Definition And Objectives Of Reward System Management Essay

Most of the time, organisations tend to focus on their operation and finance systems rather than reward system. The reward system is only considered as a minor part of the overall structure. However, the effect of the reward system is underestimated by most of the organisations. It can affect the staff’s morale level and the overall culture of the organisation.

There are not many researches regarding to the design of reward system. The misalignment of reward system will create many negative effects on organisation. Hence, the reward system needs to be carefully designed to fit the organisation objective and structure. In this project, the researcher use Wal-Mart as an example to discuss on how the reward system can be effectively implemented and designed in retail industry.

Information in this project is mainly obtained from internet and textbooks. Certain theories are studies and modified from the textbooks. For example, the book of Innovative reward systems for the changing workplace by Wilson, Thomas B is very useful to define the approach of designing an Ideal Reward System. The theory of fulfilling the employee’s needs is extracted from Rewarding excellence: pay strategies for the new economy by Edward E. Lawler III. In addition, the background of Wal-Mart China and the information of its current reward system are obtained from internet. (Wal-Mart China’s main page and other research websites)

Objective of project

To study the definition and objectives of reward system

To identify the requirements, key considerations and approaches to design an Ideal reward system

To analyse the effectiveness of Wal-Mart’s reward system

To define strengths and weaknesses of the reward system and provide recommendations to improve current reward system.

Limitations

This research covers limited areas of reward system. Only the key objectives of the reward system were discussed in this project. In actual practice, reward system can achieve more than these objectives.

Wal-Mart China’s detailed reward system information is not available. Some confidential information such as percentage of yearly increment and bonus cannot be found in Wal-Mart China’s financial report. Other sensitive financial information related to the amount and frequency of reimbursement are not available on internet as well.

The sample size of this research is small. From researcher’s perspective, the survey needs to achieve a minimum sample size in order to make the survey result valid. The ideal sample size can be calculated based on overall number of staff in Wal-Mart china. However, due to the restriction of resources and manpower, there are only 30 completed surveys have been done. Hence, the result should only service as a reference.

(437 words)

2. The organisation:

2.1 Organisation history

Wal-Mart Stores is an American multinational retailer corporation that runs chains of large discount department stores and warehouse stores. The company is the world’s third largest public corporation and biggest private employer in the world with over two million employees. The company was formed by Sam Walton in 1962 and incorporated in October 1969. It was publicly traded on the New York Stock Exchange in 1972. In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business. It has 8,500 stores in 15 countries, under 55 different names. As the largest retailer in the world, it remains as a family-owned business and the Walton family owns 48% of company’s stake.

This project will only focus on the reward system and operational structure of Wal-Mart China. Wal-Mart entered the Chinese market and opened its first Supercenter and Sam’s Club in Shenzhen in 1996. Currently, Wal-Mart operates a number of formats and banners in China including Supercenters, Sam’s Clubs, and Neighborhood Markets. As of March 1, 2012, Wal-Mart had owned 370 units in 140 cities in 21 provinces and four municipalities, and had created over 106, 500 job opportunities across China.

2.2 Products and services

Wal-Mart has four retail divisions that offer a wide variety of quality merchandise to consumers around the world.

Wal-Mart Discount Stores:

Wal-Mart now has more than 1,470 discount stores in the United States. It offers different quality, price products and a pleasant shopping experience. These stores are large and clean. Its products cover family apparel, automotive products, health and beauty aids, home furnishings, electronics, hardware, toys, sporting goods, lawn and garden items, pet supplies, jewelry, and housewares.

Wal-Mart Supercenters

Wal-Mart Supercenter was developed in 1988 to meet the growing demand for one-stop family shopping. There are more than 1,430 Wal-Mart Supercenter in nationwide and most of them are open 24 hours a day for the convenience of customer. Supercenters combine full grocery lines and general merchandise to help customer save time and money.

In addition, Supercenters provide bakery goods, deli foods, frozen foods, meat, dairy products, and fresh produce for customers. Many specialty shops such as vision centres, Tire & Lube Expresses, Radio Grill restaurants, portrait studios and one-hour photo centers, hair salons, banks, and employment agencies are setting up their stores in Wal-Mart Supercenters.

Sam’s Club

Sam’s Club is a chain of warehouse clubs that are selling groceries and general merchandise in large quantities. The first Sam’s Club opened in 1983 in Oklahoma under the name “Sam’s Wholesale Club”. Sam’s Club’s sales during 2007 were $42 billion and it covers 12.1% of Wal-Mart’s total 2007 sales. As of December 2009, there were 605 Sam’s Clubs in the United States. Wal-Mart also operates more than 100 international Sam’s Clubs in Brazil, China, Mexico, and Puerto Rico. Most of Sam’s Club customers are buying annual membership. Non-members can make purchases either by buying a one-day membership or paying a surcharge based on the price of the purchase. Sam’s Club stores are open early hours exclusively for business members. In recent years, Sam’s Club attempts to attract more member from different areas. In March 2009, the company announced that it plans to enter the electronic medical records business by offering a software package to physicians in small practices for $25,000. Meanwhile, Wal-Mart is also collaborating with Dell and eClinicalWorks.com in this new venture.

Wal-Mart International:

Wal-Mart’s international operations 2,980 stores in 14 countries. According to Wal-Mart’s 2006 Annual Report, the International division contributes about 20.1% of Wal-Mart’s overall sales. There are wholly owned operations in Argent in Brazil, Canada, and Puerto Rico. By 2008, it operates in 310 locations and employing 77,500 Canadians, with a local home office in Mississauga, Ontario. Wal-Mart Canada’s first three Supercenters opened on November 8, 2006, in Hamilton, London, and Aurora, Ontario.

Wal-Mart is operating a large scale of retailing business in many countries. To adopt different market environment, Wal-Mart needs to change its operation strategy accordingly. In this project, the researcher will focus on the reward system of Wal-Mart China. The demographic and market environment in China will be analysed to explain the relationship between the local work force and reward system.

Certain level of comparison will also be conducted on staff age groups and market environments between Wal-Mart China and Wal-Mart Canada.

(707 words)

3. Literature Review:

3.1 Definition of Reward system:

Reward is an objective way to describe the positive value an individual ascribes to an object, behavioural act or an internal physical state. Primary rewards include those that are necessary for the survival of species, such as food and successful aggression. Secondary rewards can be derived from primary rewards. (Reward Systems: Does Yours Measure Up? Steve Kerr, Glenn Rifkin) Money is a common type of reward. Most of the times, organisation rewards its staffs by pay increment or higher bonus. Money is the most direct and easiest way to reward the staff and create a sense of satisfaction.

Nowadays, companies are making many modifications on their rewards system to adopt internal and external changes. Reward system is used as a critical tool for driving business growth and boosting staff morale. It is important to align the right measures and reward systems with firm’s structure and culture.

However, the reward system is not emphasised when the operational system is designed. Finical and HR systems are prioritized in the organisation. The firm needs to be aware of the importance of the reward system and spend enough manpower and resources to design a decent reward system.

3.2 Five Main Objectives of reward system

To design an efficient reward system, the organisation needs to fully understand the definition and meaning of reward system. It also needs to setup a clear objectives for its reward system.

These are five key objectives that can be achieved by applying reward system.

Attraction and Retention:

Research shows that reward system can directly affects the job choice, career choice and turnover rate of the organisation. Organisations that give the highest rewards tend to attract and retain more people (Gerhart and Milkovich, 1992). This indicates that the better reward system can give a higher satisfaction level to employee. The higher satisfaction level will lead to a longer length of service and reduce organisational turnover rate.

In retail industry, employees are the most important resources. The organisation needs to retain high performance employees and remove inefficient employees. To maintain the top performers, current reward system need to be compared with other organisations. The firm need to ensure that its reward system is superior than its competitors.

However, it is very costly to maintain a higher reward system. This will increase the labour cost of the organisation. In certain organisation, the labour cost covers 50% of overall operational cost. In addition, if all employees are awarded in the same level, it can cause feelings of inequity because the better performers are likely to feel inequitably treated when they are rewarded at the same level as poor performers in the same organisation. (Lawler and Jenkins, 1992).

Motivation of Performance:

When certain conditions exist, reward systems have been demonstrated to motivate performance. (Gerhart and Milkovich, 1992; Lawler, 1990; Lawler 1971; Vroom 1964).

The reward system must be directly link to the effective performance. Staffs should be rewarded according to their needs. Once the staff is rewarded for their outstanding performance, they will further improve their work process. The effect of this reward system depends on the situation and the needs of people. There are three factors that can affect the motivation effect by using reward system.

Performance-Outcome Expectancy: Individuals expect that if they behave in a certain way, they will get certain outcomes due to their behaviours. For example, if a person sells ten units of product within one month, they will receive their based salary without any additional bonus. In the other hand, they can receive 15% of commission if they can sell 15 units per month. In this case, the staff will be motivated to achieve a higher sells level in order to receive 15% of commission.

Attractiveness: Based on the perception of the staff, the outcome of the reward system will lead to different attractiveness to employees. For example, some staffs want to be promoted as they have higher desire to gain more control power. Other staffs might prefer increment of their salary rather than promotion. The firm needs to understand the employee’s need and select the most attractive way to retain and attract motivated staffs. In retail industry, the firm should select the most appropriate approach to reward its employees. For staffs who want to lead a team and manage people, the firm can promote them to be a leader of a sells team. For staffs who enjoy the interaction with customer, the organisation can increase their commission and keep them at ground level.

Effort-Performance Expectancy: The expectancy represents the individual’s perception of how hard it will be to achieve certain behaviour. For example, if the employee has very negative thought, they feel that they can never achieve the sells target. The employees will be further discouraged if they really fail to achieve the target. However, if the firm creates a positive working environment, the staff will feel that the quota is achievable and they will be motivated to hit the target and receive the reward. Therefore, most of the retail firms want to encourage their staff to think positively and believe that the sells target is achievable. This could help the staff to performance better.

Create Positive Organisational Culture:

Reward system can help the firm to create a positive culture. Depend on the way that reward systems are developed, administered, and managed, the organisational culture will be affected according to these factors. For example, the reward system can influence the human resources oriented culture, entrepreneurial culture, innovative culture, competence based culture, fair culture and participative culture. It can also affect the communication, motivation and satisfaction of the employees. For example, the employees will work hard to achieve their personal value if their efforts are recognized organisation. However if the organisation rewards all staffs equally without appreciation of the individual’s effort, most of the staff will tend to slack.

The established culture should be able to meet following standards:

The individual believes that the better behaviour will lead to better outcomes.

The individual feels that the reward is attractive enough for them to improve their work. Organisation needs to understand the needs of the staff

The individual believes that it is possible to achieve certain level of target. The firm should encourage the staff to think positively and set an achievable target for them. For example, the monthly sells quota need to be reasonable.

Improve on Skills and Knowledge:

The reward system can encourages employees continuously improve their skill sets. The firm can pay employees based on their skill levels. Staffs will be motivated to attend extra courses and improve their skill sets in order to receive more benefit.

For example, the firm can reward staff with outstanding explanation and presentation skills. Staffs will take more initiatives to improve their presentation skill and attend related courses.

Both organisation and staffs can be benefited from this. The firm can adjust the setup of the reward system based on the requirement of the organisation. For example, effective communication skill and customer service skill are more important in retail industry. The firm can provide benefits to staffs who attend relevant courses and have outstanding customer service skills.

Reinforce and Define Organisational Structure:

The reward system can reinforce and define the organisational structure (Lawler, 1990). The firm might not foresee the impact of reward system on firm’s structure changes. However, the reward systems can have a strong impact of how integrated the organisation is and how differentiated it is. (Lawrence and Lorsch, 1967).

For example, if the company wants to create a united structure, it can reward all staff in the same manner. In this case, more teamwork will be encouraged and there are less competition within the organisation. If the firm wants to differentiate the top performers from average performers, they can apply a reward system that can create a more competitive environment. In this system, employees focus on their individual work instead of the benefit of the whole team. Insurance companies encourages on agent’s individual efforts. The reward system provides intensive benefit for top sellers and insurance agents are not sharing their information even within their own team.

By studying this theory, researcher defines that the reward system can be used to motivate the staff; encourage continues learning process and build organisational culture/structure. The retail firm needs to select the most attractive approach that can best fit into the needs of staff.

It is not necessary for the retail firm to focus all five objectives. The firm should select one or two main objectives that have highest priority. For example, some retail firms focus on Motivation of Performance. Supervisors need to consistently encourage their staffs and create a positive working environment. Staffs are informed that the sells quota is achievable if they work hard enough.

Based on the structure of the firm, the reward system need to be carefully designed to meet the organisational target. The retail firm should never underestimate the impact of the reward system on the structure of the firm.

3.3 The requirements of an Ideal reward system:

After identifying the objective of the reward system, the organisation also needs to understand the needs of its staffs.

A good reward system can meet the needs of the staffs in order to maximize its effect. Reward system needs to address four basic needs of the employees.

Compensation: Monthly basic pay and salary.

Benefits: Sharing of organisational profit; bonus and other types of staff welfare

Recognition: Staffs want to be recognised for their effort and good work. The organisation needs to create opportunities for staff to have more exposure and gain recognition.

Appreciation: the firm should show appreciation to staffs for their achievements. The firm can show its appreciation by promote premonition and giving out award to top performers.

Many businesses miss one or more of these elements (usually recognition and/or appreciation). Most firms only focus on financial compensate since it is the easiest way to reward the staffs, however there are many employees emphasise on recognition and appreciation. If the firm miss these two elements, it might not be able to retain staff effectively.

In addition, an ideal reward system should be able to award both employee’s performance and behaviour. The performance is easier to measures since it is a direct comparison between the desired target and actual performance of employee. For example, the top sellers should be awarded for achieving and exceeding the selling target. This can be easily measured by looking at the profit generated by individual employee.

It is harder to use reward system to affect the employee’s behaviours. The firm needs to define the behaviours that the employee should adopt and design the reward system based on this target. For example, manufacturing firms will award the employees based on their work efficiency. The aim of the reward system is to motivate staff to achieve higher productivity yield. In the other hand, most of the design companies focus more on the innovation and creativity of the staff. Instead of time spend in the office, the firm will reward employees who have more creative ideas.

According to this theory, an ideal rewards system needs to be able to address the needs of the staff and effectively affect staff’s behaviours based on the needs of the organisation.

3.4 Factors that need to be considered when designing a reward system

Only set up a clear objective and understand the requirements of an ideal reward system are not enough to design a decent reward system. The firm needs to consider the feasibility of the rewards system before proceed to the designing stage.

There are a few common queries that need to be answered before start to design the reward system.

Should reward system be a driver or reinforce of behaviour?

The firm can motivate the staff by using reward system. However, this should not be the only driving force for employees to improve their performance.

Where does the firm wish to position itself in the labour market (at what percentile)?

By providing an attractive reward system, the firm can recruit and retain a better workforce. The firm should also position themselves based on their financial state and external market environment.

What portion of total rewards will be distributed in cash, equity and social benefit programs?

The reward system can be applied in many different forms. Other than cash, the social benefits such as insurance and staff welfare can also contribute to the overall reward system.

How much leverage should variable rewards have (how much pay should be at risk at different levels of the organisation)?

The firm needs to consider the amount of capital that should be used to apply the reward system. Both over paying and under paying of the reward system will cause serious consequences. The amount of payment should be comparable to the market average salary level.

The frim needs to consider these operational issues seriously to ensure the efficiency of the reward system. The designer might has many wonderful ideas when designing the reward system. They need to consider the feasibility of these ideas in local market environment. For example, Wal-Mart’s rewards system in U.S.A is not feasible in china due to the market and culture different.

3.5 Efficient way of designing the reward system

After defining the objective, requirements and consideration of an ideal reward system, the firm can proceed to the design stage.

Reward systems need to be able to fit into the organisation’s operation system. It will directly affect the effectiveness of the organisation and employee’s working experience. Therefore, it is crucial to design a reward system based on the type of the industry and the setup of the organisation.

In many large organisations, the reward system is not solely adopted from the book. Modification will be made based on the organisation’s core value, process features and system practices. The firm needs to align the reward system with these three key factors during the designing process.

Core principle:

This is the key value of the organisation. The firm needs to help the employees to build trust on the core principle. The core principle can be the belief in pay for performance; a belief in secrecy about pay and other fundamental long-term commitments such as long service award.

All rewards system need to be designed based on this core principle. The firm needs to maintain the consistency when applying the reward system. It is not convincing enough if the firm is keep changing its core principle and reward system. For example, if the firm wants to promote a fair and united working environment, the reward system needs to treat every employee equally. Even with certain level of objection from the ground level, the organisation still needs to make its stand by consistently practicing in the same manner. If the firm wants to promote a competitive working environment, the reward system shall only provide benefit for top performers. The system will create a gap between top performers and average performers.

Process features:

The process feature will determine how the reward system can be implemented in organisation. For example, the communication policies will determine the approach of the reward system. In retail industry, positive communication approach is widely used to motivate staffs. The reward system needs to emphasize the benefit of achieving the target instead of remind the staff on the consequences of fail to achieve the target. The rewards system needs to fit the process features of the firm.

System practices:

System practice can determine the method of delivering reward to staffs. This includes pay delivery systems such as profit-sharing plans and other organisational welfare programs. Instead of paying a fix salary, the firm can share its benefit by paying bonus quarterly. It can also provide a better facility and healthcare benefit to staff. The way of delivering reward system should determine by staff needs and system practices of the organisation. Different organisations are having varies ways to deliver their reward systems. For example, insurance company provides free trip for its top performers every year to boost the staff morale. In addition, the insurance agent can receive 50% of the commission for each policy that they sold to client. This encourages agents to reach out for more clients. However, the same practice is not feasible at all in the retail industry. Due to the high operational cost, the firm cannot afford to pay 50% of commission to its employees.

The literature review shows that the firms need to put in many considerations in order to design a decent reward system that can be best fit into their organisational structures.

Firstly, the firm needs to fully understand the definition and objectives of the reward system. In retail industry, the reward system is mainly used to motivate staff and create a positive organisational culture.

In addition, management team needs to consider through the firm’s economic state and needs of their employees in order to achieve the best outcome of the reward system. The needs of staff in retail industry might be different depends on their designations. The ground staff might focus on the based benefit and staff welfare. While staffs that work at management level need more recognition and appreciations.

Organisation needs to consider its core value, process feature and system practices when the reward system is designed. Therefore, many new reward systems practices have become popular in order to align reward systems with the important changes that are occurring in the way organisations are designed and managed (Lawler, 1990; Schuster and Zingheim, 1992).

There is no good or bad for a particular reward system. The organisation must evaluate the context of other systems and business strategy of the organisation. The reward system needs to match with the information system; human resource management system and other crucial operating systems for maximize its effect.

Finding and Analysis:

To further analyse the effects of reward system on employees, the researcher has designed a set of survey questionnaire.

This survey questionnaire can help researcher to understand the perception of employees toward the Wal-Mart’s reward system. The survey questionnaire covers staff’s age group, gender, designation and length of service, etc.

This information helps researcher to conduct a detailed sub-analysis on the effectiveness of Wal-Mart China’s reward system. It can also define the employee’s need in different perspectives. The organisation can further improve current reward system based on the survey result.

The actual survey questionnaire can be found in Appendix A.

Question 1: Gender

What is your gender?

This pie chart illustrates the gender ratio of Wal-Mart China. It shows that 70% of staffs are male. Only 30% of the staffs are female. The unbalance ratio might due to the job nature in Wal-Mart China. Besides interacting with customers and conducting sell activities, staffs also need to rearrange the layout of the stock and carry heavy items. Male staff s will have more advantages when moving these heavy stuffs. Wal-Mart decides to hire more male staff due to this reason.

Question 2: Age Group

What is your ago group?

This bar chart illustrates the age group of staffs. The result shows that most of the staffs work in Wal-Mart are 25-30 years old (60%). 20% of the employees are 30-35 years old. Only 10% of the staffs are 35-40 years and above 40 years.

As mentioned earlier, retail industry is a labour intensive industry. Wal-Mart China needs to hire many staffs to handle daily store operations. Staffs need to handle the selling activities and rearrangement of products. There are many manual work need to be done in this working environment. Hence, Wal-Mart China decides to hire younger staff since they have enough strength to handle these works. The firm adopts different strategy in other countries. Wal-Mart (USA and Canada) tend to hire more middle age and senior staffs due to the short of labour force in these countries. Wal-Mart China can manage to recruit enough younger work forces since China has abundance support of younger labours.

Question 3: Designation

What is your designation in Wal-Mart?

This graph shows that most of the employees in Wal-Mart china are having a lower rank designation (30% of seller and 30% of Store man). The retail industry needs many ground staffs to handle all the logistic and operational issues. Less skill is required since these ground staffs are handling relatively simple works. Each team will have a leader to supervise the operation and plan the schedule for staffs (10% Assistant store manager and 10% Store manager). The centre managers are mainly handling the overall operation of the outlet and setting short term and long-term targets for the outlet. Hence, Wal-Mart China decides to hire massive amount of ground staffs and the satisfaction level of this group of staff is crucial.

Question 4: Length of Service

How long have you been working in Wal-Mart?

This diagram shows the staff’s length of service in Wal-Mart China. It indicates that the time of the employees work in Wal-Mart China is relatively short. More than 50% of the staffs are working in the firm for less than 3 years (30% for 1 year, 20% for 2 years and 20% for 3 years). This might create a problem for Wal-Mart China since the high turnover rate is leading to an increase of the retraining and recruitment cost.

The high turnover rate might due to the age group of staffs. The previous figure shows that Wal-Mart China has a relatively younger work force. Younger people tend to switch their jobs more frequently compare with middle age staffs. In addition, Wal-Mart China needs to review its reward system to increase the average length of service.

Question 5: Efficiency of Reward System

Do you think the current reward system is efficient?

30% of staffs feel that the current reward system is not efficient. This seems like a minority group of people and the firm may not be paying enough attention on this issue. However, 30% of dissatisfaction rate is remarkable in normal satisfaction survey. In this case, the researcher has done a sub-analysis on the age group and designation of staffs who felt that current system is inefficient. The researcher noticed that most of the ground staffs (sells personnel and store man) are more dissatisfy about the current reward system. Employees in management level felt that the current reward system is efficient. Wal-Mart China needs to treat this issue seriously since the ground staffs are handling the key operation process. The reward system should be revised to create more benefit for this group of staff to increase their satisfaction level.

Question 6: Preferred Reward

Please rank following factors based on their important levels.

Compensation

Benefits

Recognition

Appreciation

The result shows that 70% of staffs prefer to be awarded by compensation and benefits. Only around 30% of staffs feel that recognition and appreciation are mor