Reward and benefits systems need to be tailored to fit the organisation

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Organisation is said to be a Social arrangement or group of people who work with each other to achieve collective goals. People are very important in any organization and play a vital role in success or failure of any organisation. For the individual employee, the pay cheque at the end of the month is primary source of income, which determines the purchasing power of that employee, and it also concludes the standard of living of an employee and will therefore be the most important consideration for the majority of the employees.

Concept of rewards and benefit is very closely related to motivational factor of employees. Employees are provided with pay and other facilities and then rewarded just for the maximum utilization of their abilities or just to motivate them to work efficiently for the best of the organization because with the proper rewards and benefit system, we can increase the overall efficiency of employees to improve the performance of organization. Reward system should be knotted as much as possible to desire performance of employees because employees must see a direct relationship between their attempts and their financial reward. It is in the best of organization to link reward with the main objective of organization.

What is reward system?

Reward system is set of procedures or policies of any organization to reward the employees according to the skills and contribution made by the employee into the organizational success or profit. Basically, it is a tool to motivate the employees and get best out of their abilities. (Thomas G. Cummings, Christopher G. Worley 2009)

Why reward system is important in organization?

Now a day's most of the organizations operate through decentralized business units and teams and are much closer to their client then the strategic or corporate management. These organizations admit that competitive advantage comes from knowledge, skills and links created by employees with customers. (Robert S.Kaplan & David P.Norton 2001)

From the organization's point of view, it's highly suitable to have motivated employees as they

Don't waste time

Work harder

Generate less waste

Make few mistakes

Together these should result in higher quality, improved productivity and lower cost. (Kaplan 2009)

Reward system should also help to

Attract and retain staff

To encourage desirable behaviour

Provide a fair and consistent basis for motivating and rewarding employees

William James of Harvard absorbed that normally people operate or work only at 20-30% of their capabilities. With proper motivation this can jump to 80-90%. Reward and benefits are provided to the employees to let them feel that they are part of the organization and are important for the organization. Organizations use a different rewards and benefits system to satisfy the need of an employee and to motivate them.(Thomas B. Wilson 2007)

Vroom expectancy theory

According to Vroom's theory factor of motivation depends on the valence which is how much you want the outcome and expectance that how many chances are there or your assessment of probability of the outcome. (Kaplan Financial Publications 2009)

Therefore to get highest possible motivation in employees organization should offer some value and rewards and something they want with a reasonable chance that they will get that. (Kondalkar 2009)

Rewards and benefits are of different kinds and not only in financial terms it could be insurance policy, accommodation, shopping discount, job enlargement or paid holiday, etc.

Does one reward system fit all?

One reward doesn't fit all organizations. A proposition that has worked well for a company will not necessarily work well for another. Assume a hotel reservation centre wants to set incentives for employees to increase productivity by lowering the time spent on each call. If that reduction is only the measure quality of customer services and the number of reservation made might drop as employees rush callers in order to reduce talk time. Therefore, the centre should consider numerous measures such as talk time. Reservation booked and the result of the customer satisfaction survey.

If improved quality of service is the serious business objective, this should be portrayed in a payment system which rewards front-line staff which provides the best standards of service to customers. Alternatively, if increased productivity is searched for, then a payment system which rewards efficiency would be more appropriate. (Derek Torrington, Laura Hall, Stephen Taylor - 2008)

For some organizations to attract new and efficient and retain the highly skilled employees might be the way to get the competitive advantage like In the service sector like consultancy firms, lawyers, and doctors companies don't have assets like plants and machineries' but these companies depend solely on the intellectual asset like skills and capabilities. So the rewards and benefit should be according to the organizational requirement which in case is long term retention of employees.

For example, Boeing found that their reward system was expansive, complex and confusing and was not motivating employees, then they came up with the new reward system based on financial performance, customer satisfaction and good corporate citizenship. The results are successful.

The success of the reward system relies on its thickness with culture of organization. For example, if an organization is Autocratic and adheres to classical approach, a reward system which rewards flexibility and teamwork is likely to fail. (Robert L. Mathis, J. H. Jackson 2008)

Types of Rewards System

Basically there are two rewards philosophies which are opposite to each other namely

Entitlement Philosophy

Performance Philosophy

Entitlement Philosophy expects that individuals which have worked another year are entitled to pay increase with little regards to performance. On the other hand, Performance philosophy constrains that rewards changes reflects performance distinctions. Almost all reward systems fall somewhere in between.

Base Pay:

Wages are directly calculated on the amount of time work by employee whereas salaries based on the periods regardless of the hours worked.


For example, the base wage for machine operators may be $12 an hour, but some individual operators may receive more because of their experience and/or performance and company may hire them permanently and can offer experienced staff on the monthly salary instead of hourly wages to keep them happy and to give them job security.


It helps organizations to seduce new employees and keep old employees.

It is a very easy to easy to use system

Less complicated as compare to other payment systems.

It exists frank to inspection.

More friendly for employees as It provide surety of income

Equal opportunities for all the employees irrespective of the skills


Sometimes employees are less motivated, and they don't work in the best of organization, and they just spent their time at the job to get paid and waste the time and money of the organization.

It ignores the performance and skills of employees and treat all the employees equally ignores the motivational factors and pay all employees equally

Some time it might be less productive for organizations as not all the employees work with full efforts

Variable pay:

Variable pay is compensation linked to individual, group/team or organizational performance. Traditionally also known as Incentives provide employee reward on their input in the overall lucrative ness of the organization.

It is based on some of these assumptions that

Some people perform better and are more productive than others.

Employees who perform better should receive more compensation.

Some of employee's total compensation should be tied directly to the performance and results.

Some jobs contribute more to organizational success than others.

Main desires of employers to adopt variable pay or performance based pay might be following.

Link strategies business goals and employee performance

Enhance organizational results and reward employees financially for there contribution.

Examples of Incentives:

Team bonus

Stock options


Service awards

Spot bonuses


Recognition and reward programs

Monetary incentives

Trips (Robert L. Mathis, J. H. Jackson 2008)

Three categories of variable pay:




Individual Incentives:

Basic purpose of individual incentives is to tie individual effort to additional rewards. According to Robert L. Mathis, There are some conditions, which are necessary for the use of individual reward systems.

Individual performance must be identified

Individual competitiveness must be desired

Individualism must be stressed in the organizational culture.

Piece-rate system:

It is a pay system in which wages are decided by multiplying the number of units manufactured by the piece rate for one unit. Wage for each employee can easily be decided that how many units he produced and multiplying with per unit rate.

There are two types of piece rate system

Straight piece rate system

Differential piece rate system

Under a straight line piece rate system wages are paid on all units produced by an employee at the same rate, whereas under differential piece rate system employers set a standard of output on which employees are paid at normal piece rate system and out put on access of that standard are normally paid at higher piece-rate system.

Managers normally determines the standards or quotas by using time and motion studies


Let suppose a standard set for worker is=200 units/day at standard rate of £0.10 for all units produced over that standard, employee receive £0.20 incentive. Under this system worker who produce 400 units will get £60 (200 x 0.10) + (200 x 0.20)


It help organization to increase output as all individual will try to maximize their wages and will work very hard to get incentives

Less supervision is required which result in low cost

Increase productivity

Motivate employees to work hard

Employees use all efforts to achieve targets


Difficult to apply

Determining standard is complex

Not possible in some jobs to measure the output


Organization can also remit individuals some extra rewards in shape of bonus. A Bonus is one time payment by management to reward an employee on his/her good performance. When performance of an employee is the good organization may announce a surprise bonus or pre determined bonus. It can be either of team or individual.


A financial services firm provide a week salary as a bonus to employee who master the job relevant computer skills.


Motivate employees to work hard

Create competition among employees which result in good output

Employees take more interest in job to impress management


It may create jealousy among employees

Other may think that they are were deserving but did not get

Group/Team Rewards

Organizations may offer some group or team based rewards to employees in order to

Tie pay to team performance

Improve productivity

Increase employee retention

It can be in monetary term like cash or it can also be some special trip, or stock option.

Group/Team results:

Sometime organizations reward their employees in Group or team basses in which all individuals of that team are paid when desired goals are met. It can be Cost saving or quality betterment. Money is basically used to reward all members.


Gain sharing is also called team sharing or goal sharing. In different organizations workers are not paid for the discretionary but are paid to meet the meet the minimum levels of effort/performance required. When worker input more efforts which result in productivity organizations can afford to pay them going rates, which are gain sharing.

Normally labour cost, overtime hours, and quality of output are used to measure.

There were two older approaches for the gainsharing as well namely


Scanlon Plan

Profit Sharing:

In profit sharing rewards scheme some of the profit of the company is distributed among its employees. The level of profit to share is normally decided at the end of the year and then segmented in employees. Whereas in some companies profits are postponed and then paid at the time of the retirement. Often the level of profit is in related to employees somehow like accounting decisions, marketing efforts and competition.


It helps organizations improve productivity

Increase organizational performance

Improve products quality

Encourage team work


Not simple to use as some organizations don't want to disclose their profits

Level of profits fluctuate from year to year

Employee stock options:

Some of the organizations use employee stock option plans, which give employee right to purchase a fixed number of shares of company stock at a price. The purpose of this plan is to get employees to think and act as owners.


It gives favourable tax treatment to organization

It gives piece of action to employees and they can share in growth of the organization.

Employee ownership may motivate them to be more productive and do best for organization


It makes employees wages and salary and benefits dependant on employer


A benefit is a secondary reward given to the employees or group of employees. It includes

Security benefits

Retirement benefits

Health care benefits

Financial benefits

Time off benefits

Benefits can also be used to get competitive advantage like reward system. Organizations should not look at the cost of benefits as benefits contribute more in HR practice and help management to motivate employees.

Government Mandated benefits:

There are many benefits in UK mandated by Government like National Insurance and some pension plans and like medical and family related benefits.

Some of them are

Universal health care

Child care assistance

Paid time off

Voluntary Benefits:

Different organizations offer some other types of benefits to attract and retain employees.


In this complex world of business now a day's different organizations are trying to get the competitive advantage over others by using all possible means. Reward and benefits system can also be used for the growth and organizations overall success.

However, if one reward system work well for one organization it cannot be guaranteed that it'll work for other organizations effectively. Different organizations need the different reward system which should be specifically designed according to the overall objectives of the organization. Like in a Culture of classical approach of managing people rewards assuming team/group is not meaningful. Another example is in call centres where the target of sales is very important it is useless to offer reward system on the period of service because if offered employees will just pass their time on the job and will not put their efforts to sell products. Whereas in some organizations long term retention is necessary for these organizations reward systems should be based on a period of employment.

Organizations can choose a reward system according to need of the organization, but it should reflect the company's overall objectives and goals. Some temporary rewards can also be used to resolve some timely conflicts and can give a long term benefit in the shape of motivation of an employee. Proper reward system is as well capable of managing the performance of employees. Proper reward systems motivate employees and help them to work for the best of organization. In order to make the reward system more effective it should be tied with performance of employees and culture and objectives of organization.