The need for reward management and systems

Reward management is not just about money. As shown in the above diagram, it is concerned with intrinsic as well as extrinsic rewards and with non-financial as well as financial rewards. Intrinsic rewards arise from the nature the job itself. Decenzo and Robbins ( 2005, p.274) stated that intrinsic rewards are self – initiated rewards like pride in one’s work, a sense of accomplishment or being part of the job. Intrinsic rewards related to responsibility and achievement they are inherent in individuals and not imposed from outside. On the other hand, extrinsic rewards arise from the factors associated with the job context such as financial rewards, promotion and benefits. They are external to the job and come from outside source.

All reward systems are based on the assumptions of attracting, retaining and motivating people. Rewards are of two type – Financial and non-financial rewards. Many people view money as the sole motivator but many studies have found that among employees surveyed, other non financial reward also motivate them and influence the level of performance. A recent study of reward practice by CIPD’s shows that higher proportion of employers have adopted a “total reward” approach, in which they try to align the financial and non-financial elements.

Non financial rewards indirectly increase workers’ financial position. It differs from workers to workers. For example an employee may value office furniture and other may find it useless whereas financial rewards can be wages, bonuses, or indirectly paid sick leaves and paid vacation. They are mainly of three types such as profit sharing, job evaluation and merit rating. However, Decenzo and Robbins (2005) classified financial rewards as shown in the diagram above as performance based, implied membership based and explicit membership based. They mentioned that performance based use commissions, piecework pay plans, incentive system, group bonuses, merit or other node of payment for performance whereas membership based rewards include cost of living increases, benefits and salary increases attributable to the labour market conditions, seniority, qualifications, and specialised skill. Membership-based rewards may attract many employees on the whole when the extent of the reward increases with seniority.  Though, there are drawbacks:  They discourage poor performers from leaving and people from leaving the organization, they indirectly motivate job performance. However, Seniority-based rewards lessen turnover because the cost of leaving raise with the employer’s duration of service.

2.3 REWARD MANAGEMENT LINKED TO THEORIES OF MOTIVATION

Employees’ motivation depends on the perception of achieving the reward, i.e. their expectations. Motivation theory describes why people at work act in the way they do, and what organisations can do to persuade people to apply their efforts and abilities in ways that will help to achieve the organisation’s goals as well as satisfying their own needs. Everyone has their own needs and a different set of goals. Employees can motivate themselves in different ways that will guide them to expect that their goals will be achieved whereas management can motivate people through methods like pay, promotion and praise.

Motivation is important because there is ‘reward’. People work because they get revenue to spend on their individual, family and society needs. Some needs are the basics of life, what individual needs to survive physiologically. Maslow defined the hierarchy of needs with essential physiological needs at the base and going up through safety, social needs and ends in the need for self-fulfillment. However, some critics say that there is little empirical evidence to support this model. Herzberg differentiated between firstly ‘hygiene’ extrinsic factors such as pay and organisation strategy and measures that will cause dissatisfaction in the workplace if absent or insufficient. Secondly, ‘motivators ‘ which are intrinsic factors such as the worth of the work, attainment, appreciation, responsibility and potential for growth which will positively motivate people. Maslow’s Hierarchy of Needs and Herzberg’s Two Factor Theory are a “content theory” of motivation”. They both suggest that needs should be satisfied for the employee to be motivated but, Herzberg argue that only the higher levels of the Maslow Hierarchy (e.g. self-actualisation, esteem needs) act as a motivator. The remaining needs can only cause dissatisfaction if not explained clearly. Thus he stated that satisfaction and dissatisfaction were not necessary related.

Taylor developed his theory of “scientific management where he made three assumptions in his observation: Man is concerned with maximising money, People are considered as individuals and they can be treated like machines. Taylor had analyzed what motivated people at work which was money. He though workers should be paid for what they worked and pay should be associated to the amount produced Workers who work less would be paid less and Workers who did more than usual would be paid more. The main limitation in Taylor’s approach is that it overlook that each individual is unique Secondly, money is not an important motivation for everyone. Taylor ignored the fact that people work for reasons other than financial reward.

Other theories of motivation have been developed as well which are believed to focus on cognitive or process theories that are how people consider their ‘reward’. Expectancy theory distinguishes two factors of value and probability. People value reward according to the level it satisfies their needs of security, community esteem, achievement and autonomy. Armstrong also agrees with the fact that Expectancy is the likelihood that reward depends on effort where there is more effort, the higher the reward but Marchington and Wilkinson (2006, p.325) argue that this is not a fixed and there may be other sets of expectation at different times. For that effort to be useful to the organisation, individuals need to have the correct ability and the right perception of their role. The theory implies that low motivation will be product of jobs where there is little worker control. (Marchington and Wilkinson 2006, p.326)

Two other theories of motivation are significant to reflect on. Latham and Locke developed goal theory which describes that both performance and motivation are improved if people have challenging and monitored goals but accepted when there is feedback on performance. On the other hand, Equity Theory which advocates that people are more motivated when they are treated equitably and demotivated if they are treated inequitable while they deserved more than that.

2.4 STRATEGIC REWARDS

Reward strategy is a declaration of intent that defines what the organization wants to do in the longer term to develop and implement reward policies, practices and processes that will further the achievement of its business goals and meet the needs of its stakeholders. (Armstrong 2006, p.643) Reward is more than compensation and benefits. Thus, a reward strategy must consider many aspects of the workplace in order to both attract and keep high value employees doing the correct things in the correct way so that they the organisation is successful.

Reward policies provide guidelines for the implementation of reward strategies and the design and management of reward process. Basically, every employer must obey four major policies (White & Druker 2000): internal alignment, external competitiveness, employee contributions, management of the pay system. Many research and studies on reward strategy has revealed that people are difficult and motivation is a complex process. What is obvious is that while financial reward is essential, for many people other factors are also, and can be more, important. Rewards are designed to promote behaviour that will contribute directly to the achievement of the organisations objective.Reward systems should be in line with the following:

HR Strategy

Business Strategy

Organization Culture

The elements of reward management and their interrelationship can be shown in the figure 1.2

Figure 2.2: Rewards management: elements and interrelationships

Source: Michael Armstrong, 2006, A Handbook of Human Resources Management Practice, p.630

The elements of a rewards management system are:

Job Evaluation

Job evaluation is an organized method for defining the relative value or size of jobs within an organisation in order to institute internal relativities. It provides the basis for designing a fair grade and pay structure, grading jobs in the structure, managing job and pay relativities and guiding the success of equal pay for work of equal worth. However, there has been many criticism of job evaluation by some HR practitioners, in the late 1980s and early 1990s A numbers of major charges were made against it in many organisation. Critics argued that it was not only bureaucratic and rigid, but also time-consuming and unsuitable in today’s organisations.

2.4.2 Grade and Pay Structure

Pay grade is a system indicating rate and shows the rate at which an employee receives basic pay. It is also a means to compare ranks, which may have different names in the different services. Pay grades facilitate the employment method by providing a flat range of salary whereas Pay structure refers to the various levels of pay for jobs or groups of jobs by referring to their point as determined by job evaluation as compare to market rate surveys. it provides scope for pay increment in accordance with competence or contribution.

Market Rate Analysis

Market rate tell us the actual salary of some jobs. It is determined by the forces of demand and supply of the labour market. If an organisation pays below the “market rate” then it will probably have trouble in recruiting and retaining suitable staff. To know the market rate an organisation has to do pay surveys. It helps to obtain and keep high quality staff and response to market pressures.

There are several ways in which a company can obtain data on market rates such as Local employment agencies, Job centres, Job adverts in national newspapers

2.4.4 Contingent Pay

Contingent pay measures what do we value and what we are ready to pay for? It refers pay for individual that is related to performance, competence, contribution or service.

Employee Benefits

Benefits can be defined as all the indirect financial payments an employee receives for continuing his or her employment with the company. Benefits are generally available to all firm’s employees and includes such things as time off with pay, health and life insurance, and child care facilities. (Dessler 1997, p503)

Today many organisations regard benefits to be an important approach in reward management in order to achieve a competitive advantage in labour markets. Both financial and non-financial benefits play an important function when it comes to attract, keep and motivate employees. As an addition to base pay financial benefits may improve an organisations ability to attract and retain employees, and non-financial benefits allows organisations to meet the specific needs of the employees.

Allowances

Allowances may be regarded as additional to base pay. Example of it may be meal allowances where some employees in any organsation are given a sum of money for a meal.

Performance Management

Performance Management refers to a process, which frequently measures work as it occurs. It is a way of obtaining better results by managing performance according to set of planned goals and competency achievements. It motivates people to do the right things by specifying their goal.

Non-Financial Rewards

It refers to rewards that are not related to pay but rather satisfaction arising from the job itself like recognition, success, responsibility, autonomy, and leadership skill.

Total Remuneration

Total remuneration refers to all the monetary reward and benefits than an employee received for working in the organisation.

Total Rewards

A total reward refers to all the rewards that exist like financial aspects of reward of basic pay, any bonuses and additional financial benefits with the non-financial benefits at the personal and organisational level. WorldatWork (2006) introduced a total rewards framework that proposed to advance the concept and help practitioners think and implement in new ways. Today, professionals primarily use the terms “total rewards,” “total compensation” or “compensation and benefits” to describe the joint strategies. There are five elements of total rewards, each of which includes programs, practices, elements and dimensions that together define an organization’s strategy to attract, motivate and keep employees. These elements are:

Compensation

Benefits

Work-Life

Performance and Recognition

Development and Career Opportunities

 

2.5 INDIVIDUAL REWARD SYSTEM

Many sectors of employment use remuneration systems that contain direct relations to individual performance and results. On an individual basis this may be payment by results (PBR) for example bonus, piecework, commission, work-measured schemes and pre-determined motion time systems, measured day work (MDW), appraisal/performance related pay, market-based pay and competency and skills based pay.

2.5.1 Performance Related Pay

Performance-related pay (PRP) is a method of remuneration that links pay progression to an assessment of individual performance. Performance pay may be defined as “any remuneration practice in which part or all of remuneration is based directly and explicitly on employees’ assessed work behaviour and/or measured results” (Shields 2007, p.348). Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved. Like piece-rates and commission, performance related pay is a form of incentive pay. Individual performance is reviewed frequently (usually once per year) against agreed objectives is known as performance appraisal. Then employees are classified into performance groups – which determine what the reward will be. The method of reward involves a cash bonus and/or increase in wage rate or salary.

However performance related pay is not very understandable in the mind of researchers. Thorpe and Homan (2000) accounts both for research stating that one of the main advantages of performance related pay is that it attract and retain good employee while other research indicates that performance-related pay fails to motivate and that the employees generally regard the performance-related pay system as unfair in practice.

Some drawbacks may be rewarding employees individually does very little to encourage teamwork and, such schemes also usually carried out only once a year assessment and payout, which may weaken any incentive effect. If a worker rated less than satisfactory receives no increase at all under an appraisal pay scheme their motivation and morale may be badly affected. Thus, it is important to focus appraisals on the assessment of performance, the identification of training needs and the setting of objectives, not on any dependent pay.

2.5.2 Individual Payment by Results (PBR)

The aim of any PBR scheme is to provide a direct relationship between pay and productivity: the more effectively the employee works, the higher their pay. This direct link means that incentives are stronger than in other schemes. However, in recent years traditional bonus, piecework and work-measured schemes have decreased, as many employers have moved to 360-degree feedback, also known as ‘multi-rater feedback’ that is employee development feedback that comes from all around the employee. Nevertheless, payment by result fails because material shortages or delays can affect production and Individual skills are not rewarded and indeed the most skilled may be put onto more complicated and potentially less rewarding work.

2.5.3 Piecework, Bonus Schemes and Commission

Piecework is the easiest method of PBR – workers are paid at a particular rate for each ‘piece’ of output. This means the system is simple to operate and understand, although open to the shortcoming that it is often at the expense of quality. Pieceworkers must be paid at least the national minimum wage.

Incentive bonus schemes is where for instance an extra payment is paid when production exceeds the established threshold, or where there is a raise in sales which surpasses given targets. Variable bonuses can also be paid in relation to performances achieved against pre-determined standards so that the higher the performance achieved, the greater the level of bonus produced. However, Armstrong (2006, p.635) mentioned that bonus payment are related to achievement of profit and or to other financial targets.

Time rates are used when employees are paid for the quantity of time they spend at work. The common form of time rate is the weekly wage or monthly wage. Generally the time rate is fixed in relation to a standard working week (e.g. 40 hours per week). Time worked above this standard is known as overtime. Overtime is generally paid more than the standard time-rate. It reflects the extra contribution of the employee. The main advantages of time-rate pay are that they are appropriate for organisations that desire to employ workers to present general roles (e.g. financial management, administration, and maintenance) where employee performance is not easy to evaluate.

Commission is a payment made to employees based on the value of sales achieved. For example, in sales jobs, the seller may be paid a percentage of the selling price or a flat amount of each unit sold (Werther & Davis 1997 p.411). The rate of commission depends on the selling price and the amount of effort required in making the sale. Armstrong (2006, p.638) stated that commission provide a direct financial incentives and attract high performing sales staff.

2.5.4 Measured Day Work

Measured day work (MDW) has been developed from both individual PBR and basic wage rate scheme. Salary is constant and does not vary in the short time provided that that the targeted performance is maintained. MDW systems need performance standards to be placed through some framework and undergo modifications as required. It involves full commitment of management, workers and trade unions. The pay structure is regularly formulated by job evaluation and with full employee agreement. MDW is now somewhat unusual. It suits organisations where a high, secure, expected level of performance is required, rather than highest potential individual performance.

2.5.5 Market-Based Pay

Market-based pay refers to the salary level available in the market for the same type of work. Factors that help to consider the market rate are: the skills that are necessary are widely accessible, the unemployment level in general versus the employment rate and the job’s requirement for specialised skills. It is usually used in conjunction with other rewarding scheme like performance appraisal, but may be element of a reward strategy integrating several performance elements.

2.5.6 Competency and skills-based pay

Competency and skills-based pay schemes are more common nowadays. There a direct relationship between the attainment, development and effective use of skills and competencies and the individual’s pay. Competency and skills-based schemes measure what the employee is inputting to the job. Competency based systems have become more popular because many organisations use competencies in staffing and in performance appraisal for non-pay reason, such as training. There is an increasing trend for pay to be associated to the abilities of the individual. Competency based pay is used together with an existing individual performance related pay scheme and will reward them not on the basis of their performance but competencies. Leadership skill or team-working may be examples of competencies. Reward is given for the skills already gained and for the acquirement of new skills that would be helpful in other jobs in the same job band. This can promote multi-skilling and improved flexibility.

2.6 GROUP AND ORGANISATIONAL REWARD SYSTEMS

Group pay schemes include those based on the performance of the team, plant or company. Team-based pay gained its importance with the increased interest in teamworking. It reflects the performance of the team. It is not easy to define the team, the goals, and the right reward. Peer group pressure can also be useful in increasing the performance of the whole team. Company based performance pay schemes are based on the whole organisation performance. The most common forms of this system tend to be based on overall profits (profit sharing), gainsharing systems. They are effective where communications and employment relations are good Share incentive plans involve the provision of shares to employees. In the journal of knowledge management, Milkovich and Wigdor, (1991) said: “Team-based rewards may potentially result in a loss of motivation because of feelings of inequity due to a perceived ”free-riding” of other team members and the use of an equality principle when allocating rewards rather than an equity-based principle”. (Milne 2007, p.33)

2.6.1 Gainsharing

Gainsharing is a pay scheme that links workers’ pay to the success of organisational goals by rewarding performance above a pre-determined target. This is always led by measures of productivity, performance and quality. Gainsharing aims to develop these indicators by improving communications, staff involvement and promoting teamwork. It should be element of a full long-term strategy to maintain an effective system through involvement and sharing. It may thus be used as a substitute for bonus/piecework schemes, where quality is at times lost to quantity. The whole employees and management who have any association in the product of the organisation should be integrated in any gainshare plan. Marchington and Wilkinson (2006, p. 336) pointed out that such scheme have the merit that employees perceive their contribution to the total effort of the organisation and they do not consider themselves as individual units. They further mentioned that gainsharing plan will affect the role of trade union as their collective bargaining will become less important in determining wages or union will think employees will be more committed to the organiastion.

2.6.2 Profit Sharing

Profit Sharing means rewarding employees a percentage of the company’s profits. Singh (2006, p 385) defines “profit sharing usually involves the determination of organization’s profits at the end of the fiscal year and the distribution of a percentage of the profits to workers qualified to share in the earnings.” Profit sharing helps employees to form part of oganisation success. However, Beardwell and Holden (1997, p.574) argued that there is little evidence that such schemes have any great consequence on the performance, motivation or attitudes of employees.

2.6.3 Share Ownership Schemes

Businesses whose shares are traded on a stock exchange can offer shares to its promising employees. This compensation method can motivate employees to be committed to the business in the long run.There are different schemes available which companies can use to offer shares such as:

2.6.3.1 Share Incentive Schemes

Under this scheme employer gives employees shares directly or ask them to buy. This motivates staff to be involved in the performance of the company. The Share Incentive Plan, previously known as the employee share ownership plan. For example, In the UK, a company using an ESOP can give employees shares worth up to £3,000 each year.

2.6.3.2 Savings Related Share Option Schemes (SAYE)

All employees and directors benefit from this scheme All scheme members get the right to buy a number of shares (normally at a lower price than their current price) after three, five or seven years. In this period of time, employee members save an expected amount to pay for the shares. If the shares increase in price, employees have a profit when they buy the shares. No income tax is paid on any gains made on these shares.

2.7 INFLUENCES ON PAY DETERMINATION

According to Beardwell and Holden (1997 p.555) the pay system is affected by the following:

2.7.1 Beliefs about the Importance of the Job

If a job is considered to be of high value, the salary scale of the job will be higher as compared to other jobs.

2.7.2 Personal Characteristics

Individual characteristics like age, experience, education, skill affect the salary of a person.

2.7.3 Labour Market

The demand and supply of labour affect pay determination. A business will have to match its pay with that of its competitors’ before setting its own pay structure.

2.7.4 The Strategies and Policies of the Company

Each company has it own remuneration policy and strategy that determine the salary of its employees.

2.7.5 Government Rules and Regulation

The government usually intervene for the welfare of employees like we have the equal opportunity Act, employment right Act 2008, and the employment relation Act 2008. Organisations have to consider all these Act before setting a fair compensation program.

2.7.6 Power of Bargaining Group

Trade union action may affect the pay level. They can bargain for an increase in salary.

2.7.7 Cost of Living

Due to high inflation rate, the cost of living tends to increase. Thus, this may affect the salary of employee.