Reward System Performance Related Pay And Gain Sharing Commerce Essay


Reward system has been widely used in modern management by corporations and organizations all around the world. It is because reward system influences significantly on human resource process and practiced by motivating employees who contribute in organizations with benefits, stated by Marchington and Wilkinson (2008). In earlier times, according to Oliver (1980), reward was simply reflected in an increase of employee's salary. However, as decades passed, employees' education level and living standard has been improved, and human resource management is getting complicated. Therefore, various methods, such as moral encouragement, promotion, training and monetary incentives, etc., in a reward system is inevitable to maximum the efficiency of an organization (Britton et al, 1999). The enhancement of reward systems to human resource management had been proved by Cameron and Pierce (1994) in their analysis of 96 experimental studies, which rewarding methods produce an increase in intrinsic motivation, and therefore led to better performances at work.

In this report, it concentrates on financial reward systems in human resource management. A literature review will be given at first, followed by two case studies about the Performance Related Pay of National Health Service and Gain Sharing of Colorado Memory Systems. In the end, we will analysis and compare the two cases mentioned earlier.

Section 1 Literature Review

1.1 Definition

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Led by the principals of fairness, equitability and consistency, Armstrong and Murlis (2007) concluded the basic idea of reward system, is to reward the employees according to their contribution to the organization.

Arnold (1990) defined that motivate employees and maintain productive workforce is the basic objectives of a reward system, and in order to complete reward system, there should be reward policies, processes and practices designed and applied in human resource management. After that, performance appraisal should be implemented to supervise, exam and assess the rewarding results. Excellent reward system maximizes the benefits of both the organizations and the individuals.

1.2 Categories of reward system

Generally, there are two main types of rewards, extrinsic/monetary rewards and intrinsic/non-monetary rewards. Monetary incentives such as salary increase, bonus and any other financial payment, according to Richard (1979), are the most direct and simple way to motivate employees. On the other side, better working environment, promotion, insurance, holidays and children care, etc., are non-monetary rewards for staffs. It has also been categorized into five different sorts by Luthans (1998), financial, social, consumable, visual and auditory, and manipulatable rewards.

As it is suggested by Ellis et al (2004), monetary incentives affect employees directly but in short term and on the other hand, non-monetary rewards influenced slow but deeper on employees.

1.3 Monetary incentives and Performance Related Pay

Among all the monetary incentives, Performance Related Pay is currently the most widely used reward method. Extra payment will be given to employees according to their performance appraisals, which implemented by the HRs and designed to appraise their contributions to the organization (Redman and Wilkinson, 2009). The advantages of PRP are obvious, since it is efficiency-oriented and has a strict appraising standard towards all kinds of positions in organizations, employees will be motivated to improve their working qualities and efficiencies. On the other hand, due to the huge amount of factors required to considering in the PA, disadvantages and errors are unavoidable. Just as Brown and Armstrong (1999) indicated, the number of criticisms grew impressively and it had almost equaled to those who approved. Fairness is the core issue argued between individuals and organizations.

Moreover, under the PRP system, an instant return of payment will be pursued by employees and therefore led to the under-focus of organization culture construction and other non-monetary works, such as after-sale service and customer relationships, etc. This is dangerous for an organization in long term.

1.4 Non-monetary incentives

Armstrong (2009) pointed out that non-monetary incentives bring deeper and longer influences to organizations and individuals. He categorized non-monetary incentives into four sorts, individual extrinsic rewards, individual intrinsic rewards, collective extrinsic rewards and collective intrinsic rewards.

For example, according to the collective extrinsic rewards, work-life balance policies, employee well-being services, concierge services, etc., will be provided to employees as part of their rewards.

1.5 Comparison

According to the research of Kinney and Raiborn (2009), short-term workers and low-skill employees such as cleaners, sales and drivers, etc., are motivated more by financial rewards because they need money to improve their living conditions; on contrast, non-monetary and long-term incentives affect better on long-term workers and high-skill employees for their purposes to develop further on their positions.

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Arnolds and Venter (2007) indicated that monetary incentives are still regarded as the only method in employee's motivation by many managers in the modern society. However, limitations of sole monetary incentives are obvious since the development of employee's education and living condition, employees tend to concentrate more on their career developments, job satisfactions and self fulfillments, etc. Therefore, suitable non-monetary incentives given to employees will motivate them more and contribute to a win-win situation for the organization and individuals as well.

Section 2

2.1 Case1: Evaluating performance-related pay for managers in the National Health Service.

As the world's largest publicly funded health service, National Health Service (NHS) remains free for people who is resident in the UK. It founded in 1948, until now it is currently more than 62m people. NHS provides the most efficient, egalitarian and comprehensive treatment for penitent.

PRP was introduced into the NHS scheme in 1986, in practice, it still be adopted until now more or less unaltered. The scheme includes three parts. First of all, the individual manager will set work target for employees at the head of a year. Secondly, at the end of the year, managers will assess whether employee's performance meet the objective, then managers give each employees a feedback. This feedback is ranked in one of five bands from 1 ("consistently exceeds short-term objectives and makes excellent progress towards long-term goals") to 5 ('meets few short-term objectives and makes little or no progress towards long-term goals'). Thirdly, the increasing salary is related to this rank. The maximum proportion increasing in pay is 6 percent in level 1, 4 percent and 2 percent in level 2 and 3, respectively. If a staff get level 4, no pay will increase but still has annual pay award for grade; whereas, those who get level 5 will get no increase and annual award.







Proportion increases in pay






Annual pay award






Table 1: different level of PRP

It is obvious that some managers reach level 1 means that they can earn an extra bonus except their basic salary, and their extra bonuses are rated by annually performance. On the other hand, those who ranked at level 4 can still receive the annual paying award, though unable to get award that based on performances. Furthermore, it is similar to those level 4 employees, workers ranked at level 5 can neither achieve growth in payment, nor does the annual paying award. Moreover, people who got band 5 may face the situation of being fired.

This research shows that 29 % of managers thought PRP could motivate employees to reach the objective of work, whereas, only 5% managers asserted that it could demotivate. As for the majority of managers and employees, fairness and satisfaction are also significant for motivation promotion in PRP scheme.

Case 2: Colorado Memory Systems

Colorado Memory Systems (CMS), which takeover by HP, had not own a profit-sharing system. After it acquired by HP, managers in CMS attempted to institute HP's corporate profit-sharing program, in order to make them feeling that CMS had become a large organization as HP. However, management felt hardly to reach the salary at HP levels. Hence, CMS instituted a gain-sharing program by themselves so that they cloud enhance its employees' basic salary and provide compensation that reached or exceeded HP's standard.

Management of CMS thought that with the installed of local gain-sharing program, workers in CMS would increase several behaviors which can enhance productivity: individual initiative and responsibility; adaptiveness; willingness to learn; hustle; willingness to confront conflict; willingness to learn; and focus and attentiveness. Management hoped that these characteristics could create financial achievement for firm and reduce the gap between CMS and HP.

Results: Management reported that the program had some positive aspects: increased visibility between departments, a heightened awareness of business fundamentals and so on. However, there are more negative effects appeared. For instance, workers wished that they could get the same compensation program level with the employees in HP. Employees of CMS also perceived the program to be promoting short-term behavior.

Furthermore, employees who used the gain-sharing program should be rewarded on revenue of CMS. After integrating with HP, it is difficult to distinguish whether the CMS's performance growth due to the employees themselves rather than HP's department or employees. Finally, in order to pay out enough to reduce the gap with HP, CMS managers found that they need to pay out at least five out of six times (pay outs were every two months) and average at least 10% of base salary. However, the program only paid out four out of six times and averaged 6.13% of base salary. Therefore, employees began to query the program and its credibility was damaged. Overall, the benefit of CMS did not outweigh the cost.

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