One of the major determinants of job satisfaction is adequate and fair compensation. The various methods businesses use to compensate employees attempt to provide employees the compensation they deserve while simultaneously attempting to achieve cost effectiveness. The seniority system was commonly used in years past to determine which employees deserve a higher salary; some businesses still use this method. In more recent years, other compensation methods, such as pay-for-performance and skill-based pay, have replaced the seniority system in many business environments.
The Seniority System
The seniority system compensates an employee based on the length of time he has spent working for the organization. The employee with the longest time in service generally earns the highest pay, if all other factors are held constant. Under the seniority system, employees with the longest time in service are also given the most preferential treatment in areas such as promotions, vacation time and scheduling.
Seniority and Performance
The rationale behind the seniority pay system is that in the past, business leaders believed experience working in a specific position was directly correlated with higher performance measures. Various studies performed on the relationship between seniority and performance have shown conflicting results. A 1980 study by Medoff and Abraham found neither a positive nor negative correlation between performance and seniority. A 1995 meta-analysis by Quinones, Ford and Teachout found a significant correlation between seniority and performance. Another study in 2003 by Sturman found that employees with complex job duties achieved higher performance ratings as they gained seniority, but for employees with jobs that involve little complexity, performance and seniority were not as closely related. Consistent proof of a correlation between performance and seniority is lacking, and an organization may not be able to contain the cost of seniority-based pay increases, as reported by Robert L. Heneman, author of the book: "Merit Pay: Linking Pay to Performance in a Changing World."
Changes in the Business Environment
The U.S. economy has changed from the beginning of the 20th century to the 21st century. Technology has changed the face of the business environment. Businesses seek ideas from fresh, young minds that have a more modern education. Maintaining the same position for decades at a time can be a disadvantage, as many businesses value a diverse professional background. Technological advances have also provided businesses with an easier means by which to quantify employee productivity, so productivity and performance are the often the main indicators of employee value, as opposed to seniority.
Other Pay Systems
Skill-based compensation pays employees for the relevant skills and knowledge they possess, as opposed to their job title or seniority. For example, a skill-based pay system will compensate an employee for additional certifications, degrees or for the ability to transition back and forth between multiple job positions or work teams. Pay-for-performance offers higher wages to employees with high performance ratings and lower wages to employees with lower ratings. Under this compensation structure, the business ensures pay and performance are positively correlated.