Q4 You have just been engaged as the HR consultant to a medium-sized

manufacturing company which is undergoing massive change as it moves

from employee-paced production methods (where output is dictated by the
energy and motivation of the production workers themselves) to machinepaced methods in which the human contribution to productivity is much
smaller.
The company has never had a formal reward strategy but has relied on an
individual performance-related pay system; now it sees the need for a much
stronger focus on team-working and collaboration.
Write a brief report to your clients Chief Executive in which you supply
reasoned responses to the following questions:
(a) Why might it now be time for the organisation to produce a formal
reward strategy? (10 marks)
(b) What are the disadvantages of the firms current rewardpractices,
relative to the new technology it is about tointroduce? (5 marks)
(c) What reward strategies should now be introduced, and why? (10 marks)
(Total 25 marks)
Question 4
Reward strategies to meet the challenges of new technology
(a) Rationale for a formal reward strategy
Michael Armstrong points out that a reward strategy can make an important
contribution to the achievement of corporate goals if:
It facilitates the integration between reward policies and processes and
key corporate strategies for growth and improved performance.
It underpins the organisations values, especially those concerned with
innovation, teamwork, flexibility, customer service and quality.
It fits the culture and management style of the organisation, either
existing or desired, and therefore works indirectly to embed the culture
and style more firmly and confidently.
It drives and supports desired behaviours at all levels by indicating
what types of behaviour will be rewarded, how this will take place and
how their expectations will be satisfied.
It provides a competitive edge, enabling the organisation to attract,
motivate and retain the skills that it needs.
It enables the organisation to obtain value for money from its reward
practices.
In Strategic HRM: The Key to Improved Business Performance (CIPD, 2002),

Armstrong and Baron make the obvious but nonetheless necessary point that
reward strategy is founded on the proposition that the ultimate source of
value is people. This means that reward processes must respond creatively
to their needs as well as to those of the organisation. The basis of the
strategy is the organisations requirements for performance in the short and
longer term as expressed in its corporate strategy. The strategy relieson an
understanding of the behaviours required to achieve highperformance and of
what can be done to encourage those behaviours.
(b) Disadvantages of the firms current reward practices In essence, the
firms current reward practices work effectively so long as production and
productivity are dependent on individual effort. However, the practices do
not encourage co-operation and mutual assistance in problem-solving, so if
an individual employee encounters difficulties it is unlikely that he or she
would receive any assistance from so-called colleagues (because their
incomes would be jeopardised).
Another difficulty often encountered with these piece-rate payment systems
is that individual employees may artificially restrict their output so that they
manage the work-effort equation. They determine a level of earnings which
they consider reasonable, which can be sustained over time, and which
does not involve financial rewards which are so large that management then
tries to reduce the bonus payable. In some scenarios, such payment and
output ceilings are imposed collectively within work groups, so that some
individuals are not permitted to work to their limits. A third problem is that
bonus payments arising from individual effort create an attitude that is
hostile to changes in work methods or the introduction of new technology
because any such development threatens established expectations about
income.
(c) Design of reward strategies appropriate to the new needs of the business
At Flowpack Engineering, a company examined by John Bratton in his book,
Japanisation at work: managerial studies for the 1990s [mentioned on page
123 of the ABE Study Manual], the company substituted the individual
performance-related pay system for a straightforward mechanism in which
individuals were simply paid for their presence, to encourage co-operation
and to tap into the synergy from team working. The transformation was
remarkable, because suddenly the employees realized that there was no
longer any need to hide knowledge from their co-workers, to protect the
good jobs, or to be inflexible.

Another possibility is to create reward systems based on overall corporate

performance as measured by appropriate indices like profitability, profit-percustomer, customer satisfaction levels, and so forth. Suchsystems have to be
carefully thought through to ensure that they do notgenerate unwanted side
effects, but their impact can be very beneficial.

organisations human resource strategies.

(a) Summarise the principal purposes of a reward strategy from both an
organizational and an employee perspective. (10 marks)
(b) Some organisations have created performance-based reward strategies
which appear to assume that people only respond to monetary incentives.
Examine the validity of this assumption and suggest how reward strategies
could be designed to stimulate both employee performance and employee
engagement. (15 marks)
(Total 25 marks)

Q7 Reward strategies
(a) Principal purposes of a reward strategy
(1) To attract competent and motivated people
(2) To retain competent and motivated people
(3) To motivate people to perform in ways which meet their objectives, which
are in turn aligned to the organisations objectives and goals
(4) To encourage employees to go the extra mile
(5) To promote team-work and a commitment to corporate purposes
(b) Performance-based reward strategies to stimulate both performance and
engagement
(1) Validity of the assumption that people only respond to monetary
incentives
a. Money as a hygiene factor.
b. Need to avoid mutually exclusive, single-cause explanations of human
behaviour: people are motivated by money but by other things as well.

c. Other motivators: the work itself, responsibility, advancement

opportunities, self-actualisation, achievement, identification with the team.
(2) Strategies to promote both performance and engagement
a. Job design: job enrichment, job rotation, job enlargement (but treated
cautiously, not as inevitably successful solutions).
b. Rewards based on the performance of the organisation as a whole
(e.g., John Lewis Partnership) rather than on the contribution of specific
individuals or teams).
c. Rewards based on the achievements of the unit, e.g., Currys (electrical
stores), where a bonus is paid to the staff as a whole, including back-office
personnel, rather than being paid solely to salespeople.
d. Deliberate use of strategies to stimulate employee involvement, e.g.,
cross-functional continuous improvement projects.
e. Celebration of individuals or teams who have demonstrated both
performance and engagement attitudes.

Q2 Reward strategies adopted by employers tend to emphasise one of three

factors: service, skills, or performance.
(a) Briefly indicate what is meant by each of these three strategic options,
and summarise their principal advantages and disadvantages. (15 marks)
(b) Explain and justify the type of reward strategy you would recommend for
(i) a call centre, and (ii) a computer software company. (10 marks)
(Total 25 marks)
Question 2
Reward strategies based on service, skills or performance
The three options: meaning, advantages and disadvantages
Focus on service
A focus on service is characterised by open-ended agreements about
continuity of employment, incremental pay scales and annual reviews.
The advantage of this approach is that it simplifies the management of the
reward system; it also ensures that all employees are treated equally, and
therefore removes the possibility of envy arising from disparities of reward
between people undertaking similar work (it is possible that different
individuals within the same task arena will receive different levels of reward,

but this can be accounted for merely by positions on a pay scale, not by any
subjective judgments about performance). A focus on service makes
assumptions about low levels of employee turnover, since it emphasises long
term benefits and rewards rather than short-run incentives.
The disadvantages of a system modelled on service include the fact that it
does not conspicuously acknowledge and celebrate excellent performance,
nor does it penalise poor performance. Instead, it assumes that all
employees undertaking a given role are more or less operating at equal
levels of effectiveness, and it further assumes that longevity of experience is
associated with performance improvement. Neither of these assumptions
need be accurate. The system may also encourage complacency on the part
of employees working within it, since they will receive increments
irrespective of their contribution to the enterprise so where is the incentive
for superior effort and achievement?
Focus on skills
This approach produces higher rates of pay for those with greater or rarer
skills, so that differentials within an organisation may be extreme, with
generous rewards for particularly talented people or individuals with unique
skills, and low rewards for commodity employees undertaking tasks for
which few skills are needed, and employees who can be easily replaced. A
focus on skills model has become more popular recently with the growth of
competency frameworks. The advantage of a focus on skills is that, clearly, it
takes account of the peculiarities of the labour market, and provides a route
enabling organizations (with otherwise rigid payment scales) to attract
individuals with specialized expertise. It is a flexible approach that can be
rapidly modified as conditions in the labour market fluctuate if, for
example, a skill that was once rare now becomes more widespread (e.g., if a
localised labour market suddenly becomes global or more regionally
diversified, as it did for the UK when the European
Community extended its size in early 2004), or if a human skill is replaced by
technology.
Among the disadvantages of a focus on skills is the key point that it assumes
a direct link between the presence of a skill and the delivery of worthwhile
performance: yet, as many observers and researchers have shown, the
individuals willingness to perform a skill is frequently dependent on other
factors, such as the presence or absence of facilitating leadership throughout
the organisation as a whole. For example, Professor Purcells recent work for
the CIPD has shown that P = A + M + O, or Performance = Ability +

Motivation + Opportunity [see J. Purcell et al, Understanding the People and

Performance
Link: Unlocking the Black Box, London: CIPD, 2003]. In addition, a focus on
skills can generate considerable tension within a workforce, especially if they
detect the disparity between possession of a skill and achievement of
performance or contribution among certain individuals who then seem to be
receiving excessive recognition for something (a skill) that generates few
benefits for the enterprise.
Focus on performance
A focus on performance emphasises target setting, adapting to change and a
close relationship between what the employee achieves and what the
employee is paid.
The key advantage of a focus on performance is that, if properly managed, it
promotes a felt fair culture, since there is widespread acceptance that
individuals should be rewarded in proportion to their efforts, contributions
and outputs. The focus-on-performance approach may also stimulate
employees to
maximise their productivity, since they can see a direct link between their
results and the rewards they will receive. Among the disadvantages of a
focus on performance is the fact that many jobs do not lend themselves to a
direct quantification of numerical target-setting, and so judgments about
performance inevitably become qualitative (at least in part), with the result
that some subjectivity enters into the evaluation process.
When this happens, there is room for selective perception to function, the
willingness to seek (and find) excuses for relatively poor performance by
some employees, and to dismiss excellent performance by others (on the
grounds that the circumstances were accidentally propitious). Moreover, a
focus on performance implicitly assumes that individual employees will
respond impartially to money-based incentives and this is an assumption
that is false for some employees, and false for all employees some of the
time. One does not have to be a committed enthusiast for Maslows
hierarchy of needs to recognise that financial rewards only satisfy a
proportion of the employees normal aspirations. A further difficulty with a
focus on performance is that it encourages a range of instrumental attitudes
on the part of employees, who come to believe that everything they do must
be rewarded and so they refrain from engaging in voluntary, unpaid,
collaborative discretionary behaviour that would otherwise be to the
advantage of the organisation. People may begin to work to their job

descriptions and refuse to undertake additional duties unless these, too, are
suitably acknowledged within the reward system.
Reward strategy recommendations for a call centre and computer software
company
The danger with the call centre is that employees may be rewarded for
achieving performance targets that are unrelated to the requirements of the
customer. Experience has shown that if call centre staff are measured
against call duration, for instance, and targeted to achieve a call rate of at
least 30 calls per hour (which, with auto dialling, is possible), then they are
being evaluated against criteria that are not only irrelevant to the customer,
but which are also counterproductive. Another problem conventionally
associated with call centres, too, is high labour turnover, particularly if
employees are located in an area where there are several call centre
businesses. With these factors in mind, it may be sensible to recommend a
mixture of a focus on service, with incremental pay scales, and a focus on
performance, with rewards derived from measuring such significant criteria
as the customer experience and customer satisfaction.
In the case of a software company, the organisation is peculiarly dependent
on the scarce skills exercised by software systems designers. Because of the
nature of the business arena in which they function, these individuals
operate within a global labour market in principle, they could sit anywhere
in the world and perform for an employer in another part of the world
altogether.
These core competents, therefore, have to be treated well though
employers must guard against the belief that all motivational problems can
be resolved solely through the administration of highly-incentivised payment
systems. The software company would be well advised to introduce a reward
strategy with a focus on skills at its core, but with supplementary
ingredients that also incorporate a focus on performance. Merely relying
on money will not work: the organisation has to supply enthusiastic
leadership and effective people emanagement infrastructure processes,
mingling Herzbergs hygiene considerations (working conditions, job
security, and so forth) with appropriate motivator factors (the challenge and
autonomy associated with the work itself). If this combination can be
engineered professionally, then the commitment of the organisations
employees will be guaranteed.

Q7 You has just been asked by your HR Director to help him prepare for a
presentation he is due to deliver to students at a nearby university. Outline
your responses to each of the following questions which will form the basis of
his lecture.
(a) What is the justification for performance-related pay? (5 marks)
(b) What are the conditions that have to be met if performance-related pay is
to work? (10 marks)
(c) What are the disadvantages of performance-related pay? (5 marks)
(d) How can the disadvantages be avoided or overcome? (5 marks)
(Total 25 marks)
Question 7
Performance-related pay
(a) The justification for performance-related pay
1. It is an effective motivator because it provides a financial incentive and
rewards people according to the level of performance they achieve. If PRP is
based on measuring performance in relation to agreed objectives, is fully
transparent (as it should be) and provides rewards that are viewed as
worthwhile by employees, then it will function in accordance with the
principle of expectancy theory.
2. It conveys a clear message to employees that the organisation believes in
a high level of performance from everyone, and is prepared to pay for it
(because the organisation in effect claims that better performance has a
positive impact on the bottom line, at least in profit-seeking enterprises in
the public sector, such cause-effect relationships are harder to identify and
measurement of what ismeant by the bottom line is itself much more
problematic). PRP can therefore be used as a lever for cultural change
helping to create a performance-oriented organisation.
3. It is equitable and ethically appropriate for pay to be related to
contributions made by individuals for achieving organizational objectives.
High performers should be paid more than low performers.
(b) Conditions to be met if PRP is to work
1. Individuals and teams should be clear about the targets and standards
of performance required.

2. They should be able to track their performance against those targets

and standards throughout the period over which their progress is being
assessed.
3. They must be able to measure their performance, achievements
andprogress, because (as Armstrong and Baron Point out,
PerformanceManagement: The New Realities, CIPD, 1998, p. 243) if
you cannot measure performance, you cannot pay for performance.
4. They must be able to influence their performance by changing their
behaviour or decisions.
5. They must understand what rewards they will receive for achievingthe
end results, so that there is a clear link between effort and reward.
6. The reward should follow as closely as possible (in time) the
accomplishment that generated it.
7. The reward should be viewed/perceived as worthwhile by those
receiving it.
8. The results required to generate the reward should be seen
asattainable, though not too easily: in other words, the
targets/objectives should be stretching yet not impossible.
9. The basis upon which rewards are made should be
communicatedpositively and the system should be easy to understand.
10.
Individuals and teams should be clear about what happens if
they exceed their targets/objectives, and ideally the rewards should be
strengthened in that eventuality, in proportion with the extra output
attained.
(c) Disadvantages of PRP
1. PRP is not a guaranteed motivator: to assume that individuals are
motivated by the prospect of financial gain, but not by anything else, is
too simplistic. For example, when responding to a PRP programme,
individuals will frequently trade off effort (and reward) against the
desire to pursue other personalised objectives, like leisure.
2. If PRP outcomes are derived from a form of performance assessment
that has elements of subjectivity about it (such as ratings along a
continuum), then the ratings may be seen as unfair, subjective and
inconsistent.
3. If there is an undue emphasis on individual performance,
thenteamwork will suffer (and vice versa); indeed, in some systems the
rhetoric focuses on teamwork, but the PRP process is only applied to
individuals.

4. PRP can lead to pay rising faster than performance (pay drift). In
thesecircumstances, PRP is not cost-effective, though this may be said
to bea disadvantage of specific PRP applications rather than a
disadvantage of PRP per se.
5. PRP schemes are difficult to manage well. They rely upon
effectiveperformance-management processes and skills that are
relatively scarce.
6. PRP can adversely affect the maintenance of quality because people
concentrate on achieving quantitative performance targets and are
prepared to allow the quality of their output to be impaired.
7. PRP can lead to short-termism, i.e., the pursuit of quick results rather
than longer-term strategic goals.
8. If the PRP system focuses on a small number of incentivised targets,
then individuals will ignore or neglect other important and relevant
aspects of their duties.
9. Once a PRP culture is established, then individuals will only act
iffinancial incentives are provided; in other words, they become
materialistic and instrumental.
(d) How the disadvantages could be avoided or overcome
1. Any PRP scheme must be carefully designed centrally around the key
corporate performance indicators (preferably within a balanced
scorecard system).
2. The PRP goals and its rewards must address the vast majority of
theaccountabilities for individuals, so that the likelihood of some
accountabilities being ignored or neglected is reduced.
3. PRP should only be applied if: there are (or can be) fair and consistent
methods of measuring performance, there is an effective (and non
subjective) performance management process in place, managers are
properly trained to rate performance fairly and consistently, there is
likely to be enough money available to provide worthwhile rewards,
and the scheme can be cost-effective.
4. From the top down, the organisation must emphasise some key
strategic priorities (e.g., customer service excellence) that are
reiterated in every aspect of the PRP process. It is nonsensical to have
some parts of the organisation fighting other parts which could
happen if functional goals differ in various parts of the enterprise.
5. The PRP system must incorporate some elements of cross-functional
problem-solving and continuous improvement, so that co-operation
between functions is maintained.