The Importance Of Reward System Business Essay

An essential part of the process of management is that proper attention be given to the efficient use of resources. In Particular, human resources management is one of the most important parts of management strategies because it plays a significant role in organizations in improving organization performance. In the business area, there are many ways in which employers and managers have sought methods to influence and motivate their employees and it is true to say that in terms of all the techniques and methods available, the remuneration and proper reward payment system, have been widely used in contemporary society.

Salaries and wages have been a main concern for every person and they can dominate great part of an individual’s business life. As stated by Hegewisch (as cited in Breadwell and Holden, 1997): “The payment package is one of the most obvious and visible expressions of the employment relationship.” this means that reward is the most efficient way to encourage an employee’s best behaviour and this can be linked to the achievement of an organization’s objectives. In this way, employee motivation is therefore crucial to the success of an organization.

From the point of view of employees, they can feel how fairly they are being treated by their company and their feeling is directly related to the effort they put into their work. According to Bowey and Thorpe(1986): “Since employees came to work to earn money, they would work better if they were given more money for better work.” With this theory, money provides the motivation to work. That is the reason why a reward system should be effectively and carefully implemented. This essay will first examine the methods and strategies of reward systems and then evaluate the importance and implications of reward management.

– Aims of reward management

Historically, the aims of rewards are to motivate and retain people. While basic annual salaries play a role in attracting people to companies, rewards in the form of financial and non-financial payment keep them there. The aims of reward management can be divided into two distinctive parts; one is “participation of organization” and another is “performance in organization” (Steers and Forter, 1991). Firstly, the notion of “participation” means to make employees getting a sense of belonging and becoming a member of organization, by feeling of part of community, they can not only develop a desire to stay for a long time as a member of an organization but also devote great effort to their work. Thus, rewards can attract people to join an organization and encourage behaviour that contributes to the achievement of an organization’s objectives. Therefore, one of aims of the reward management is to give employees a sense of belonging and motivate their attendance.

Secondly, the notion of “performance” means that reward systems are generally designed to fit for an employee’s performance. To be general, employers seek to use rewards to dominate an employee’s behaviour and to increase productivity. In this sense, employers have minimal expectations for each employee. Thus, when employees reach an expected level of job performance, an organization will pay attention to them and give them proper reward. Furthermore, if a reward system is set up fairly and equitably, most individuals in the organization will make greater efforts for companies.

â…¡. Types of reward management

Rewards provide a special payment for a special activities or results. This is distinct from the general meaning of payment such as wage or salary which fixed payment based on a regular basis. On the other hand, the term of ‘reward’ is used to identify the additional payment related to performance or job skill. This concept of reward can be generally classified as intrinsic and extrinsic according to the aspects. Intrinsic rewards are provided by oneself as a result of performing tasks (Beardwell and Holden, 1997). Examples of such factors are a sense of accomplishment, increased responsibility and autonomy, a belief of individuals that they are a valuable member of team and so on. However, extrinsic rewards are provided for individuals by someone else. These extrinsic rewards including financial and non-financial payment can be composed of some elements from those shown in Figure 1. All of these rewards are designed to motivate employees to achieve a higher level of performance.

Financial

Bonus

Rewards for successful performance which are related to the results obtained

Incentive

Payments linked to the achievement of previously setting targets

Commission

A special form of incentive in which payments to sales representatives are made on the basis of a percentage of the sales value they generated

Non-financial

Promotion

An advancement of an employee’s rank or position in an organizational hierarchy system. Promotion may be an employee’s reward for good performance

Praise

It includes autonomy in decision making and competency of authorize.

Figure 1. The elements of extrinsic rewards

Source: Armstrong(2001), A handbook of human resource management practice

– Example of financial reward: Case of AVIVA

Aviva is one of the leading insurance companies in the world. Furthermore, they have a well equipped reward system. Recently, Aviva start a new reward system which is called the “peer recognition scheme”. In this system, staff can nominate colleagues for additional bonuses to praise their efforts. According to report, this system will be run through a website enabling the company’s 22,000 UK-based staff to send e-cards to colleagues and put forward individuals and teams for rewards. Nominations will then be submitted to line managers who can then decide what level of reward the employee deserves. They will then award an appropriate number of points to the staff member, who can select his or her own rewards. (Source : www. hrmagazine.co.uk, Woods. 2009)

– Importance of balance with two types of rewards

When behavior is intrinsically motivated, an individual’s perceived locus of causality is thought to be internal; that is, individuals feel that task accomplishment is under their own control….when individuals receive extrinsic rewards for task behavior, they will perceive their locus of causality to be external and will engage in those activities only when they believe that extrinsic rewards will be forthcoming

As can be seen the states of Steers and Porter(1991), when individuals are motivated by internal factors, they can obtain self-satisfaction and the fact that they can complete the missions and tasks gives them self-confidence. However, this is insufficient to motivate employees because this kind of intrinsic satisfaction leads to a shift from internal to external rewards.

Because, the results or outcomes make employees believe in and this leads to reasonable rewards for their performance. Thus, the balance of rewards is crucial in reward management. This is the reason why companies or employers focus primarily on extrinsic rewards. If these two intrinsic and extrinsic rewards are combined well, it can be useful tool in managing an individual’s job performance.

â…¢. Designing the reward systems and strategies

– Payment by results

This is directly related to performance which is the second aim of reward. This strategy begins with the simple concept that all rewards are based on individual’s performance results. Beardwell and Holden(1994) state that the system of payment by result is based on the principle of scientific management and tasks which could be measured by standard assessment. In this same context, employees also have a belief that if they produce an average rate of outcomes they will expect to receive their normal payment while if their outcomes are above the average level they believe that they will receive a bonus or other kinds of rewards. Because they produce more result than other colleagues or an employer’s expectations. According to Steers and Porter(1991), an individual’s motivation to behave in a certain way is greatest when he or she believes that their behaviour will lead to certain rewards. In this way, the method of payment by result is the most prompt and efficient way to motivate employees.

– Focus on enhancing employees job skills

This strategy related on intrinsic motivation. Rewards systems can be used as tools to employees not just only to motivate them to achieve for better results but also so that they can develop their job skills. Thus, this could be another significant strategy in setting up a rewards system. Reward systems are often designed so that pay higher at challenging tasks than normal tasks. In this sense, individuals make considerable efforts to achieve more bonuses. Torrington and Hall(1987) claim that, “Employees who see the incentive scheme as an opportunity to wrest control of their personal activities which provide little intrinsic satisfaction.” These days, many companies have designed reward system targets for an employee’s skill-development. However, this reward system may not always bring positive effects in organizations for example, when employees pursue only their own interests the organization’s objectives would be a low priority for them.

– Importance of consultation in reward system

Lawler and Bullock 1978 (as cited in Steers and Porte, 1991) following research into remuneration systems in the USA remarked that

‘Most approaches to changing pay systems are top-down; they assume that people above those on the pay scheme should make the decision. What about letting the people who will be affected by the plan be a fundamental part of the decision?’

When creating a reward system or changing the design of reward system, the first thing to consider is cooperation between employer and employees. Historically, reward system has functioned as on an employer’s behaviour management side, but actually this is for employees. Vroom and Yetton (as cited in Breadwell and Holden, 1997) suggested that participation and cooperation in the design of payment systems leads to a greater understanding of their workings and the need for their introduction. There are some considerations when making the reward system.

– Equity and Comparability

Employees want to be financially rewarded for producing a certain outcome and they want to be fairly treated. Furthermore, they want to receive proper rewards for their inputs which include effort, job skills and so on. If they do not receive suitable treatments or rewards, the individual will take actions for instance they may ask for promotion or attempt to reduce their effort for their duties. Beardwell and Holden(1994) make a distinction in terms of equity. They divide it as two types of criteria.

• Internal criteria is the assessment of pay within an organization which relies on the relationship between colleagues or employee-employer

• External criteria is the assessment of pay by comparison with the incomes of outside of the company’s individuals or other organizations

Therefore, there are many possibilities which can generate conflicts in the reward system and these conflicts can be directly related to outcomes and an organization’s productivity. Thus it is necessary to adopt a careful approach whenever evaluating job performance.

â…£. Example of reward strategy

– Case of SAMSUNG

The two principle factors of management system in SAMSUNG are ‘competitiveness’ and ‘reward’. SAMSUNG adopted a result-based reward system, which has differences in promotion and other benefits for their employees according to performance results. However, the majority of employees in SAMSUNG do not have any complaints about distinctions which are created by the result from an individual’s effort on tasks. Because, they believe that these distinctions can stimulate job performance such as a wish to achieve a task, encourage of challenging and lead to improve of productivity. Moreover, clear goals and the opportunities to achieve these goals are given to employees. These features together with reasonable reward system raise a company’s competitiveness in the world market.

– Structure of reward system

• The basic annual salary in SAMSUNG accounts for about 50 to 60 percents of total annual salary

• A large range of incentives and other rewards represent important part of an individual’s total wage.

– Features of rewards

• Annual salary: This is decided by the present year’s result of assessment regardless of the previous year’s salary

• PI (Productive incentive): This is given when departments or individuals achieve their goals, up to 300% of the monthly wage;

• PS (Profit sharing): Redistribution of excess profits, this is given when departments or individuals exceed their goals, up to 50% of total salary;

• Non- Financial incentive: Promotion and other benefit programmes

(source: Ga, J. S.(2007), The monthly Rodong bubryul)

â…¤. Conclusion

This essay has evaluated the reward systems and highlighted the importance of reward management. As discussed above, payment including reward and other benefits does not mean simply encourage minimal expectation of employees. This can be basic in organization to attract and retain people. Effective reward management can not only be applied to dominate an individual’s behaviour but also improve an organization’s productivity.

Although only few kinds of strategies have been examined in this work, other significant role of reward strategies have also been existed in the business area. There is no perfect system of reward. However, well-designed strategies and appropriate management skill can work in improving the organization’s competitiveness.

â…¥. Bibliography

Armstrong, M. (2001). A handbook of human resource management practice. Kogan Page.

Bowey, A. M. & Thorpe, R. (1986). Payment system & productivity. The Macmillan press.

Beardwell, I. & Holden, L. (1997). Human resource management : A contemporary perspective.

Pitman.

Ga, J. S. (2007). The reward and incentive system of SAMSUNG. The monthly Rodong bubryul,

194(14). Seoul. [online]. Available from : http://www.elabor.co.kr/worklaw/MList.asp

Steers, R. M. & Porter, L. W. (1991). Motivation and work behavior. Fifth edition.

Torrington, D. & Hall, L. (1995). Human resource management. Prentice Hall Europe.

Wood, D. (2009). Aviva’s new reward scheme allows staff to nominate colleagues for additional

perks. Retrieved August 19, 2010, from www. hrmagazine.co.uk, David Woods.