Various Methods of Remunerating Employees

Introduction

Rewards can be defined as the compensations and benefits received by an employee in exchange for their services (Torrington Et al, 2014). Remuneration forms an important subset of the total rewards and comprises of those elements that can be valued in monetary terms (Jiang Et al, 2009). Effective remuneration strategy often underpins the success of the business as it is considered as one of the key factors to attract and motivate human capital. Herzberg (1993) asserts that inadequate remuneration is one of the key factors causing dissatisfaction amongst employees.

The term remuneration is often associated with basic pay. However, remuneration is a much broader term and can encompass a wide range of techniques for rewarding employees in the form of salaries, bonuses, piece based remuneration, commission, employee stock options, fringe benefits, deferred considerations, performance related pay and profit sharing amongst many others (Torrington Et al, 2014).

One of the major challenges for organisations in the contemporary business environment is that of employee motivation. Motivation can be defined as ‘the degree to which individual wants and chooses to engage in certain specified behaviour’ (Mullins, 2002, p.418).

The purpose of this essay is to critically examine various methods of employee remuneration and assess its role in strategic management of human resources for an organisation by shedding light on its key advantages and disadvantages. The essay will finally conclude by analysing if a particular method of remunerating employees fits all situations or is preferred over other means of remuneration.

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Different methods of remuneration

Performance related pay scheme:

As the name suggests, performance related pay schemes reward employees by linking the level of reward with the performance of the employees (Perry, Engbers, and Jun, 2009). Typical examples of performance related pay include bonuses, commissions and deferred considerations. One of the key advantages of performance related remuneration is that it provides an effective means of rewarding by distinguishing between good and poor performers (Torrington Et al, 2014). Other advantages of performance related pay are increased motivation amongst employees to improve performance, attract and retain high performers and talented individuals, and ultimately improve corporate performance (Torrington Et al, 2014).

Nonetheless, empirical evidence highlights that the performance related pay has often been ineffective (Frey and Osterloh, 2012). Frey and Osterloh (2012) also highlight that the link between the increases in performance related pay and corporate performance has remained weak. Performance related pay is also criticised for inciting employees to take dysfunctional decisions, as it acts as an inducement for employees to take greater risks which could put an organisation’s survival at stake (Frey and Osterloh, 2012). Performance related pay may also lead to conflict of interest for the employees by inducing them to focus exclusively on areas that impact their pay and ignore other important tasks that may be in the long term interest of the company. Performance related pay might often supress the intrinsic motivation of employees (Frey and Osterloh, 2012, p.2). Amabile (1998, p.79) asserts that intrinsic motivation reflects employees passion and interest in work, which has a stronger impact on the performance of an employee and the business. Lastly, Maslow’s theory of motivation elucidates that within every individual there are hierarchy of five needs – basic physiological needs, safety needs, belongingness needs, esteem needs and self-actualisation needs (Maslow, 1943). Maslow asserts (1943, p.363) that the needs lower than the self-esteem needs can be accomplished through remuneration, whereas the higher level needs of esteem and self-actualisation for the senior management are unlikely to be achieved through extrinsic rewards, such as performance related pay. Thus, it may not act as a motivational factor for the senior management.

Profit Sharing

In the contemporary times, increased numbers of business organisations have started linking the level of remuneration offered to the employees with the profits of the organisation (Torrington Et al, 2014). Stock options are a common example of this type of remuneration. One of the key advantages of this remuneration policy is deemed to be higher level of commitment by the employee towards the company because of increased level of mutual interest (Torrington Et al, 2014). Other common advantage of profit sharing schemes is deemed to be change in attitude of workers due to increased sense of belongingness with the company (Rappaport, 1999). Amabile (1998) asserts that feeling of increased sense of belongingness leads to intrinsic motivation which has a more direct and stronger relationship with company’s performance.

However, Empirical evidence highlights a lack of evidence of relationship between this type of remuneration and performance of the company (Rappaport 1999). One of the key criticisms of this type of remuneration is that any improvement in company’s performance will reward both good and bad performers, resulting in poor motivation for high performers as they may feel that part of the reward that they deserve is being enjoyed by the low performers (Rappaport 1999). Furthermore, sometimes profit based remuneration policies might fail to motivate the employees as they often feel share prices are undervalued despite of business outperforming the forecasts (Rappaport 1999). Lastly, Kohn (1993) argues that shareholders expect the board to reward employees when the company has outperformed the market. However, empirical evidence highlights that for executives to exercise the option profitably, the performance of the company need not be superior and executive can easily benefit in the times of rising market (Rappaport 1999). Thus, if employees feel that the movement in share prices are independent of their performance, there is a risk that profit based remuneration scheme may not act as motivational factor.

Piece Based Remuneration

Piece based remuneration scheme is historically one of the most commonly used incentive schemes in practice for manual workers and is based on the number of items they produce or the number of hours worked by them (Torrington Et al, 2014). Typical examples of piece based remuneration schemes include individual time saving scheme, measured day work schemes, group incentives, plant wide bonus schemes and commissions (Torrington Et al, 2014). Advantages of such schemes typically include increased level of control by the management over the production process and it also acts as a cost control measure because the workers main goal is to do the task expediently and efficiently in order to achieve the goal (Kohn, 1993). Furthermore, Maslow’s theory of motivation (1943), as mentioned above, highlights that extrinsic rewards, such as piece based remuneration, might act as a motivational factor for manual workers because these workers are likely to have the lower level needs as per Maslow’s theory.

Like other types of remuneration, piece based remuneration has its own set of disadvantages. Remunerations such as group incentives and plant wide bonus schemes lead to additional pressure on employees and create interpersonal animosities because of high performers not being able to receive the incentives due to some low performers in the group (Torrington Et al, 2014). Furthermore, time saving schemes and measured day work schemes may act as a deterrent to creativity, as individual employee’s focus is on standardisation and predictability in order to complete the work in the minimum possible time (Kohn, 1993). Herzberg (2003) motivation hygiene theory suggests that job satisfactions and job dissatisfactions are two independent experiences. Whilst extrinsic rewards, such as piece based remuneration, can help the manual workers to avoid job dissatisfaction, it might not lead to job satisfaction as the employees are not intrinsically motivated by the work itself.

Skill Based Pay

This is a remuneration policy where employees are remunerated based on the skills and competencies they possess (Armstrong, 2002). One of the biggest advantages of skill based remuneration is that it promotes employees to acquire multiple skills, thereby, offering flexibility to the organisation in terms of using same employees for various purposes and responding to customer needs more efficiently (Torrington Et al, 2014). Such remuneration schemes also enable organisations to attract and retain skilled employees easily compared to their competitors as people are likely to be rewarded appropriately for the skills they possess under this scheme (Torrington Et al, 2014).

Potential disadvantages with this scheme is that costs often outweighs the benefits if the increase in productivity is not enough to compensate the increased cost of hiring and training skilled employees (Armstrong, 2002). As business operates in a dynamic environment, there is a risk of skills obsolescence and associated high cost of training. Lastly, the business might also bear the risk of losing a skilled employee, on whom the business has invested a significant amount in training, to a competitor due to a highly competitive labour market (Torrington Et al 2014).

Flexible and Fringe Remuneration

Fringe benefits can be defined as the benefits in kind provided to the employees and have substantially growth in the recent years (Armstrong, 2002). The value of the fringe benefits paid to the employees reflect approximately twenty to fifty percent of the remuneration and typically includes benefits like pensions, company cars, sick pay, private health insurance, mobile phones, staff discounts, maternity or paternity pay, crèche facilities and relocation expense amongst many others (Torrington Et al, 2014).

Flexible benefits provide options to the employees to decide how their remuneration should be structured (Torrington Et al, 2014). Under such schemes, the gross value of the remuneration package is determined by the employer; however, the employees have the flexibility to choose the mix of cash and other benefits as a part of remuneration package (Dychtwald, Erickson, and Morison, 2006). Examples of flexible benefits include the option to choose between additional holidays, access to company crèche, childcare vouchers or cash, amongst many others. The advantages of flexible benefits include the potential of increased employee motivation as they end up getting the rewards they desire. Savings in social security taxes could also be made through comprising the salary for the desired benefits that might attract a lower level of tax (Thomsons, 2015). Furthermore, research has highlighted that flexible remuneration programs contribute to attracting new employees, improve retention of existing employees and improve employee engagement (Thomsons, 2015).

The primary disadvantage of flexible benefits remuneration schemes is increased cost burden for the employer due to rise in the amount of administrative work related to managing the individual choices of employees (Armstrong, 2002). Another criticism of flexible remuneration policy is that the expensive company cars and glamorous lifestyle provided to employees have contributed little towards developing long term commitment towards the business organisation and retention of employees (Thrope and Homan, 2000). Empirical evidence highlights that the employees do not completely understand the value of the flexible benefits and there is little evidence of the positive motivational impact of these remuneration policies on the employees (Torrington Et al, 2014). Nonetheless, it does not indicate that employees do not value the presence of these benefits and are likely to resist their removal (Torrington Et al, 2014).

Conclusion

Based on the discussions in the sections above, it is evident that each method of remunerating employees has certain advantages associated with it. However, Maslow’s theory of motivation and Herzberg hygiene factors, as discussed above, have highlighted a common issue across all forms of remuneration, i.e. the extent to which extrinsic rewards can contribute to motivating an individual employee, thereby, improving the company’s performance. Kohn (1993, p.1) asserts that whether remuneration is performance based, profit based or piece based, it might motivate employees in the short run, but would not contribute to long term commitment towards the company.

Nonetheless, it is not deniable that remuneration plays an important role in influencing employee’s decision regarding the long term commitment towards the company. However, no one method of remuneration is deemed to be recommended over another method and a business might use a combination of methods to remunerate the employees according to the needs and motivations of the employees. Employees at lower level might be motivated by the prospects of better remuneration through different tools; however, for senior management self-esteem and self-actualisation needs would need to be satisfied in order to motivate them. Thus, rewards needs to be carefully crafted to support one another and incorporate both financial and non-financial remuneration.

References

Armstrong, M., 2002, Employee Reward: People and Organisation, Chartered Institute of Personnel and Development, pp. 410 – 420

Dychtwald, K., Erickson, T., and Morison, R., 2006, Flexible Compensation and Benefits: Why Variety Will Rule and How to Leverage it, Harvard Business Review, pp. 1 – 9.

Frey, B. and Osterloh, M., 2012, Stop Tying Pay to Performance. The Evidence is Overwhelming: It doesn’t work, Harvard Business Review, pp.1 -7.

Herzberg, F., 2003, One More Time How Do You Motivate Employees?, Harvard Business Review on Motivating People, Harvard Business School Press, pp. 45-71

Jiang, Z., Xiao, Q., Qi, H., and Xiao, L., 2009, Total Reward Strategy: A Human Resources Management Strategy Going with the Trends of the Times, International Journal of Business and Management, vol. 4 (no. 11), pp. 177 – 183.

Kohn, A., 1993, Why Incentive Plans Cannot Work, Harvard Business Review, pp. 1 – 19.

Maslow, A., 1943, A Theory of Human Motivation, Psychological Review, vol. 50 (no. 4), pp. 370 – 396.

Mullins, L.,2002, Management and Organisational Behaviour, Edinburgh Gate: Pearson Education Limited, pp. 410 – 420.

Perry, J., Enbergs, T. and Jun, S., 2009, Back to the Future? Performance-Related Pay, Empirical Research, and the Perils of Persistence, Public Administration Review, vol. 69 (no. 1), pp.39-51

Rappaport, A., 1999, New Thinking on How to Link Executive Pay with Performance, Harvard Business Review, pp. 1 -23.

Thomsons, 2015, Introduction to Flexible Benefits. Accessed on 25th May 2015 at : http://www.thomsons.com/resources/guides/intro-flexible-benefits

Thrope, R. and Homan, G., 2000, Strategic Reward Management, Prentice Hall, pp.378 – 390.

Torrington, D., Hall, L., Taylor, S. and Atkinson, C., 2014, Human Resource Management Ninth Edition, Pearson Education Limited, pp. 412 – 460.