Principles Underpinning A Rewards Strategy

Various scholars/writers contributed to the study of reward management strategy, by providing a wealth of information to increase the body of knowledge. This section therefore contains the views of them on the subject reward management strategy and the various method adopted. The views of these authors will be related to this current study.

This Literature Review will be divided into the five main parts of the study:

• Reward Management
• Performance Management
• Motivation
• Staff Retention
• Labour Turnover

The areas being analysed will aid in understanding whether the organisations reward management strategy is effective, which is reflected in labour turnover and the ability of the organisation to retain and motivate staff of the organisation. This literature therefore sought to ` critically analyze other views on the main areas of the research title, compare and contrast them and use the views/perspectives of the published work by other accredited authors to guide and inform this present study.

2.2 Reward Management

What is Reward?

Bratton and Gold (1999, p. 238) defined reward in the following terms, “Reward refers to all forms financial returns and tangible services and benefits employees receive as part of an employment relationship.”

According to Thompson and Martin (2005, p. 229) “reward are an important motivator, but it is important to appreciate that an individual may feel rewarded by things other than money or promotion”. The demands and responsibility of a job, and the freedom that people are given to decide how to do things, can be rewarding.

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Berry, J. (2000, p. 45-46) as cited in Henley Management College (2000, p. 23) advocates that reward ‘may very well be more than just pay and benefits, but will increasingly be base on skills and knowledge and will be innovative’. In the context of the studies Philbean and Corbridge (2002, p. 204) argues that reward ‘encompasses pay, remuneration and compensation. It represents a portfolio of managerial practices where financial and non financial elements are flexibly directed at enabling and rewarding employees who add value in the interests of competitive advantage’, he went further to say that reward is total remuneration concept of pay and benefit together with non- financial recognition and motivation applied in a contemporary context.

What is Reward Management?

“Reward Management is about how people are rewarded in accordance with their value to an organisation. It is concerned with both financial and non-financial rewards and embraces the philosophies, strategies, policies, plans and procedures used by organisations to develop and maintain reward systems.” Armstrong (2001, p. 126)

This statement underlines the importance of reward management to an organisation success. According to Beardwell and Holden (2004, p. 501) ‘reward management has often been viewed as the ‘poor relation’ of human resources management concerned with ‘systems, figures and procedures.’ Another definition states ‘Reward Managements is one of the central pillars of human resources management. While the term ‘reward management’ is problematic, we consider that the term best captures the current changes in management assumptions and practice about pay. Bratton and Gold (1999, p. 238)

Principles Objectives of Reward Management

The three principal objectives of reward management as cited in Bratton and Gold (1999, p. 238) are to:

• Attract and retain suitable employees
• Maintain or improve levels of employee performance
• Comply with employment legislation and regulations

These objectives have to be achieved within an agreed budget for rewards. First, the new and must be competitive to encourage membership of the organisation. In other words, it must attract and retain qualified and competent people to the organisation. Reward that are perceived by prospective members to be inadequate or inequitable will make it difficult for the organisation to attract the types of people necessary for success.

Second, reward systems are designed and managed to improve productivity and control labour cost. The question of what motivates employees to perform effectively is difficult to answer. Among practising managers there is a wide spread conviction that pay alone motivates workers. In comparison to this Thorpe and Homan (2000, p. 12) advocates that the principal objectives of reward management are to:

• Minimize expenditure on wages and salaries over the long term;
• Attract and retain staff of the desired calibre, experience and qualifications;
• Motivate the workforce so as to maximize organisational performance;
• Direct effort and enthusiasm in specific directions and to encourage particular types of employee behaviour;
• Underpin and facilitate the management of organisation change;

To help us examine the complexities of pay, we have developed a framework of reward management. Figure 2.1: illustrates a model for reward management that contains three basic elements, internal equity, external competitiveness, and the objectives. Our model shows two broad areas that any organization must consider in reward management, internal equity and external competitiveness. Internal equity refers to the pay relationship among jobs within a single organisation. This is translated into practice by the basic techniques of reward management, job analysis, job evaluation and performance appraisal. The focus is on comparing jobs and individuals in terms of their relative contributions to the organization’s objectives.

Reward Management Strategies

According to Stephen Taylor (2000) as cited in Thorpe and Homan (2000, p. 11), there are two key questions, which an organisation has to ask when formulating reward strategies and policies, they are: how much should be paid to each employee and what form should that payment take?

There is nevertheless a large choice of payment systems and methods available for management to choose from and many methods of determining pay levels available for manages to choose from. However, Taylor (2000) as cited in Thorpe and Homan (2000, p: 12) states “the principal determining factor when deciding on rewards for employees of the organization are the objectives the organization has for their HR policies and reward systems in particular”.

In the context of the studies Armstrong and Lybrand (1992, p. 41) states that reward strategy is concerned with: – developing a positive, performance orientated culture; underpinning the organisation’s values, especially those relating to excellence, innovation, performance, teamwork and quality; conveying a message to prospective high-calibre employees that the organisation will satisfy their reward expectations; ensuring that the right mix and level of reward are provided inline with the employees and the environment in which the business operates; linking reward policies, systems and procedures to the key business and human resources strategies for innovations, growth development and the pursuit of excellence; also developing a strong orientation toward levels of performance throughout the organisation by recognising successful performance and increase in levels of competence, thus contributing to the processes of empowering, enabling and energising all employees; and indicating to existing employees what types of behaviour will be rewarded and how this will be place, thus increasing motivation and commitment and improving performance.

In the same vein, Armstrong (2001) also states in order for organisations to achieve their strategic objectives it must have a skilled, competent, committed and well motivated workforce which is supported by a reward strategy that: – flows from and fit’s the business strategy; links reward to performance; aligns individual and organisational competencies; integrates with other human resources management and development strategies; and evolves from consultation with key stakeholders.

A useful way of conceptualizing different reward philosophies is provided by Rajan (1997: 75). Figure 2.2 shows how reward can be categorized along two dimensions, identifying rewards that are money-related and non money-related; and rewards that are group-related (available to all or most staff) or individual-related. Thus Rajan (1997) argues that there are four types of approach to reward.

1) Types of reward

Group-related

2) Security -driven Tradition-driven

• Lifetime jobs
• Cost of living increases
• Corporate prestige •Perks
• Non-money-related Money-related

3) Employability-driven: Contribution-driven

• Training and development
• Performance-related pay
• Personal career plans
• Merit bonus
• Individual-related

Source: Rajan (1997: 75). Reproduced with the permission of Eclipse Group Limited cited in Beardwell, and Holden, (2001), Human Resources Management, A Contemporary Approach, Third Edition, Pearson Educational Limited p. 511

Types of reward are important in terms of motivation where by different types of reward may motivate an individual; the diagram above illustrates this by highlighting different elements. Motivation can take the form of money-related or non-money related an individual may become motivated by security driven knowing that they have a lifetime /permanent job as compare to those that prefer to become motivate by money-related issues such as cost of living or perks offered by the organisation.

On the other hand their are employees whose motivation stems from employability driven that is motivated through the use of training and development or personal career path, in comparison to those that are contribution driven, believing performance related pay or merit bonus are better form of motivation.

Best Practice versus Best Fit Approach to HR Management

“The best fit approach stresses significantly on the strategic alignment of HR policies and ensuring that it fits the objectives of the organization, while the best in terms of attracting, retaining and motivating human beings.” Taylor 2000 as cited in Thorpe and Homan (2000, p. 15).

There are however significant challenges to the best fit approach to HRM. According to Walton, 1985; Guest, 1987 as cited in Thorpe and Homan (2000, p. 16) ‘There is nothing new about challenges to the best fit perspectives from those arguing that some form of best practice approach to HRM is more likely to lead to performance improvements at the organizational level in most all circumstances’.

Maund (2002) states there are a number of words used to describe what employees receive for their efforts at work. All the words commonly used can be housed under one word; payment.

Foot and Hook (1999, p. 123) defines ‘Payment as the most straight forward of …… terms and seems to be the most appropriate terms to use. It can include monetary or non-monetary payment’.

New Pay’ and Old Pay Systems

In addition to reward, Lawler, 1995; Armstrong and Murlis, 1998; Lewis, 1998) as cited in Philbean and Corbridge (2002, p. 205) reveals that ‘New pay and its juxtaposed stereotypical’ opposite of Old pay are concepts which are used to distinguish between contemporary and traditional reward practices. Old pay is characterized by bureaucratic salary administration, organisational hierarchy, rigid job evaluation and grading system, incremental progression, lack of horizontal integration with other HR activities and the detachment of pay from the strategic objectives of the organisation. The primary concerns of old pay are fairness, consistency, equity and transparency. This is arguably more compatible with the traditional organisation structures and employment relationships of the 1970s and 1980s. In the twenty-first century old pay, it is alleged, will inhibit organisational responsiveness and development in more turbulent organisational environments.

New pay can be viewed as a functional adaptation to change in the external context and increasing competitive pressures. There have been significant changes in the reward strategies adopted by organizations in Europe, moving from the traditional based payment system to Wheat Howler (1990) called ‘new pay’. This new pay has introduced more flexible and variable rewards systems. This consisted of: – Bonuses; Performance Related pay; Promotion and Career Advancement; and Performance Related Pay – pay based on performance at work, based on the acquisition of new skills and knowledge.

Maund (2002) argues that ‘new pay’ is seen as being more suitable for fast moving organizations of the 21st Century. This will form the analysis of the organization as to determine whether the organization uses ‘new pay’ as compared with traditional forms of pay.

In comparison Stacey (1996), states ‘if the rewards are suitable it will stimulate individuals to make actions which are directly relevant to the strategy of the organization’ Stacey 1990 as cited in Maund (2002, p. 439) implies this will result in the aims of the organization being realized through employees.

Bowey and Thorpe as cited in Thorpe and Homan (2000, p. 81) in order for remuneration systems to be effective there needs to be a sound understanding of how people at work are motivated. This forms the basis of the next section of the literature review, which focuses on method used to encourage motivation of employees that is performance.

Performance Management

Baron and Armstrong, (1998: 38-39) as cited in Beardwell and Holden (2001, p. 538) states that performance management can be defined as ‘a strategic and integrated approach to increasing the effectiveness of organisations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors,’ and also can be seen as a continuous process involving reviews that focus on the future rather than the past’ In the same vein, Bartol and Martin (1998, p. 529) states that performance management ‘focus on ensuring that specific goals that have been set are achieved. Henley Management College (2000, p. 25) states that performance management ‘is about people and motivation – the system can get in the way’, it further states that performance management is a ‘management process and the key if the relationship between a manager and his her people – performance management system are often an elaborate way to foul that up’.

Hendry et al., (1997) as cited in Beardwell and Holden (2001, p. 538), advocates that performance management is not simply the appraisal of individual performance: it is an integrated and continuous process that develops, communicates and enables the future direction, core competences and value of the organisation, and helps to create an ‘horizon of understanding’. It identifies who or what delivers the critical performance with respect to business strategy and objectives and ensures that performance is successfully carried out. Effective performance ensures that employees and managers understand each other’ expectations, and how corporate strategy and objectives impact on their own context- their roles, behaviours, relationships and interactions, reward future.

Performance management is a holistic process that ensures that the following are developed and effectively carried out: – setting of corporate, department, team and individual objectives; performance appraisal system; reward strategies and schemes; training and development strategies and plans; feedback, communication and coaching; individual career planning; mechanisms for monitoring the effectiveness of performance management system and interventions.

Thus performance management incorporates the effective day to day management and support of people, and is not simply concerned with appraisal forms, procedures and interviews or the paternalistic evaluation by superior of a subordinate’s performance. Employee commitment and performance are secured through a mutually supportive strategy of reward-driven integration, developmental integration and culture management. Figure 2.3: outlines the steps of systematic and integrated performance management.

Figure 2.3: The performance management cycle

Business Strategy

Training and development

1. Setting direction and planning

Resourcing

3.Reviewing

2. Coaching and support

Reward decision

Employee relations

Source: Beardwell and Holden (2001), Human Resources Management, A Contemporary Approach, Third Edition, Pearson Educational Limited p. 538

However it is argued that for performance management to be effective these activities should be carried out throughout the year as normal part of the interaction between employee and manager, and not simply through the annual performance appraisal. All these activities should involve joint problem solving and the acceptance of joint responsibility for action.

Linking Performance appraisal with Pay

Performance appraisal is seen as a major element that forms the bases of any performance management system. Foot and Hook (2002, p. 241) states ‘ performance appraisal basically entails trying to reward employees for their past work, while hoping that the incentive of a reward will encourage other employees also to strive to work harder in the future.’ Bartol and Martin (1998, p. 331) defines performance appraisal as ‘the process of defining expectations for employee performance, measuring, evaluating, and recording employee performance relative to those expectations; and providing feedback to the employee.

The link between individual behaviour and organisational performance, effectively linking rewards to a performance management system requires a clear ‘line of sight’ between individual behaviour and corporate performance. It also requires a view of corporate performance which looks at ends as well as means, and which is not limited to accounting measures.

Foot and Hook (2002, p. 242) further states that ‘it is difficult to imagine that a person being appraised is likely to admit to any development need, or be willing to accept any help in their performance, if their salary increase depends on a good appraisal’. It is therefore recommended that employers should in general try to keep reward considerations separate from the other areas of appraisal.

In spite of this advice and research evidence which suggests that performance rated pay (PRP does not always motivate everyone in a work force, many employers think that the offer of an incentive or reward is the only way to motivate employees to work harder, and this is often their main reason for introducing performance appraisal.

However Foot and Hook (2002, p. 242) also went further in stating that great care needs to be taken if appraisal systems are linked to pay. It will be especially important to ensure that the criteria being appraised are objective and free of unfair bias, and that there are genuine opportunities for all employees to be rewarded for their efforts.

Therefore the link between performance and pay is considered Performance Related Pay Torrington and hall, (1996) as cited in Philbean and Corbridge (2002, p. 219) states performance related pay is ‘some attempt to relate pay to performance is the dominant feature of current reward strategies’. According to (Swabe, 1989: 17) as cited in Beardwell and Holden (2001, p. 523) performance related pay can be defined as: ‘a system in which an individual’s increase in salary is solely or mainly dependant on his/ her appraisal or merit rating’.

The critics of performance related pay (PRP) cited several advantages and disadvantages, Beardwell and Holden (2001 p. 523) states the possible reasons for introducing performance related pay (PRP): to increase the motivation of employees; to encourage certain behaviours; to help in recruitment and retention; to facilitate change in organisational culture; to encourage the internalisation of performance norms; to weaken trade union power; increased role of the line manager; greater financial control and ‘value for money’; a moral justification; encouragement of flexibility.

Hague (1996) argues that performance related pay can demotivate staff rather than reward performance. Beardwell and Holden (2001, p. 526) states the possible problems with performance related pay (PRP): it is not a guaranteed motivator; it is difficult to produce realistic performance measures and as a result, ratings may be unfair, subjective and consistent; it places undue emphasis on individual performance which can be damaging to teamwork; it can produce poor quality performance as people concentrate on achieving quantitative targets; it leads to short-termism’ in the pursuit of quick results to the detriment of longer term strategic goals; reinforcement of status, control and power differences; financial constraints; crowding out’ intrinsic motivation.

The underlying theoretical basis for performance related pay is motivation theory. Content theories, such as those of Maslow (1943,1987) and Herzberg (1959), draw attention to pay as one of many sources of human need. The satisfaction of this need can contribute to motivation at work, but the relative importance of pay as a motivator will vary with individual circumstances. More specific to performance related pay are the process theories of equity (Adams, 1965) and the expectancy theory (Porter and Lawler, 1958; Lawler, 1973; Vroom, 1964) and it is useful to have an understanding of these. This will form the basis of the next section of the literature review, which will focus on the motivation of employees.

Motivation

As a consequence of competitive pressure, organisations encourage their employees to increase the ”added value” and also increase their performance beyond the acceptable standard, As a result, the study of employee behaviour and more particularly, motivation, remains a real managerial concern. Maund (1999, p. 87) defines motivation as ‘ the process by which an individual wants and chooses to engage in certain specified behaviours’. Cole (1995: 119) as cited in Cole (2000, p. 28) states ‘Motivation is the term used to describe those processes, both instinctive and rational, by which people seek to satisfy the basic drives, perceived needs and personal goals, which trigger human behaviour’.

There are several theories that help us to identify specific factors that motivate people including the content or needs theory, the two-factor model and the cognitive theory. The underlying assumption is that individuals have needs that must be satisfied.

Motivational Concepts

Motivation as revealed by Abraham Maslow (1943) is highly individualistic and is either determined by intrinsic or extrinsic factors. According to Maslow human beings are motivated by different motivators at each stage of there life. Maslow presented a Hierarchy model of motivation which consisted of Physiological needs at the lowest point, next was the safety needs, then love needs, esteem needs and finally the highest needs was the self actualization needs as depicted in Figure 2.4 below. By Managers understanding the physiological, safely, love, esteem and self actualization needs, they can therefore appeal to the individual employee’s present needs in life therefore motivating them.

Douglas Mc Gregor (1960) has identified the theory X and theory Y worker, this theory differs significantly to Maslow (1943) theory in that Maslow’s theory focuses on the needs of individuals, while Mc Gregor’s theory focused on the behaviour of employees at work. According to Mc Gregor the theory X worker has an natural dislike for work and will avoid it at any time possible on the other hand the theory Y worker as conductive to problem solving techniques and given the opportunity will not only take but desire responsibility. In order for mangers to put theory Y worker into practice they must use the four basic aspects of the theory Y worker, they are: –

1. Decentralization and Delegation – this would give employees a sense of freedom to act.
2. Job Enlargement – this would encourage employees to accept responsibilities.
3. Participation and Consultation Management – this would allow employees to voice there opinions of matters affecting them and encourage creativity.

Performance Appraisal – this should be done to assess management abilities.

Frederick Herzberg presented a theory similar to Mc Gregor, which focused on the needs of employees at work, Herzberg presented a two factor theory that identified two sets of needs of individuals at work the need to avoid pain and discomfort and the need to develop Psychologically, he identified two areas that are of concern to the organization, first was hygiene factors such as job security, working condition, status and administrative concerns, the second area of concern to mangers was motivators; recognition from supervisors, the opportunity for growth and advancement, if managers were able to avoid pain and discomfort such are by fostering good employees relations, providing safe and comfortable working conditions, managers will be able to motivate employees. However, this study gives little insight into how managers can motivate manual or unskilled workers.

Adams (1965) brought forward the Equity theory of motivation, this theory of motivation differs significantly as it attempts to show how individuals determine the amount of effort that needs to be exerted. According to Adams an employee desires to be treated fairly by the organization, they wish to be treated fairly compared to others and to avoid inequity. Employees evaluate rewards by a comparison with others, if an employee perceives his contribution to be the same as the person they compare themselves with (referent) then a state of equity is perceived, if an employee however sees there self as being unequal, a state of ‘inequity’ arises. In the context of the studies Bartol and Martin (1998, p. 397) states that equity theory is ‘a theory that argues that we prefer situations of balance, or equity, which exists when we perceive the ratio of our inputs and outcomes to be equal to the ratio of inputs and outcomes for a comparison other. Thorpe and Homan (2000, p. 22), ‘the major determinant of satisfaction at work is the extent to which workers judge the ‘outputs’ that accrue from their work (such as pay levels, pay increases, promotions) to be distributed equitably. We are less interested in how far these ‘outputs’ equate to our ‘inputs’ (effort, skill, experience, qualifications) than we are in the extent to which the ratio between the two compares with that achieved by others.

Rensis Likert (1976) also saw extrinsic rewards as most important in motivating employees to achieve organizational rewards. According to Likert (1976): ‘Motivation is by economic rewards based on goals which have been set in participation’. Likert claimed that in order for organizations to achieve maximum profit, good labour relations and high productivity, every organization must make best use of their human assets. It is through effective human resources management that productivity will be increased. Likert identified the participation – group system which is the optimum solution, were leadership is by superiors who have complete confidence in their subordinates.

Fowler and Lawler (1968) modified Vroom’s (1964) expectancy theory and developed process theories of motivation as they consider the relationship between effort, performance and reward for each individual. The principles of the Fowler and Lawler model are as follows:

• Employees value intrinsic arising from the work itself as well as extrinsic motivation such as bonus or rewards;
• Effort will be increased if employees believe that good performance will lead to the achievement of desired rewards;
• Employees must have the opportunity, resources and effective management to carry out tasks;
• Expectations and objectives need to be communicated so employees know what is expected of them;

2.5 Staff Retention

Browell (2003, p. 64) simply defined staff retention as ‘ ‘keeping those members of staff that one wants to keep and not loosing them from the organization, for whatever reasons, but especially to competitors’. According to Browell (2003), ‘Wages and Salaries are insufficient to maintain staff successfully within an organization in the long term, organizations in retaining staff must introduce a successful staff retention strategy, as there failure to do so can result in demotivated staff and a high level of labour turnover’.

Hannagan (2003, p. 176), states ‘A successful staff retention plan must contain a competitive rewards strategy, proper recruitment standards must be set and there must be an effective appropriate selection process, the training and development process must include a good induction process and must have room for development for both the organization and the individual employees. There must be flexible working conditions and ensure the leaders of the organizations have the skills necessary to manage effectively.’

Training and development is seen as an important implementation tool by many authors, according to Hussey (1991) as cited in Maund (2002, p. 440) training and development acts as a motivator and provides the skills necessary for strategy implementation’,

In the same vein Buckingham (2000), cited in Hannagan (2003, p. 176) employees are more likely to remain with an organization if they believe that their managers show interest and concern for them.

Browell (2003) states, ‘organizations need to compare the costs of staff going with the cost of them staying and determine whether it will have an adverse effect on the rest of the organization if they leave’. Henley Management College (2000, p. 21), recent IDS study showed the average turnover rate with considerable variation between industries and sectors are high, however the financial costs of this turnover can be up to 150% of salary for key staff. Add in the non-financial costs, including loss of key skill morale and the overall price of a departure to an organisation can be considerable. Because of these cost companies should carry out external benchmarking, and gather information on internal factors affecting turnover, such as monitoring wastage rates, and carrying out exit interviews and attitude surveys. The following measures may help to improve staff retention: –

pay competitive rates and consider other types of compensation such as retention bonuses and share-options schemes; put together an attractive employee benefits package; recruit the right people in the first place; pay more attention to induction processes, especially in the critical first few weeks; provide career paths, more interesting work and support for personal development; offer more flexible work options and implement family – friendly policies as work-life balance issues come to the fore; provide good line management; evaluate the effectiveness of the measure taken.

Not all employee turnover, though, is a bad thing. An acceptable level, dependant on the organization and the labour market, allows the entry of ‘new blood’ and ideas, and creates new opportunities for careers, staff development, and restructuring.

Maund (2002), there are three (3) particular areas that an organization must monitor in order for them to maintain motivated and loyal staff, they are: –

The Terms and Conditions of employment must be such that employees feel valued by the organization, these terms and conditions of employment includes both the remunerations and conditions at work w