The Role Of Reward Systems Business Essay

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The current discussion on the role of reward systems in industry and the impact of bonuses on managers' performance has yet not reached to a unanimous conclusion among practitioners and academics. The statements of those who are in favor of bonuses claim that emphasizing on monetary rewards and applying bonuses increase organizational performance and productivity. These statements conflict with that of those who are against bonuses. They argue that use of monetary rewards and bonuses lead to harmful results. One of the key questions that is frequently overlooked in the debate is: How significant is it to hand out bonuses for a company to stay and become successful for a long period? The appears from the research results that implementation of certain types of reward systems and the use of bonuses neither have positive nor negative effect on the performance of organization. The fact that explains this is that the reward systems are always a hygiene element for an industry. An organization that does not implement appropriate reward system will enter into troubles with its employees and face difficulty in improving its performance. If it does, then it is considered to be running in a situation where employees expect and consider that their company is being normal. In such cases, the organization can work on becoming an HPO (High Performance Organizations).

Table of Contents



Reward System

Brief about organization referring:

Reward system at Eco-Care and Aware:

Types of reward systems followed by Eco-Care and Aware:

Conclusion, Limitation and Further Research



One of the most significant assets of a company is its employees, whether it is in the service or manufacturing sector. To preserve good employees, jobs need to provide scope for development and motivate people by things apart from titles. Moreover, with the drift towards "flatter" companies and lesser employees, organizations need to inspire the rest of the employees to make a beneficial participation while still continuing to allow them answerable for their work. Organizations can no more meet the expense of paying an employee who is poor in performance that is needed for building organizational goals and business strategies. (Bruce, 2004)

One of the duties of HRM is to plan substitute ways in linking rewards or pay to performance. One method is through competency-based pay, where employees are salaried for their demonstrated competencies. The latest pay system or latest pay philosophy address the needs of an organization to support business strategies and inspire employees.

Reward System

The ability to grant rewards to its members is one of the most significant attributes of work organization. Status symbols, fringe benefits, promotions, and pay are possibly the most significant rewards. Since these rewards are significant, the ways in which they are distributed have an intense effect over the quality of work life and effectiveness of industry as well. (Kelley, 2007)

An Organization typically relies on reward system to do four things:

1. Inspire workforce to come to work.

2. Inspire individuals by indicating their position in the organization structure.

3. Inspire workforce to perform effectively, and

4. Inspire workforce to join the organization.

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

Engage employees in the reward process and authorize them to do the needful.

Make sure that the employee participates in the reward system.

Create a fair and effective reward system.

Arrange performance standards within the control of the team.

Formulate the reward system easy to understand so that it can be utilized effectively to gain maximum out of it. Elaborate procedures for review by many levels of management, filling out forms, and evaluating performance result in conclusion.

Give significance to reward system by giving preference to workforce for the type of rewards being offered. Few employees wish to see their name in their company's news letter while others like public identification surrounding award ceremony. (Jing, 2005)

High performing organisations manage their reward practices in ways that enable them to predict accurately what innovations are likely to work best and to ensure that what they are doing now delivers the expected results. They try their best to avoid what Kerr (1995) referred to as 'the folly of rewarding A while hoping for B'. Such organisations adopt an evidence‐based management approach. They appreciate that reward management is not just a soft 'art' and that scientific and evidence‐based methodologies are now used increasingly in general management and can readily be applied in the reward field. But despite the very obvious costs of pay budgets, incentive and benefits plans, the spread of sophisticated HR information systems and shared service centres, the widespread adoption of balanced scorecards and near‐universal pay benchmarking, many organisations seem to have little concrete evidence to evaluate or justify their reward practices. (Kelley, 2007)

Lazear and Oyer (2009) presented a summary of research on the effect of incentives in rganizations. Both of them analyzed many studies and finally concluded that incentives are the most influential management tool for affecting the performance of individuals in an encouraging manner. In particular, there are certain possibilities for increase in productivity using incentives like piece rates. Further, Lazear and Oyer recognized though studies that although incentives seem to be working properly, they won't give assurance in consistency all the time or with delay effects and sometimes even had unintended and unnecessary outcomes like manipulation of results.

The opponents of bonuses and monetary rewards are taken into the study on the other side. For example, Bloom (1999) demonstrated that difference in high paying companies suffer from greater manager and employee takings.

It is been noted that the advantages to the high performers are over-considered with the costs to the low level performers. It could make negative feel among low performers whose efforts may be ignored as a result.

As per Gneezy and Rustichini (2000), commencing new incentive schemes that offers financial incentives to employees could end up with poor performance and meanwhile employees with no compensation could perform better. (Lewis, 2006)

Siegel and Hambrick (2005) explained that organizations with higher pay have inequality in top management groups as bonuses have below average market-to-book value and shareholder profits than organizations with equal pay. According to Stone et al. (2010), financial incentive effects are unreliable. Some studies are ended up with mixed results. For example, Bonner et al. (2000) showed that financial incentives are directly influenced by the type of task and incentive scheme. As per Samuels and Whitecotton (2011), the effects of incentives weighed up based on certain contextual factors.

Brief about organization referring:

In this study, an organization namely Eco-care and Aware is taken as a sample to analyze appropriate academic literature about the reward systems. This study focuses on the reward system of particular organization and how it satisfies the employees and the company.

Eco-care and Aware is a non-profit firm which provides training and support service or consultancy to developmental sector. Support services includes certain aspects such as planning and formulation of developmental projects, technical support during implementation, Monitoring & Evaluation, Training and Capacity Building, Research & Study, Micro Planning & PRA. This organization provides its finest services for the sensible use of Human, Natural and physical resources.

There are certain areas of activities deemed in this organization and that includes Environment, Watershed Development, Biodiversity, Sanitation, Minor Irrigation, Biotechnology, Sustainable Agriculture, Horticulture, Capacity Building, Training and Awareness. All the fields in this organization are filled with qualified professionals and they are well clarified about their role. Some cases would require mutual interaction and dependency within the firm for achieving organizational objectives. (Kelley, 2007)

Reward system at Eco-Care and Aware:

Eco-care and Aware has directly connected its reward system with reward to performance. In this reward system, high level performer who is working hard and getting better results to the company would get more rewards than poor performers. The criteria for getting rewards are clearly mentioned in this reward system which helps the employees to know whether they qualified to receive rewards or not for their innovation, quality performance, efforts or attendance.

The management is responsible for making their employees to aware in distribution of rewards equitable. In addition, Eco-Care and Aware offers more rewards to its employees when comparing with competitors. For that, it attracts, motivates and retains qualified and capable employees.

Types of reward systems followed by Eco-Care and Aware:

1) Incentive and Rewards:

Eco-Care and Aware prepares financial incentives terms to motivate their employees. Financial rewards can make the employees to work hard for the organization as they are recognized through this reward system. It also leads the employees to achieve the desired results.

The main purpose of financial incentives is that employees can attain their objectives, improve their performance by focusing on goal oriented tasks. One of the added advantages in financial rewards is that employees can be recognized for their achievement in attaining specific targets or reaching certain level of competence skill.

Maister (2001) explained the reward system based on more studies about employees attitudes and financial success. Maister identified that reward systems can directly influence in employees' attitudes as it makes a way for better compensation. Based on researches of Taiwanese high performance organizations, Huang (2000) concluded that reward system can bring better performance than low-performance firms as they are offering equity while preparing their compensation systems. Bases on research on performance pay in England's National Health Services, Corby and White found that the new reward system theories got favorable response but certain worries also encountered like the possibilities of inappropriate use of the system and equability issues which leads to unproductiveness. According to Underwood (2004), well developed international companies are using reward systems to acknowledge their employees performance. Sirota et al. (2005) found that employees can be motivated based on certain aspects such as considering equity as an important one in order to do well, treating them as per the basic employment conditions, providing satisfactory compensation and fringe benefits. Holbeche (2005) and Prinsloo et al. (2007) named this review system concept as 'a fair employee deal'. They found that it is essential for making the impression of a fair payment system among employees. As per Burney et al. (2009), employees' perceptions towards the reward system would get better results when tying the reward structure to a strategic performance measurement system directly. (Burney, 2004)

2) Competency related Pay:

Competency 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 (2) people may be rewarded with reference to their level of competence.

Competency has been defined by E.G. Bogeley as "demonstrable characteristics of the person, including knowledge, skills, and behaviors, that enable performance." The emphasis in this definition is on the characteristics of the person. This is important because the competencies are independent of a job or position. Competencies must be demonstrable to serve as the basis of pay. If it is not possible to verify that a person has a competency, the company should not be paying based on that characteristic. Furthermore, competencies indicate the potential for performance. Therefore, an organization must have both a competency-based pay plan and a performance-based system to motivate performance. (Chang, 2005)

This plays as prominent factors because competencies are independent of a job or a position. Our organization endorses competence-related that pay for an effective use of competence to generate a good value. Competence related pay works through the process of competence analysis of not only individual competences but also multiple level of competence.

3) Skill Based Pay:

The skill based pay is totally based upon skills that are used in job. Sometimes it even depends on achievement and application of getting additional skills by a person who's actually carrying out the job. On the other hand, skill based pay usually depends on skills such as follows:

manual workers

including fitters



Our organization evaluates the potential cost of skill-based pay as well as its benefits rigorously before its introduction.

4) Team based rewards:

Hammer in 2001 has reviewed emerging business concept which was developed only through best companies. And found that these organization employed reward system on group performances over individual performance. The same was found by Guthrie in 2001 intended for New Zealand organizations and found that productive benefits are induced by group incentives which are used in medical partnerships offset reductions in output which are connected with free-riding in addition to efforts devoted to monitoring. (Guojin, 2011)

The team based rewards connected to our organization payments which are linked to the performance of team and they are only shared among the team. These all schemes are conducted to encourage and to influence team members for a better organization and they are not that easy to manage.

5) Profit sharing:

As our organization is a no profit based organization it keeps no profit or shares all the profit to employees and growth of the organization. Profit sharing is better known, older and more widely practiced which is associated with participative management theories. Profit sharing is a group based organization plan. The fundamental objectives of profit sharing are as constrained below: (Burney, 2004)

(a) To give confidence in employees to identify themselves more closely with an organization in developing a common concern for its development.

b) To encourage a greater interest among employees in an organization.

(c) To get a better co-operation among management and employees.

6) Merit Pays:

Pay for performance

Bee and Lawler in 2000 came to know that Korean organizations used a high involvement HRM strategy to accomplish better results than ever before, and that performance based pay was an integral part of that HRM strategy. The same results were found by Challis et al. in 2005 and Knight-Turvey in 2005 intended for Australian companies, Kok and Hartog in 2006 for Dutch small as well as medium-sized companies. Chang in 2006 let South Korean firms and Origo in 2009 for Italian metalworking organization. Joyce et al. in the year 2003 identified that successful US companies used eight management practices, among which pay-for-performance systems. This result was similar to that of Martel in 2002 a study of some of American best companies. (Jing, 2005)

Pay and incentives linked to long-term performance.

Captivating part in a literature review into characteristics of high performing organizations, Kling in the year 1995 found that connecting employee pay and incentives to long-term performance of an organization had a positive relationship by means of productivity. Weller and Reidenbach argued that, in the light of the recent recession and ponderous economic recovery, a better balance in the incentives intended not only for short-run but also long-run performance has to be achieved as currently corporate managers have stronger incentives to practice short-term profit seeking activities to invest in longer-term productive activities. (Chang, 2005)

Rewards based on relative performance.

One of the prominent key factors is rewarding success based upon their total performance. Another form of relative performance is discussed by Guojin et al. in 2011, which is peer performance within an organization, in which incentives are paid out after a comparison of an individual's performance with that of his peers in the same function.

The merit pay is widely used in our organization that which are intended for paying performance. The merit pay is totally based upon their performance and to improve motivation. The organization itself takes care of employee transport.

7) Employee Ownership:

There are number of plans that exist to help in getting some or all the stake ownership of our organization into the hands of employees. Nothing like companies which tender stock option plans, stock purchase plans and employee stock ownership plans; our organization always provides an opportunity to competent, loyal and high performing employee to be included in the board of Directors. And giving special description as Promoters and therefore these benefits are always there. This is a great motivation for our employees to contribute fully to organization. (Matear, 2005)

8) Employee benefits:

The Employee benefits are fundamentals of remuneration that are given in addition to various forms of cash pay. Our organization endow with a quantifiable value intended for individual employees and that would be in the form of contingent like a pension scheme, insurance cover or sick pay, or may cater with immediate benefit like a organization vehicle. It also includes elements that are not strictly remuneration, such as annual holydays. Benefits in general do not exist in separation. They are a part of comprehensive compensation package that which are offered by an organization. (Jing, 2005)

The main objectives of employee benefits are as follows:

(a) To increase the assurance of employees to an organization;

(b) To make obvious that the organization cares for needs of its employees.

(c) To get together personal security and also personal needs of their employees.

(d) To make sure that these benefits are cost-effective in terms of commitment along with their improvement in retention rate.

These benefits play a vital role in representing a large share of total compensation. On the other hand, they have a very good capability in influencing employee, unit and organization outcome variables. The empirical literature takes aim that benefits would affect on employee attitude, retention, and perhaps job choice. Additionally it appears that sole preferences may play a particularly prominent role in determining the employee reaction to benefit.

The Statutory and Voluntary Benefits: our organization provides not only statutory but also voluntary benefits. Statutory benefits are given to employees by organization despite the consequences of whether it wants to or not. And some of them are termed below:

social security benefits


Provident fund etc.

Voluntary benefits as provided by organization and they are as follows:

vacations holydays

special leave

sick leave

health insurance

educational assistance

employee discounts

medical benefits

canteen facility

recreational facilities

Credit cards etc.

Financial Reward Systems

The enticement and financial rewards are under financial reward system. These incentives are forwarded in retrospective. The financial incentives are designed to provide direct motivation. Financial rewards give a tangible form of appreciation and therefore it mainly serves as indirect motivators. (Burney, 2004)

The main aim of financial incentives is to motivate in obtaining their objectives, enhance their competence or skills in concentrating their targets and priorities.

Conclusion, Limitation and Further Research

The literature review described in this paper showed there are twelve characteristics, found in research studies into high performance organizations that have a bearing on the type of bonuses and reward systems that organizations can apply to achieve high performance. However, eleven of these twelve characteristics seem to have a minor role compared to other characteristics found in the literature review (which have to do, among others, with organizational structure, quality of management, quality of workforce, information technology and communication) and did not make the cut into the empirical study. In the empirical study, the remaining characteristic A fair reward and incentive structure did not show a significant relation with organizational performance. The conclusion therefore is that using bonuses or implementing certain types of reward systems does not have a positive nor a negative effect on organizational performance. A possible explanation for this result is that reward systems are a hygiene factor for an organization. If the organization does not have an appropriate reward system, with or without bonuses, it will run into trouble with its employees. If it does, which employees expect and consider being normal, it can start working on improving its performance. (Chen, 2006)

This research result puts the ongoing debate on the use of bonuses and reward systems to improve the results of organizations in a different light. Putting a lot of effort in introducing bonuses or a certain type of reward system and then expecting the organization to improve its results and maybe become an HPO is unrealistic. The reward system is not a determining factor for high performance. There may be other arguments for designing a reward system though. For instance, an organization should not differ too much from other organizations in its sector (Dimaggio and Powell, 1991) or, for equity reasons, internal pay dispersion should not be too large. The practical implication of this study is that organizations should not spend a lot of time on designing and implementing elaborate and sophisticated reward systems to improve performance. They just have to make sure an appropriate reward system is installed that is considered to be fair and equitable by employees. This creates a good foundation for building an

HPO. (Burney, 2004)

There are several limitations to this study. Despite the fact that the literature search was extensive, potentially valuable studies may not have been included. In this respect, also it should be noted that predominantly published studies were taken into account, which created a potential bias as unpublished studies may contain different outcomes. Another potential bias is the presence of subjectivity in the choice of literature sources that were included in the study. This problem has been alleviated by including literature from many different disciplines during the selection process. As common in questionnaire-based research and self-reported scores, there is the possibility of attribution. Is it possible that the respondents reporting high performance and those reporting low performance make implicit attributions of characteristics, and in fact, causation. The studies used in the descriptive literature review by definition looked at what organizations did in the past and the results are therefore not necessarily valid for the dynamic future. (Guojin, 2011)