REWARD MANAGEMENT

Reward management defined

Reward management is concerned with the strategies, policies and processes required to
ensure that the value of people and the contribution they make to achieving organizational,
departmental and team goals is recognized and rewarded. It is about the design,
implementation and maintenance of reward systems (interrelated reward processes, practices
and procedures) that aim to satisfy the needs of both the organization and its stakeholders and
to operate fairly, equitably and consistently. These systems will include arrangements for
assessing the value of jobs through job evaluation and market pricing, the design and
management of grade and pay structures, performance management processes, schemes for
rewarding and recognizing people according to their individual performance or contribution
and/or team or organizational performance, and the provision of employee benefits.
It should be emphasized that reward management is not just about financial rewards, pay and
employee benefit. It is equally concerned with non-financial rewards such as recognition,
learning and development opportunities and increased job responsibility.

One of the important attributes of work organisation is its ability to give rewards to
their members. Pay, promotions, fringe benefits, and status symbols are perhaps the
most important rewards. Because these rewards are important, the way they are
distributed have a profound effect on the quality of work life as well as on the
effectiveness of organisations.
Organizations typically rely on reward systems to do four things:
1) motivate employees to perform effectively,
2) motivate employees to join the organisation,
3) motivate employees to come to work, and
4) motivate individuals by indicating their position in the organisation structure.

There are several principles for setting up an effective reward system in an

organisation:
A. Give value to the reward system. Employees must have a preference for the types
of rewards being offered. Many employees prefer cash awards and plaques.
Some employees like to see their name in the company newsletter. Others like the
public recognition surrounding award ceremonies.
B. Make the reward system simple to understand. Elaborate procedures for
evaluating performance, filling out forms, and review by several levels of
management lead to confusion. The system must be easy to understand if it is to
be used effectively.
C. Lay down performance standards within the control of the team.
D. Make the reward system fair and effective.
E. Ensure participation in the reward system.
F. Involve people in the reward process and empower them to do the needful.
Most organisations use different types of rewards. Examples of recognition and
rewards include money, plaques, trophies, certificates or citations, public recognition,
official perquisites, special assignments, parties or celebrations or other meaningful
considerations. The most common are wages or salary, incentive systems, benefits and
perquisites, and awards. For majority of people, the most important reward for work
is the pay they receive. For one thing, an effectively planned and administered pay
system can improve motivation and performance.

Money may not actually motivate people. Surprisingly, there is no clear evidence that
increased earnings will necessarily lead to higher performance. A great deal of
research has been done on what determines whether an individual will be satisfied with
the rewards he or she receives from a situation. The following five conclusions can be
reached about what determines satisfaction with rewards:
1) Satisfaction with reward is a function of both how much is received and how
much the individual feels should be received. When individuals receive less than they feel they
should receive, they are dissatisfied. When they receive more than they feel they should, they
tend to feel guilty and uncomfortable.
2) People’s feelings of satisfaction are influenced by comparisons with what happens to others.
These comparisons are made both inside and outside the organizations they work in, and are
usually made with similar people. Individuals tend to rate their inputs higher than others.
3) In addition to obvious extrinsic rewards individuals receive (e.g., pay, promotion,
status symbols), they also may experience internal feelings that are rewarding to
them. These include feelings of competence, achievement, personal growth, and
self-esteem. The overall job satisfaction of most people is determined both by
how they feel about their intrinsic rewards and how they feel about their extrinsic
rewards.
4) People differ widely in the rewards they desire and how much important the
different rewards are to them. One group feels money is the most important,
while another group feels interesting work and job content is. Both groups, of
course, are able to find examples to support their point of view.
5) Many extrinsic rewards are important and satisfying only because they lead to
other rewards, or because of their symbolic value.
An effective reward system should link reward to performance. Workers who work
hard and produce more or give better quality results should receive greater rewards
than poor performers. Also, criteria for receiving rewards should be clear and employees should
know whether they are going to receive rewards for quality performance, innovation, effort or
attendance. Management must ensure that workers perceive distribution of rewards as
equitable. Furthermore, for organizations to attract, motivate and retain qualified and
competent employees, they must offer rewards comparable to their competitors.
INCENTIVES AND REWARDS
A distinction may be drawn between incentives and rewards. Incentives are forward
looking while rewards are retrospective. Financial incentives are designed to provide
direct motivation – ‘do this and you will get that’. Financial rewards provide a
tangible form of recognition and can therefore serve as indirect motivators, as long as
people expect that further achievements will produce worthwhile rewards.
Financial incentives aim to motivate people to achieve their objectives, improve their
performance or enhance their competence or skills by focusing on specific targets and
priorities. Financial rewards provide financial recognition to employees for their
achievements in the shape of attaining or exceeding their performance targets or
reaching certain levels of competence or skill. A shop-floor payment-by-result scheme
or a sales representative’s commission are examples of financial incentives. An
achievement bonus or a team-based lumpsum payment are examples of financial rewards.

COMPETENCE-RELATED PAY
Competence-related pay may be defined as a method of rewarding people wholly or
partly by reference to the level of competence they demonstrate in carrying out their
roles. This definition has two important points: (1) pay is related to competence, and
(2) people may be rewarded with reference to their level of competence.
Competence-related pay is not about the acquisition of competence. It is about the
effective use of competence to generate added value. Competence-related pay works
through the processes of competence analysis of individual competences and levels of
competence.

SKILL-BASED PAY
Skill-based pay links pay to the level of skills used in the job and, sometimes, the
acquisition and application of additional skills by the person carrying out the job. The
term is sometimes used interchangeably with competence-related pay. But skill-based
pay is usually concerned with the skills used by manual workers, including fitters,
fabricators, and operators. In competence-related pay schemes, the behaviours and
attributes an individual has to use to perform a role effectively are assessed in addition
to pure skills. Skill- based pay may in many ways seem to be a good idea, but its
potential costs as well as its benefits need to be evaluated rigourously before its
introduction. Initially they may provide strong motivation for individuals to increase
their skills. But they may outlive their usefulness and hence need to be revised or even
replaced if they are no longer cost effective.

TEAM-BASED REWARDS

Team-based rewards are payments or other forms of non-financial rewards provided

to members of a formally established team which are linked to the performance of that
team. Team based rewards are shared amongst the members of teams in accordance
with a scheme or ad hoc basis for exceptional achievements. Rewards for individuals
may also be influenced by assessments of their contribution to team results. To
develop and manage team rewards it is necessary to understand the nature of teams
and how they function. Team-based rewards are not always easy to design or manage.

PROFIT SHARING
Profit sharing is better known, older and more widely practiced than gain sharing. Profit sharing is
associated with participative management theories. Profit sharing is a group-based organisation plan. The
fundamental objectives of profit sharing are: (a) to encourage employees to identify themselves more
closely with the company by developing a common concern for its progress; (b) to stimulate a greater
interest among employees in the affairs of the company as a whole; and (c) to encourage better
cooperation between management and employees.
The logic behind profit sharing seems to be twofold. First, it is seen as a way to encourage employees to
think more like owners or at least be concerned with the success of the organisation as a whole. Individual
oriented plans often place little emphasis on these broader goals. Second, it permits labour costs to vary
with the organisation’s ability to pay. Some companies have effectively used their profit sharing plans as
vehicles for educating employees about the financial performance of the business. The most
important advantage of profit sharing is that it makes labour costs of an organization variable and adjust
them to the organization’s ability to pay. Most Japanese firms have used this approach to adjusting labour
costs for decades.

GAIN SHARING
Gain sharing is a formula based company or factory-wide bonus plan which provides for employers to
share in the financial gain made as a result of its improved performance. The fundamental aim of gain
sharing is to improve organizational performance by creating a motivated and committed workforce as
part of a successful company. The traditional forms of gain sharing are the Scanlon Plan and Rucker Plan.
The success of a gain sharing plan depends on creating a feeling of ownership that first applies to the plan
and then extends to the operation. When implementing gain sharing a company must enlist the
involvement of all employees so that it can increase their identity with, and their commitment to, the plan,
and build a large core of enthusiastic supporters. There are three main principles on which gain sharing is
based – ownership, involvement, and commitment.
The potential benefits of gain sharing are that if focuses the attention of all employees on the key issues
affecting performance and enlists the support of all employees towards this. It also encourages teamwork
and cooperation at all levels.
Gain sharing differs from profit sharing in at least three ways. First, under gain sharing, rewards are based
on a productivity measure rather than profits.
The goal is to link pay to performance outcomes that employees can control. Second, gain sharing plans
usually distribute any bonus payments with greater frequency (e.g., monthly or quarterly versus annually).
Third, gain sharing plans distribute payment during the current payment rather than deferring them as
profit sharing plans often do.

STOCK OPTIONS
The stock option is the most popular long-term incentive. A stock option is the right to purchase a specific
number of shares of company stock at a specific price during a period of time. The price at which the
employee can buy the stock is equal to the market price at the time the stock option was granted. The
employee’s gain is equal to the market value of the stock at the time it is exercised, less the grant price.
The assumption is that the price of the stock will go up, rather than go down or stay the
same. Several trends have increased the attractiveness of stock options as a long-term executive incentive
and retention tool.
Stock options are similar in many ways to profit sharing plans. The basis for payouts is organisational
performance in the stock market. Important goals of the plan are:
(a) to motivate employees to act in the best interest of the organisation as a whole;
(b) to enhance employee identification with the organisation; and (c) to have labour
costs vary with the organisational performance. Stock options have long been a common programme for
executives, but some organizations, like Pepsi-Cola and Hewlett-Packard, grant them to all employees.
There is evidence that this approach is becoming more widespread.
MERIT PAY
Merit pay is the most widely used approach for paying performance. Merit pay systems typically give
salary increases to individuals based on their supervisor’s appraisal of their performance. The purpose of
merit pay is to improve motivation and to retain the best performers by establishing a clear performance
reward relationship. Considerable evidence suggests that most organisations’ performance appraisal is not
done well and as a result, good measures of individual performance do not exist.

EMPLOYEE OWNERSHIP
A number of plans exist that help get some or all of the ownership of a company into the hands of
employees. These include stock option plans, stock purchase plans, and Employee Stock Ownership Plans
(ESOPs). In small organisations in which participative management is practiced it has a good chance of
increasing organisational performance. In a large organisation with little employee ownership, it
may positively affect the structure by creating integration across the total organization if, of course, all
employees are included in the ownership plan. Ownership can have a more positive impact on attraction
and retention than does profit sharing. The usefulness of employee ownership, however, is likely to be
highly situational. For instance, in the case of small organisations they might make profit sharing and gain
sharing unnecessary, and if combined with an appropriate approach to employee involvement, they can
contribute substantially to employee motivation. In a large organisation they may contribute to the
integration of the organisation and to a positive culture.

EMPLOYEE BENEFITS
Employee benefits are elements of remuneration given in addition to the various forms of cash pay. They
provide a quantifiable value for individual employees, which may be deferred or contingent like a pension
scheme, insurance cover or sick pay, or may provide an immediate benefit like a company car. It also
includes elements that are not strictly remuneration, such as annual holidays. Benefits in general do not
exist in isolation. They are a part of comprehensive compensation package offered by the
organisation.
The objectives of employee benefits are: (a) to increase the commitment of employees to the organisation;
(b) to demonstrate that the company cares for the needs of its employees; (c) to meet the personal security
and personal needs of the employees; and (d) to ensure that benefits are cost-effective in terms of
commitment, and improvement in recruitment and retention rates.
Benefits represent a large share of total compensation and, therefore, have a great potential to influence
the employee, unit, and organizational outcome variables. The empirical literature indicates that benefits
do indeed have effects on employee attitudes, retention, and perhaps job choice. Further, it appears that
individual
preferences may play a particularly important role in determining employee reactions to benefits.
Consequently, many organisations have implemented benefit plans that permit some degree of
employee’s choice in the hope that a better match between preferences and benefits will be obtained,
perhaps at a lower total cost to the employer.

Statutory and Voluntary Benefits

Employee benefits may be classified as statutory and voluntary. Statutory benefits are to be given to the
employees by the organisation regardless of whether it wants to or not. For instance, social security
benefits under the Workmen’s Compensation Act, Employees’ State Insurance Act, Employees’
Provident Fund and Miscellaneous Provisions Act, Maternity Benefit Act, and Payment of Gratuity Act
are statutory benefits. The Industrial Disputes Act, 1947 also provides for compensation in cases of
lay-off, retrenchment and closure of industrial establishments. The menu of voluntary benefits offered to
employees by employers is quite astounding, and carry significant cost to the employer. The major
voluntary benefits are: vacations, holidays, special leave, sick leave, health insurance, educational
assistance, employee discounts, medical benefits, recreational facilities, subsidized meals in canteens,
credit cards, and mobile telephones.
Flexible Benefits
There are significant individual differences in benefit preferences. Such individual differences, of course,
lend greater weight to the need for offering employees a choice in the design of their benefits package.
Flexible benefits plan will help control costs and enhance employee satisfaction. When an employer
considers offering benefits to employees, one of the main considerations is to keep costs down.
Traditionally, employers attempted to do that by providing a slate of benefits to their employees –
irrespective of their need or use. Companies learn, in due course, that these benefits offered did little to
motivate their employees, or to provide an incentive to be more productive. Employees viewed
benefits as “given”. This fact coupled with the rising costs of benefits and a desire to allow employees to
choose what they want led employers to search for flexible benefits.
The term flexible benefits refers to a system whereby employees are presented with a set of benefits and
are asked to select, within monetary limits imposed, the benefits they desire. The aim of flexible benefits
programmes is to confer specific advantages to both the employee and the employer. The employees have
the freedom to choose benefits that are tailored to their specific needs. In some cases, it motivates
employees and leads to increased morale. It helps the employer to decide the nature and quantum
of benefits, and manage the costs more effectively. Also it helps in attracting and retaining quality
employees in an organisation. However, the main disadvantage of flexible benefits is: (a) wrong selection
of benefits in some cases; (b) keeping track with changing benefit needs of employees; and (c) the
administrative complexities involved in actual operation.
Trends in Employee Benefits

 Less attention to tax avoidance

 Greater simplification of benefit package
 More attention to individual needs
 Great emphasis on individual choice Reward Management
 A move towards cash rather than benefits in kind
 Greater concentration on assessing the cost/effectiveness of total benefit package
 More attention to communicating the benefits package

The reward management framework

Reward management is a complex process with many interconnecting elements and
underpinning
concepts. The reward management framework expressed as a concept map is shown
below:
This model of reward is indeed complex but it can be analysed under the headings of
aims,
strategic reward, contextual factors and reward concepts.

Aims of reward management

In the words of Ghoshal and Bartlett (1995) the overall aim of reward management
should be
to ‘add value to people’. It is not just about attaching value to them. More specifically,
the aims
are to:
 support the achievement of business goals through high performance;
 develop and support the organization’s culture;
 define what is important in terms of behaviours and outcomes;
Reward people according to the value they create;
 reward people according to what the organization values;
 align reward practices with employee needs;
 help to attract and retain the high-quality people the organization needs;
 win the engagement of people.
Effective reward management
The criteria for judging the effectiveness of a reward management system is the
extent to
which it:
 is fit for purpose – the contribution it makes to achieving organizational
objectives and
recognizing the needs and wants of stakeholders;
 is appropriate – fits the culture and context of the organization;
 is designed in accord with what is generally regarded as good practice in the
particular
context of the organization, subject to the requirement that it must be
appropriate;
 functions in line with well-defined guiding principles, which include the need to
achieve fairness, equity, consistency and transparency in operating the reward
system;
 includes processes for valuing and grading jobs and rewarding people according
to
their performance or contribution that are properly conceived and function well;
 makes a significant impact on performance through performance management
or contributions
to high-performance working;
 has produced an attractive employee-value proposition;
 provides rewards that attract and retain people and enlist their engagement;
 maintains competitive and equitable rates of pay;
 incorporates successfully a total rewards approach;
 manages reward processes carefully and obtains value for money;
 provides for the evaluation of reward processes and taking corrective action as
necessary;
 communicates to all concerned how the reward system operates and how it
affects
them;
 provides for the devolution of a reasonable degree of authority to line managers
to
make reward decisions, taking steps to ensure that they have the skills and
support
 required and that their decisions are in line with reward policy guidelines.

Effective reward in the best performing firms

 The best-performing firms as established by Watson Wyatt (2002) view their

reward programmes
 differently from the lower-performing organizations:
 Top firms are more likely to use rewards as tools to engage people in improving
business
 performance.
 These firms make greater efforts than others to communicate their plans and to
measure
 reward plan effectiveness.
 They are more likely than the rest to link rewards to their organization’s business
strategies.
Reward management: six tips

 Reward people according to the value they create.

 Reward people according to what the organization values and wants to pay for.
 Take account of employee as well as business needs.
 Best fit is preferable to best practice.
 Strive to be different, even unique, when developing reward policy and practice.
 Adopt an evidence-based management approach that involves managing reward
systems on the basis of fact rather than opinion, on understanding rather than
assumptions, on grounded theory rather than dogma.