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Rewarding Employees
Total Marks: 30
ASSESSMENT # 6
1. Give short answers to the following questions:
i.
ii.
iii.
(15)
What is the link between motivation and performance?
How do team-based rewards work?
‘Rewarding is essential for motivation.’ Which types of incentives would be most
suitable for the following workers?
a. A cleaner
b. A salesperson
c. A nurse
d. A shop assistant
Q.2.
Q.3.
Outline the principles of setting up a reward system.
Explain the different methods used for developing a pay structure.
HRM Level 4
Brentwood Open Learning College
(7)
(8)
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HUMAN RESOURCE MANAGEMENT
UNIT-6
3
Rewarding Employees
Learning Outcomes
By the end of this unit the learner will be able to:
Identify the motivational aspects of the reward system
Explore the reward system
Identify types of rewards and employee ownership
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Unit 6
Rewarding Employees
Introduction
Reward systems have been studied intensely and appeared in literature on economics, psychology, and
sociology in particular. Other disciplines have also conducted studies on the reward systems and the role
they play in business. This is because reward systems have such an impact throughout organisations. The
design and context in which reward systems operate decides what impact the systems will have. One
must focus on the characteristics of an organisation and the pay system it has in place, in order to
understand the pay system.
Whenever there is a change in business practices or the business itself, a new approach to reward
systems is necessary because often the old ones will not be sufficient in a changing environment. An
organisation must strive to ensure the reward system is fair across-the- board so that all departments
have rewards that suit their workloads.
Motivational Aspects
The development, implementation, and evaluation of the reward system, is part of reward management.
There is a lot of literature that describes the relationship between reward systems and how participative
management is practiced. This is the type of management that involves workers in the decision – making
process.
Reward systems operate for a number of reasons. Motivation is one of the major ones. Allowing the
organisation to ‘humanise’ work for employees is another one and it enables the employees to feel more
satisfied in their work. Part of this is that there is an assumption that organisations have a moral duty to
make work as satisfying and enjoyable as possible. It is understood that if employees are happier at
work, their motivation and productivity will be higher. Another reason regards management and its
ability to control behaviour of subordinates more successfully. With these systems in place and the
workforce appropriately motivated, management can then more easily secure the achievement of
organisational goals.
What is Motivation?
Motivation in business is a reason for producing or behaving in a particular way. It is about motives. They
are the internal drivers of employees that direct their behaviour towards certain outcomes. For example,
achieving higher performance at work may be because the employee wants a new car or because he/she
wants to have a feeling of achievement. Needs are usually more physiological. For example: “I’m tired
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and I need rest,” or “I need the company of others and social connections.” Another motivator could be
self-esteem; an employee needing the respect of his/her peers.
The most important elements to designing a reward system are:
Pinpointing the strategic elements of rewards and how they connect to other aspects of human
resources.
Assessing and revising the elements that make up the reward package.
Creating basic pay structures through job evaluation systems, market tracking and competence
assessments.
Determining which aspects of pay for performance schemes should be used and under which
conditions.
Constructing a benefits package which suits the needs of both the organisation and the
employees.
The Influence of Motivation Theory
Money is a major motivator for most people most of the time, but it is not so for everybody all of the
time. Money can also be used to motivate people but only to a certain level and this differs for every
person. In private enterprise especially, the aim is to motivate most of the employees through pay for
performance schemes using their achievement of goals as the motivator. Within the public and voluntary
sector, motivation is oftentimes linked with satisfaction related to the job. Here, the physiological needs
are more prominent.
In order to have a motivated and loyal workforce, organisations must put into place competitive
compensation and benefits schemes. An effective compensation scheme should include a pay philosophy
that relates closely to the company’s business strategy and reflect the company’s culture and long-term
goals. Deciding whether or not your organisation wants to set salary types on the same level as other
competitors in the field or establish yourselves as top-notch employers who pay for good talent, is
something your company must decide early on. If an organisation isn’t able to compete on salaries alone,
it can come up with other benefits, more unusual but effective, that will distinguish it from others.
Reward Systems
The ability to reward members is an important attribute of work organisation, the most important of
these rewards being pay increases, promotions, fringe benefits and increased status. The ways rewards
are allocated have a deep effect on the quality of work life for employees and the effectiveness of
organisations.
Reward systems are mostly effective in four ways.
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They:
1)
2)
3)
4)
Motivate employees to perform effectively
Motivate potential candidates to apply to join the organisation
Motivate employees to come to work, and
Motivate individuals by clearly showing their position in the organisation’s structure.
Setting up an effective reward system relies on several principles:
Giving value to the reward system. Employees usually prefer certain types of rewards and these
can differ. Many employees prefer cash rewards. Some employees like to see their names in the
company newsletter while others prefer public recognition and award ceremonies.
Making the reward system simple to understand. Too many complicated procedures for
evaluating performance, including forms, and reviews by several levels of management, will lead
to confusion. The system must be easy to understand. This is the only way it will be effective.
Decide on performance standards within the control of the team.
Ensure the reward system is fair and effective.
Ensure participation in the reward system.
Involve people in the reward process.
Different types of rewards are used by different organisations. These types include recognition, money,
plaques, citations, special assignments or parties, and celebrations. There are also other types of
rewards. Many companies use pay, incentives and awards. Most people prefer bonuses in salary or
wages. This pay system has rewards for the company as well as it usually (but, not always) comes with an
increase in employee motivation. Companies also use incentives and awards.
However, it is not only money that motivates people. Studies show that there are other things important
to achieve satisfying rewards. They are mentioned below:
1) Satisfaction with reward is not only related to how much is received but how much the individual
feels should be received. If less than expected is received, individuals usually feel dissatisfied. In
some cases, when they receive more than what they expect, they may feel guilty and/or
uncomfortable.
2) Comparison plays a big part and people’s feelings of satisfaction can be influenced by comparisons
with what happens to others. These comparisons are made both inside and outside the organisations
they work in, and are usually made with people in similar jobs.
3) As well as the obvious outer rewards employees receive (e.g. pay, promotion, and status symbols)
they also usually experience inner feelings that are rewarding to them. Feelings of competence,
achievement, personal growth, and self-esteem are among them. Overall, job satisfaction is
determined by both how people feel about their intrinsic rewards and how they feel about their
outer rewards.
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4) The rewards people want and how important rewards are to them differ from person to person.
Some feel money is the most important, while others feel interesting work and job content is
important. People are often able to find examples to support their point of view.
5) Usually, the outer rewards such as pay and awards are important and satisfying because they will
most likely lead to other rewards, or because to some people the symbolic value is of importance.
In order to be effective, reward systems must relate to performance. The criteria for getting rewards
must be very clear and it is necessary for employees to know if they are on track to receiving rewards.
The perception of rewards as being fair is also a must. Those employees who work harder should receive
greater rewards than poor performers. Furthermore, for any company to attract, motivate, and keep
qualified and competent staff, they must offer rewards comparable to their competitors.
Types of Incentives and Rewards
Incentives and rewards are different. Incentives are forward-looking, so to speak, while rewards are
more reflective. Financial incentives provide direct motivation which equates to: “do this and you will get
that.” They are tangible rewards and will continue to work as long as employees know that further
excellent performance will bring more rewards. In some cases a team-based sum will be available. This is
only when the team involved has worked co-operatively to achieve the target.
Competence-Related Pay
A way of rewarding people based on their competency level in carrying out their work can be defined as
competence-related pay. This definition can be viewed in two ways:
a) Pay is linked to competence, and
b) Employees can be rewarded according to their level of competence. Competence related pay is
not about the acquiring the specific competence, it is about how the use of the competence
produces added value. This type of pay relies upon assessing the competence levels.
Skill Based Pay
Skill-based pay is connected to the level of skills employees use while doing their jobs. It also includes the
use of any additional skills learnt by the employee. Skill-based pay is different to competence-related
pay. Skill-based pay usually refers to manual skills such as fitters and turners, machine operators and
welders. Competence-related pay refers to attitudes and behaviours an employee must have and use to
perform a particular role effectively. These employees are then assessed on the competency and the
skill. The pay schemes should be reviewed and/or changed as necessary because they may not be useful
after a period of time if other changes have occurred. They must also be cost effective.
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Team-Based Rewards
Members of a team (that is formally chosen and recognised by the organisation) may receive teambased rewards when their performance has achieved the desired goals set by the organisation. These
rewards would then be shared between all the members of the team. Rewards for individuals within the
team can also be used in order to recognise especially good performance by certain members. An
understanding of the nature of teamwork and how teams function is necessary in order to develop and
manage team-based rewards.
Profit Sharing
Profit sharing is better known and is practiced more than gain sharing. Profit sharing is a system whereby
the employees receive a direct share of company profits. It is a group based system. Basic objectives of
profit sharing are:
a) using methods that inspire employees to identify more closely with the company by building a
common concern for its progress;
b) to encourage more interest among employees in the concerns of the company as a whole;
c) to better boost co-operation between management and employees.
The rationale behind profit sharing has two main purposes:
Firstly, it is a way of fostering a closer relationship between employees and their company. This is
because staff will begin to think more like owners or at the very least, have concern for the
organisation’s success. Secondly, labour costs will change according to the ability of the company to pay.
In Japan this system is widely used. Companies can also use the profit sharing plans to educate or train
employees in the financial performance of their business.
Gain Sharing
Gain sharing is a system whereby all employees of an organisation are eligible for a share of the
company’s profits or payments. It is a system of management that encourages better performance by
involving the employees and allowing them to participate. As the company’s performance increases,
employees will share in the financial gains, as well. Success will depend upon producing a feeling of
ownership of the plan and the operations. This way, employees begin to identify more with the company
and their commitment is usually increased.
There are many potential benefits of gain sharing. It helps employees focus their attention on the main
issues which affect performance and enlists the support of all employees towards this. It encourages
teamwork and co-operation on all levels. Gain sharing is different to profit sharing in at least three main
ways. First, rewards are based on a productivity measure rather than profits under the gain sharing
system. The aim is to link pay to performance outcomes as this is something employees can control.
Second, gain sharing plans generally distribute bonus payments with greater frequency. For example,
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they can be distributed monthly or quarterly instead of annually. Third, gain sharing plans distribute
payments during the current payment period. Here it is different as profit sharing is usually deferred.
Lawler (1971, 1990) has made a summary of the most common results that have been found in research
studies of gain sharing plans:
Coordination, teamwork, and the sharing of knowledge are boosted at lower levels.
Participation and reinforcement of group behaviour is done as social needs are recognised.
The focus is on cost saving, not just quantity of production.
There is a greater acceptance of change due to technology, market, and new methods because
higher efficiency leads to bonuses.
Changes in attitudes occur among workers, and they require more efficient management, better
planning, and good performance from their co-workers.
Employees try to reduce overtime and the goal is to work smarter not more.
Employees come up ideas as well as effort.
When unions are present, more flexible administration of union-management relations occur.
When unions support the plan, they are strengthened because of better work situations and
higher pay results.
Gain sharing plans do have certain limitation, however. The most important limitation is differentially
attracting and keeping the best performers. The problem here is that, since gain sharing plans don’t pay
more for better performance, they are not a good motivator for certain employees to stay with an
organisation. Bonuses are paid even if the organisation is not making a profit (which is different to profit
sharing). Gain sharing plans also don’t fit in well with every situation.
Stock Options
Stock options are the most popular long-term incentives. A stock option is the right to buy a specific
number of shares of a company’s stock at a specific price during a period of time. The employee can buy
the stock when it’s equal to the market price at the time the stock option was given. The employee’s
gain would be equal to the market value at the time it is exercised, less than grant price. The belief here
is that the price of the stock will increase or at the very least stay the same rather than decreasing. There
have been a few trends that have improved the attractiveness of stock options as long-term incentives
and also as a retention tool.
Profit sharing plans are similar to stock options in a lot of ways. The pay-outs are based on organisational
performance on the stock market. There are a few very important aims of the plan and they are:
a) The need to motivate employees to act in the best interest of the organisation
b) To increase employee identification with the organisation, and
c) To have labour costs change with the organisational performance.
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Stock options have been a common programme for executives for a very long time now, and today many
companies, like Pepsi-Cola and Hewlett-Packard, grant them to all employees. The evidence shows that
this approach is becoming more common.
Merit Pay
Merit pay is the approach for paying performance which is used the most. Merit pay schemes tend to
give salary increases to employees based on their supervisor’s appraisal of their performance. The
reason behind merit pay is to increase motivation and to keep the best performers by clearly establishing
a performance reward relationship. Evidence suggests that most organisations’ performance appraisal is
not done well, and therefore, are not accurate. This results in measures of individual performance
becoming non-existent.
Employee Ownership
Employee ownership plans comprise of stock option plans, stock purchase plans, and Employee Stock
Ownership Plans (ESOPs). In smaller organisations where participative management is practiced, the
chances of increasing organisational performance are good. In large organisations which often have very
little employee ownership, it is possible to positively affect the structure by integrating across the whole
organisation if, of course, all employees are included in the ownership plan. Ownership often has a more
positive effect on attraction and retention than profit sharing. Employee ownership is useful, however, it
is likely to be highly situational. An example of this would be in small organisations where they might
make profit sharing and gain sharing unnecessary. If joined with a suitable approach to employee
involvement, they can contribute greatly to employee motivation. In large organisations they may add to
the integration of the organisation and to a positive culture.
Employee Benefits
Employee benefits are parts of remuneration that are given in addition to several forms of cash pay.
They deliver a measurable value for individual employees. This may be deferred or contingent as in the
case of a pension scheme, insurance cover or sick pay, or it can provide an immediate benefit such as a
company car. Elements that are not strictly remuneration, such as annual holidays, are also included.
Generally speaking, benefits do not exist in isolation but instead are part of a comprehensive
compensation package offered by the organisation. Below are the objectives of employee benefits:
a)
b)
c)
d)
To improve the employees’ commitment to the organisation
To show that the company cares for its employees’ needs
To ensure the personal security and personal needs of all employees, and
To guarantee that benefits are cost-effective in terms of commitment and improvement in
recruitment and retention rates.
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Benefits represent a bulky share of total compensation and, therefore, they have huge potential to
influence the employees, the unit, and the organisational outcome variables. The literature shows that
benefits do have effects on employee attit …
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