCE (Cao et al. 2011). Thus, from the above discussions, it is clear that the pay and conditions of the top company executives (TCEs) seems to vary from country to country, as seen in the case of China above. That means environmental context plays a vital role in determining the pay and conditions of the TCEs. And also the actors and ideologies involved in the process contribute in the TCE’s compensation determination. 1.3.Investment Banker: Investment bankers are those who help different firms and investors in case of issuing securities, buy and sell securities, and come up with suggestions where and when to make investment that would be benefit for the investors (careers in finance, 2012). Below is a brief discussion on different factors that influence the pay and condition of the investment bankers:  Performance: One of the determining factors at play for pay and condition for the investment bankers is that pay is based on performance (Prospects, 2012).  Education Qualification: Educational Qualification has been an important pay determining factor for the investment banker. A survey shows that an investment banker with an MBA degree or Masters claims higher compensation than investment banker without an MBA degree (Oyer, 2008).  Work pressure: From a study it has been found that investment bankers have to face extreme work pressure at the beginning of their career which influences their pay structure (Horkan, 2013). It is to be stated that working hour seems to be around 100 hours at the beginning of an investment banker’s career (Horkan, 2013).

5/13 | P a g e



Size of the organization: A positive relation has been noticed between the size of the organization and the pay and benefits of an investment banker (Severson, 2013). If the company size is big, the pay of the investment bankers is also high (Severson, 2013). Large size investment banks include Goldman Sachs, J.P. Morgan Chase, which are worldwide recognized as “bulge bracket” investment banks (Horkan, 2013).



Geographic region: Another pay determining factor of an investment bank is where the investment bank is located (Severson, 2013). It has been found that investment bankers in Connecticut, claim higher compensation which is above 30% than market standard, whereas it is even lower than around 22% than average in places like Nebraska (Severson, 2013).



Vast knowledge about the investment banking: Investment bankers having more insights and knowledge about various sectors of investment banking generally claims relatively higher pay than those who have limited knowledge and are confined within one or two segment (Valecillos, 2011).



Recession: The worldwide recession, especially during the year 2008 and 2009, seems to have negative impact on the pay and bonuses of the investment bankers and some of them had to quit their jobs due to this crisis (Careers in Finance, 2012; Mclagan, 2012).



Banking regulation: Another important pay determining factor has been the banking regulation that influences the pay of investment bankers (Mclagan, 2012). Research reveals that increase in the banking regulation can lower the pay of investment bankers (Mclagan, 2012).



Governance structure: At present, most of the investment banking are seen to give more importance on transparency related issues and governance as experts say these factors play a vital role in compensation structure determination of the investment banking investment bankers (Mclagan, 2012).



Experience beyond the nation:

6/13 | P a g e

Working in abroad or having international experience helps an investment banker to claim higher compensation, since working in different cities and foreign market equips investment banker with vast knowledge and the results in higher pay (Valecillos, 2011). Thus, from the above discussions, it has been clear that there are many different factors that play a major role in determining the pay and condition of the investment bankers. Also it has been observed that economic factors significantly influence the compensation structure of the investment bankers and along with it, transparency and banking regulations are also seen receiving huge importance. 2.Employee morale and employee relations: Employee morale depends on the perception of an employee about the issues like pay, promotion that he/she believes to have a major impact in his/her workplace (Steyn, 2002). Employee relations is a relationship between an employer and an employee that is build on the factors like ethics, morals, fairness and others needed for the betterment of the organization (CIPD, 2005). 2.1.How pay difference affects employee morale and employee relation: 2.1.1.Introduction: The pay differences between CEO and worker seem to increase day by day. According to a survey, a CEO in U.S. gets 354 times high pay than that of a worker (Trottman, 2013). For example, it has been found that the CEO of Wal-Mart gets 717 times compensation than the workers (Anand, 2011). However, the scenario is not confined only to the western countries; its impact is also seen in Asia too. In one of the survey in India, it has been found that the CEO gets 285 times more than the workers (the economic times, 2013). This high in pay differences has weakened the relationship between the employers and employees. It has been seen that this large differences in pay lowers employee morale, results in low performance and employees have high intention to leave the company (Pedrotty, 2011). 2.2.Steps to increase employee morale and strengthen employee relations: However, though large differences in pay structure lower employee morale and weaken employer-employee relationship, there are few important workplace related issues through which an organization can raise employee morale and strengthen employer-employee relationship. These issues are briefly narrated below: 2.2.1.Psychological contract: A psychological contract is a contract that is unwritten, basically takes place between employers and employees, where both the parties make each other aware of what they expect (CIPD, 2005;
7/13 | P a g e

Robbins and Judge, 2009). However, since the contract is unwritten, commitment from both the parties is very essential (CIPD, 2005). An example could be employees expecting job security or pay raise and employers seeking performance from each other (Roe and Schalk, 2007). Researchers explain with the help of a model how psychological contract works (CIPD, 2005): Influencing factors Psychological Contract Outcomes Employee attitudes Trust   Work satisfaction commitment

Individual characteristics

Fairness Organizational climate and context

HR policies and practices

Delivery of the deal

Employee behavior   Job performance Intention to quit

Figure: managing the psychological contract (CIPD, 2005) It has been observed that success of a psychological contract has positive relation with issues like trust, fairness and how the deal is being delivered by the employers and thus results in higher satisfaction and increased in commitment by the employees towards the organization (CIPD, 2005). On the contrary, breach of psychological contract takes place when particularly, employees’ expectations are not met (CIPD, 2005). In a study, it has been found that breach of psychological contract lowers employee morale, executes unproductive behavior and has high intention to leave the job (Bukhari, Saeed, Nisar, 2011). However, psychological contract can be changed since there isn’t any hard and fast rule, and thus employee morale can be regained by the employers which will strengthen employer-employee relationship (CIPD, 2005).

2.2.2.Equity theory: “Equity Theory”, also known as the “Inequity” theory or “Social Comparison” theory, pioneered by John Stacey Adams in 1963, stated that an employee’s motivation in the workplace depends
8/13 | P a g e

on what he/she thinks to be fair and right when comparison is made with other employees (Aswathappa, 2009; Baird, 2013). When equity theory is applied in the working environment, there must be a balance between what employees gives in into the workplace as input and the output/outcome expected to be received for the given input (Baird, 2013). Factors like experience, skill, commitment, integrity, hard work, performance are considered as input, while factors like pay, bonus, recognition, intangible rewards are considered as output (Baird, 2013). However, Aswathappa (2009) explains that, when employees find they have been treated unfairly, sees imbalance between the input and the outcome, they lose interest to work and become demotivated. Aswathappa (2009) said that an employee is likely to go through the following stages if finds unfair treatment in the workplace: Individual perceives inequity

Individual experiences tension

Individual wants to reduce tension

Individual takes action However, employee morale and productivity can be enhanced if equity theory is applied appropriately in the workplace. Dessler and Varkkey (2009) explains there are four types of equity needed to be considered by the employers or top management along with the compensation packages to boost up the employee morale. These are:  External equity i.e. comparing compensation packages among different companies operating in the same industry and this can be done through pay survey (Dessler and Varkkey, 2009), Internal equity i.e. comparison among the jobs within the organization and this can be done using job analysis and job evaluation (Dessler and Varkkey, 2009), Individual equity i.e. ensuring fairness among the pay of an individual as well as his/her colleague and this can be ensured through performance evaluation (Dessler and Varkkey, 2009) and Procedural equity i.e. making employees ensure that the process used to design the pay system for the employees is true, fair and transparent and this can be done by exchanging information with the employees and also giving importance to their opinions (Dessler and Varkkey, 2009).

 



9/13 | P a g e

2.2.3.Employee commitment: Employee commitment seems to vary depending upon the work related conditions involved. Employee commitment seems to increase in the companies that provides good pay, provides career growth, good working environment (Rodley, 2010). However, if the salary gap is higher, employee morality degrades and commitment level goes down (Pedrotty, 2011). So by minimizing the pay gap and increasing other benefits employee commitment should be increased.

References: Anand, V., (2011), “Conference Addresses to CEO-to-Worker Pay Disparity” [Online] Available at: http://www.aflcio.org/Blog/Corporate-Greed/Conference-Addresses-CEO-toworker-Pay-Disparity [Accessed 15 May 2013] Aswathappa, K., (2009), “Human Resource Management: Text and Cases”, 5th edn., New Delhi: Tata McGraw-Hill Publishing Company Limited. Baird, C.M., (2013), “Equity Theory”, [Online] Available at: https://wikispaces.psu.edu/display/PSYCH484/5.+Equity+Theory [Accessed 16 May 2013] Ballinger, L., (2002), “Train drivers” [Online] Available at: http://www.guardian.co.uk/money/2002/jun/16/wageslaves.careers [Accessed 15 May 2013] Bukhari, T.A.S., Saeed, M.M., and Nisar, M., (2011), “The effects of psychological contract breach on various employee level outcomes: The moderating role of Islamic work ethic and adversity quotient”, African Journal of Business Management, Vol. 5(21), pp. 8393-8398 Cao, J., Pan, X., and Tian, G., (2011), “Disproportional ownership structure and payperformance relationship: evidence from China’s listed firms”, Journal of Corporate Finance, Vol. 17, Issue no. 03, PP.541-554 Careers in Finance, (2012), “Careers-in-Investment-Banking.com” [Online] Available at: http://www.careers-in-finance.com/ib.htm [Accessed 18 May 2013]
10/13 | P a g e

Careers in Finance, (2012), “Investment Banking: Salaries” [Online] Available at: http://www.careers-in-finance.com/ibsal.htm [Accessed 18 May 2013] Chartered Institute of Personnel and Development (CIPD), (2005), “Managing Change: the role of the Psychological Contract” [Online] Available at: http://www.cipd.co.uk/NR/rdonlyres/06B92739-19F8-4BB4-AE47796EA5F5CB15/0/manachang1105.pdf. [Accessed 17 May 2013] Chartered Institute of Personnel and Development (CIPD), (2005), “Reflections on employee well-being and the psychological contract” [Online] Available at: http://www.cipd.co.uk/NR/rdonlyres/529EB140-833C-4849-85E70BC321170240/0/refempwbpsycon0605.pdf. [Accessed 17 May 2013] Chartered Institute of Personnel and Development (CIPD), (2005), “What is employee relations ?” [Online] Available at: http://www.cipd.co.uk/NR/rdonlyres/B39AFC72-25BD-4C10-B1BA3564CAC3BBB3/0/whatemprels1105.pdf. [Accessed 17 May 2013] Dessler, G., and Varkkey, B., (2009), “Human Resource Management”, 11th edn. India: Pearson Education in South Asia, Dorling Kindersley India Pvt. Ltd. Guardian, (2011), “Tube drivers' salaries to rise to more than £50,000” [Online] Available at: http://www.guardian.co.uk/uk/2011/oct/03/tube-drivers-salaries-50000 [Accessed 15 May 2013] Hengartner, L., and Ruigrok, W., (2011), “Pay for power? Explaining CEO compensation as a function of CEO power”, Die Unternehmung, Vol. 65(1), PP. 99-115. Horkan, L., (2013), “The Average Salary of a First Year Investment Banking Financial Analyst” [Online]

11/13 | P a g e

Available at: http://work.chron.com/average-salary-first-year-investment-banking-financialanalyst-5704.html [Accessed 18 May 2013] Kumar, N., and Singh, P.N., (2011), “Employee Relations Management”, 1st edn. India: Pearson Education in South Asia, Dorling Kindersley India Pvt. Ltd. Li, D., Moshirian, F., Nguyen, P., Tan, L., (2007), “Corporate governance or globalization: What determines CEO compensation in China ?”, Research in International Business and Finance, PP. 32-49 Mclagan, (2012), “Performance and Remuneration in Investment Banking”, Association for Financial Markets in Europe Oyer, P., (2008), “The Making of an Investment Banker: Stock Market Shocks, Career Choice, and Lifetime Income”, The Journal of Finance, Vol. LXIII, No. 6 Pedrotty, D.F., (2011), “Why CEO-to-Worker Pay Ratios Matter to Investors”, The Harvard Law School Forum on Corporate Governance and Financial Regulation, Accounting and Small business/Beverly shares [Online] Available at: http://blogs.law.harvard.edu/corpgov/2011/08/11/why-ceo-to-worker-pay-ratiosmatter-to-investors/ [Accessed 18 May, 2013] Prospects, (2012), “Corporate investment banker: Salary and Conditions” [Online] Available at: http://www.prospects.ac.uk/corporate_investment_banker_salary.htm [Accessed 18 May 2013] Robbins, S.P., and Judge, T.A., (2009), “Organizational Behavior”,13th edn. New Jersey: Upper Saddle River, Pearson Education Limited. Rodley, K., (2010), “What Influences Employees' Commitment to the Workplace?” [Online] Available at: http://voices.yahoo.com/what-influences-employees-commitment-workplace5333957.html?cat=3 [Accessed 18 May 2013] Roe, R.E., and Schalk, R., (2007), “Towards a Dynamic Model of the Psychological Contract”, Journal for the Theory of Social Behaviour, 37:2, 0021–8308 Rose, E., (2008), “Employment Relations”, 3rd edn. Harlow: Pearson Education Limited.
12/13 | P a g e

Severson, D., (2013), “The average starting Salary for a Financial Analyst” [Online] Available at: http://work.chron.com/average-starting-salary-financial-analyst-5475.html [Accessed 18 May 2013] Shin, T., (2008), “Pay Disparities within Firms: The Role of Chief Executive Officers”, Annual Meeting of the American Sociological Association Steyn, G.M., (2002), “A theoretical analysis of educator motivation and morale” [Online] Available at: http://uir.unisa.ac.za/handle/10500/237 [Accessed 16 May 2013] Telegraph, (2012), “London 'held to ransom' as Tube driver paid £61,218 a year” [Online] Available at: http://www.telegraph.co.uk/news/uknews/road-and-rail-transport/9038359/Londonheld-to-ransom-as-tube-driver-paid-61218-a-year.html [Accessed 15 May 2013] The economic times, (2013), “Huge salary disparity between owner, professional CEOs: Study” [Online] Available at: http://articles.economictimes.indiatimes.com/2013-0508/news/39117162_1_remuneration-private-sector-ceo-salary [Accessed 18 May 2013] Trottman, M., (2013), “Corporate Pay: One CEO=354 workers”, The Wall Street Journal [Online] Avaiable at: http://blogs.wsj.com/corporate-intelligence/2013/04/16/corporate-pay-one-ceo-354workers/ [Accessed 18 May 2013] Valecillos, A. (2010), “3 Secrets No-one Ever Revealed About Investment Bank Careers” [Online] Available at: http://ezinearticles.com/?3-Secrets-No-One-Ever-Revealed-About-InvestmentBank-Careers&id=5154176 [Accessed 18 May 2013] _____________________________ ___________________________

13/13 | P a g e