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Total Reward Packages And Cost Implications Management Essay

Introduction

The concept of a total reward package for employees is assessed in terms of its suitability for individual employee aspirations and the employer’s ability to deliver such a package at minimal cost above the traditional pay and benefits.

Concept

The concept of total reward is based on a core of non-financial benefits. Total reward adds to traditional pay and benefits the extras which employees gain from employment such as skills, experience, opportunity and recognition. This type of reward encompasses the less tangible benefits of employment. For the employer, the aim of such a reward package is to tailor the rewards to fit the desires of individual employees at minimal cost (Redman and Wilkinson 2006)

Torrington et al (2008) states that reward is central to the employment relationship, and how much a person is paid ad in what form is an issue of great importance. This is also central to human resource management (HRM) because money spent on salaries, benefits and other forms of reward commonly accounts for over half an organisation’s total costs. For commercial organisations it is therefore a major factor affecting both profitability and competitive advantage. In the public sector the cost of rewarding staff is determined by, and in turn helps determine, the level of taxes. For these reasons, the management of reward is controlled by the financial health of the organisation. The aim is to design competitive reward packages which attract, retain and motivate staff, while simultaneously restricting costs so as to ensure viability in the organisation’s commercial and financial status.

Rationale

Leopold ad Harris (2009) relate that a drive to link reward strategies to business performance grew out of a rejection of the rigid traditional approaches to pay and as a means of responding to increased competitive pressure and rapidly changing markets. Such variable pay offers a practical alternative to pay arrangements which take no account of individual contribution. This type of reward is growing and can be attributed to a number of factors. These include The search for human resource strategies that link individual’s efforts to business goals, they are seen as a key means of attracting, retaining and motivation key staff, they attempt to improve a sense of commercial awareness in the company’s fortunes especially where there is a financial share in success. There is also a belief that linking rewards to individual performance is more motivating and fair than the provision of blanket rewards for differing contributions and standards of performance. This is also a move away from collective, trade-union-dominated pay bargaining, and a belief that rewarding correct behaviour encourages the company’s desired values by offering a visible means of recognition for achievements and behaviours that support the organisation’s objectives. The success of the organisation is increasingly seen as requiring a degree of integration between human resource strategies and business strategy.

The purpose of managing the system of rewards within an organisation is to attract and retain the human resources the organisation needs to achieve its objectives. To retain the services of employees and maintain performance levels it is necessary to increase their motivation, commitment and flexibility by a variety of means, including a competitive compensation package. The reward management package is not restricted to incentives such as wages or salaries, bonuses, commission and profit sharing, which relate to intrinsic motivation. It is also concerned with non-financial rewards that satisfy the employee’s psychological needs for job variety and challenge, achievement, recognition, responsibility, opportunities to acquire skills and career development, and the exercise of more influence in the decision-making process. The non-financial rewards can be equated with intrinsic motivation (Mckenna and Beech 2008).

Beardwell et al (2007) describes the expectancy theory whose fundamental concepts are that the expectation of what will occur influences the employee’s choice of behaviour. Vroom (1954) interpreted motivation as the process in which employees select for a set of alternatives based upon anticipated levels of satisfaction. The first-level outcomes result from the behaviour associated with doing the job itself and include productivity, absenteeism, turnover, and the quality of productivity. The second-level outcomes are the rewards or punishments that the first-level outcomes are likely to produce. Commonly accepted second-level outcomes are merit pay increases, group acceptance or rejection, and promotion.

Models

Bacon et al (2009), discuss differing models of the employment relationship. The ‘unitarist’ relationship tends to see employees as psychological rather than economic beings, with narrow economic interests being less important than their psychological interests. The model is based on the concept that employees and employers have united interests. This is the rationale behind the label ‘unitarist’. The relationship is seen as a long-term partnership between employers and employees with common interests. Profitability and other organisational goals are entwined in fulfilling work, fair treatment, and the satisfaction of employees’ other intrinsic desires. As described by Adair (2006), Maslow’s Theory of Motivation states that after their basic needs are met people seek self-esteem in the form of a desire for reputation, prestige, status, recognition, confidence and achievement. These factors provide motivation to succeed in work and reward systems like the unitarist model recognises these needs.

The Towers Perrin model of total reward is discussed by Armstrong and Brown (2006). This is a four quadrant model with the upper two quadrants, which are pay and benefits, and two lower quadrants, representing learning and development and the work environment. The pay and benefits quadrants represent transactional rewards. These are financial in nature and are essential to recruit and retain staff but can be easily copied by competitors. By contrast, the learning and development and work environment quadrants are relational non-financial rewards produced by the lower two quadrants are essential to enhancing the value of the upper two quadrants. The real power comes when organisations combine relational and transactional rewards. Centrica has a total reward approach which integrates financial rewards like base pay, contingent or variable pay, share ownership and employee benefits; and non-financial rewards such as the work environment, including recognition, quality of working life considerations, the opportunity to learn and develop skills and work-life policies

Types of reward

The list of employee benefits available to the employer as part of the overall reward package is wide ranging. These are benefits which are additional to wages or salaries but which have a value to the employee. These so-called ’fringe-benefits’ can form a substantial part of the total reward package, especially for higher-paid employees, for whom there may be tax and status advantages. Common benefits include paid holidays in exceed of the statutory minimum, pensions, life insurance, health insurance, sick pay, maternity and paternity leave, childcare, subsidised restaurant facilities or luncheon vouchers, paid leave for personal business like dental appointments, company cars, mileage allowance, housing assistance, including subsidised mortgages, relocation expenses, loans and discounts, sports facilities, club membership and fees to professional bodies (Redman and Wilkinson (2002).

Another form of individual reward is illustrated by Motorola’s practice of encouraging inventors. New inventions and patents representing intellectual property are essential to Motorola’s success. To encourage inventors, Motorola pay bonuses to employees when a patent application is files and again when a patent is issued. For inventors receiving their tenth payment, another bonus is awarded. Depending on the company’s estimate of the invention’s value, these lump sum awards may be n the range of $10,000 to $20,000. Motorola consistently ranks among the top ten companies awarded US patents each year (Jackson et al 2008).

Advantages

One advantage of a total reward system is the fact that intangible rewards are harder to imitate by competitors. Over the long term it is in the interests of organisations to improve the perceived value of the intangible elements, but this is difficult to achieve and more difficult to estimate. Several important intangible rewards are intrinsically rather than extrinsically motivating, and by definition are not directly under management control. These terms are used by psychologists to distinguish between sources of positive motivation which are external to individuals and given to them by their employer, such as money or praise, and these which are internally generated. An example of intrinsic motivation is a person putting a great deal of effort into a work project simply because he or she finds it interesting or enjoyable. The result may be considerable satisfaction on the part of the employee concerned, but this has not resulted directly from any management action. All managers can do is to try to create and sustain a culture in which individual employees can achieve intrinsic motivation and experience rewarding work (Torrington et al 2008).

Armstrong (2006) relates that a total reward approach of holistic: reliance is not placed on one or two reward mechanisms operating in isolation, and account is taken of every way in which people can be rewarded and obtain satisfaction through their work. The aim is to maximise the combined impact of a wide range of reward initiatives on motivation, commitment and job engagement. Total reward strategies are vertically integrated with business strategies, but they are also horizontally integrated with other HR strategies to achieve internal consistency. The benefits include a greater impact where the combined effect of the different types of rewards will make a deeper and longer-lasting impact on the motivation and commitment of people. There is also the appeal to individuals of enhancing the employment relationship, and the flexibility for individual needs which is better met and helps tie the employee to the organisation.

Price (2007) relates that research for British telecom’s business indicated that more than a third of British workers would be prepared to forgo a pay increase for more flexible working options. The research, conducted by Yougov, indicates that flexible working policies are valued across the age arrange, but with an above average response from young people, more than three-quarters of whom agreed that it is an important benefit, with two-thirds agreeing that a better work-life balance was the main advantage, followed by less stress and fewer travel problems.

Cost/benefits

Beardwell and Claydon (2007) note that control of costs is at the heart of managerial responsibilities, and, within that, control of labour costs is fundamental to organisational performance. To reward the required actions and attitudes in pursuit of business objectives, a key element is seen as a total compensation package of variable pay and the reward strategy needs to be integrated with wider organisational and managerial processes. Base pay remains the foundation of the policy aligned with organisational and social norms in order to ensure that there is a feeling of justice across the organisation. However, alongside this element the organisation may develop variable non-permanent elements, which remain subject to criteria related to either the individual of organisational performance. These variable elements can go down as well as go up, addressing the issue of wage rigidity which adds damaging costs I periods of downturn. A number of such variable elements are often grouped under the generic term performance-related pay (PRP), indicating that the measurement of performance may be based on the individual, the team, or the organisation.

Bratton and Gold (2001) state that there is some debate regarding employee benefits, and there have been questions as to whether benefits impact on an organisation’s ability to attract, retain and motivate employees. Conventional wisdom states that employee benefits can affect recruitment and retention, but there is little research to support this conclusion, and given the absence of authoritative evidence on the relationship between employee benefits and performance, and their escalating costs, benefits are under constant scrutiny by HR managers. One innovation in the concept of individual reward is the variable benefits program which allows employees to select benefits that match their individual needs. Employees are provided with a benefit account with a specified payment in the account, with types and prices for each provided in a printout. This program does create overhead administrative costs, but participating employees come to understand what benefits the organisation is offering. For example young employees might select dental and medical insurance while older employees might select pension contributions.

Armstrong and Brown (2006) relate that Centrica believes that the total reward programme offers substantial benefits including the employee’s perception of the value of their reward package, increased performance through greater commitment and motivation, improved recruitment, supporting the notion of becoming the ‘employer of choice’, and reallocating reward to each individual employee needs. There are, however, issues relating to the introduction of this reward strategy, such as the fact that it took Centrica ten months to plan and implement, and it is not something that HR can do alone, without full management support. A main difficulty in the implementation of such a total reward package is the fact that the cost of some intangible rewards are not quantifiable, making it difficult to make a business case.

The cost implications of the various forms of total reward packages may not be tangible in financial terms, but cost avoidance can give a measure of savings. Like many large companies, Airbus in the UK, has large workforces operating on large establishments, with their own airfield, canteen facilities, and in the case of the Broughton site, their own football team which plays in a recognised Welsh league (Airbus UK). The benefits of a subsidised canteen on a large site are that it becomes easier for employees to remain in the work environment, rather than travel outside with the potential of loss of time due to late return. The provision of sporting and social club facilities for employees of Airbus represents another aspect which tends to encourage employee loyalty and retention.

Management is normally required to budget for payroll, and the problem with pay reviews, which are often conducted annually, are that they do not control, total payroll costs within departments. Payroll costs vary as a result in the number of changes in the numbers of people employed and increases in pay arising from general and individual reviews, the amount of pay offered to promoted or transferred staff, and the rates of pay offered to replacement employees for those who may have left (Armstrong and Muris 2004). Therefore stability of the workforce which is promoted as one of the rationales for total reward strategies is beneficial to keeping within budget forecasts. Unexpected loss of staff involves in many cases a replacement, retraining of existing employees, or promotion from within the organisation. There is also a cost associated with loss of continuity in the role which may impact production. All of these have consequential costs, helping to compensate for the costs of providing a total reward package.

The cost of replacement of employees is not simple. In many cases there are advertising costs, recruitment agency fees, employee and HR time spent in interviews, possible travel costs associated with interviews, and administrative costs attendant with verifying references. Once hired, there are costs associated with induction, familiarisation with company norms, on the job training and in some cases special equipment or clothing.

The Chartered Institute of Personnel and Development (CIPD) report on employee turnover for 2009, reported an overall employee turnover rate for the UK to be 15.7%. Although this varies between industries, the highest levels of turnover are found in private sector organisations, with retailing, catering and leisure and call centres being among the lower paid groups. The highest rates vary from region to region, but are most prevalent where unemployment is lowest and where it is relatively easy for people to secure desirable alternative employment (CIPD 2009).

Taylor (2002) relates that estimates of cost to an organisation associated with the departure of even the same types of individual vary considerably. An example in the NHS in 2001 regarding filling a typical vacancy ranged from £150 to £9, 500 (Health Service report 2001). The average figure was £2300 and at current rates it would be expected to be much higher. Researchers and consultants have conducted more detailed analyses have put the lowest figure at around 50 percent of the annual salary for the job in question. Much depends on the type of job and where it is easy to find and train a replacement costs are going to be low. Highly-skilled employees who go to work for competitors, taking their expertise and organisational knowledge with them are quite different. Such people’s skills are in short supply or where they have been developed over time at the organisation’s expense, the costs can easily run into hundreds of thousands of pounds.

Banfield and Kay (2008) in describing an economic perspective on recruitment relate that decisions about employing new staff can have either long-term financial costs or benefits for the organisation. This means that the difference between the value of the contribution of the person employed, compared with that of the one who was rejected can be either positive or negative, depending on whether the ‘right’ employment decision was made. It becomes more important to understand both the real costs of recruitment and selection, as opposed to those associated with direct expenditure, and the longer term financial consequences that follow from the selection decisions. The hiring decision is often made too lightly, and few organisations have stopped to calculate how costly the decision to hire a new employee is and every hiring decision runs the risk of being a poor one. Even when the new employee is a good one, there is a productivity loss as the person moves up the learning curve.

Conclusions

The concept of total reward has been gaining support among organisations as its perceived benefits are seen to be closely aligned with business competitiveness. The differences from traditional methods of reward are mainly that the total approach fulfils the need for recognition, esteem and intangible rewards for the employee who responds by their behaviour and commitment to the goals of the company. The total reward concept aims for a partnership between the employee and business strategy, and its flexibility can be helpful in times of economic downturn by restraining costs. The cost of employee turnover can be considerable and not recognised as a significant cost factor. The problem with minimising the cost implications of a generous policy such as total reward are that many of its effects are not quantifiable, and can only be measured in terms of cost avoidance, so that stated aim of tailoring the rewards to the individual while minimising cost implications does not facilitate the business case for proving its value.


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