In today’s competitive business environment, businesses are looking for ways to improve their business results. Employees are one source to achieve competitive advantage. Thus, companies have started to invest in the human resource to unlock employee potential thereby achieving better results. This has given rise to the development of reward management as a tool to achieved desired job outcomes.
The human resource management has many tools that can be applied to manage employee’s behaviours. One of the tools is reward management. Applying reward management in organisations can improved business results and a positive shift in employees behaviour and contributions. In order to ensure organizational success, businesses should find a proper mix of rewards that satisfies the personal and financial needs of a current and potential workforce given existing business conditions and cost constraints (WorldatWork, p.XX). Thus, management started to use reward management to motivate employees to work harder, to retain its existing employees, to attract new employees, to increase job satisfaction and commitment to achieve desired business results.
The diagram below shows how the total reward strategy in a company can influence motivation, attraction, retention, satisfaction, engagement and performance and results.
Figure 2: Source: Worldatwork 2007, p.6
The WorldatWork introduce a total reward framework that will help practitioners think and execute in new ways (WorldatWork 2007). “WorldatWork defines total rewards as the monetary and non-monetary return provided to employees in exchange for their time, talents, efforts and results” (WorldatWork 2007, p.4). It involves the deliberate integration of the five key reward elements: compensation, benefits, work-life, performance and recognition, developments and career opportunities that effectively attract, motivate and retain the talent required to achieve desired business results (WorldatWork 2007).
The WorldatWork rewards Model recognizes that total rewards operates in the context of overall business strategy, organizational culture and HR strategy (WorldatWork 2007, p.6). The model is a globe representing the external influences on a business such as legal issues, cultural influences and competition (WorldatWork Total Reward Model 2008, p.4). From this model it can be derived that by combining the five key reward elements into a tailored package results in several desired job outcomes which can be profitable to the organisation in the long term. The reward strategy can be successful only if the employees give value to the monetary and non-monetary rewards. Thus, it is important for organisations to develop an effective total reward strategy which would enable them to achieve the desired results.
Background of Reward Management
Since the past years reward has been an exciting area of HRM that has been changing rapidly (Tom Redman Adrian Wilkinson, 2001). Under the traditional approach employees were seen as a cost that has to be managed rather than a valuable asset. Employees were not allowed to think and being creative. Employers never think of rewarding their employee or improve their performance but rather they were thinking to pay as little as they can. The employers adopt high supervisory control and threats of disciplinary action to keep high performance of workers. Organisations have thought reward to be as a poor relation of personnel management. It has been seen as part of “the turgid, unimaginative and inflexible world of wage and salary administration” (smith, 1993:45 cited Philip Lewis p.98). Then, the phrase paradigm shifts came into popular use in the early 1990s to refer to a change in thinking of organisations. The use of rewards cash as well as non-financial is now an accepted tool for managers to improve performance and motivate employees. The table below shows how there has been a shift from the traditional approach to new paradigms approach in reward management.
What is reward management?
Reward management according to Michael Armstrong (2007, p.3) deals with the strategies, policies and processes required to ensure that the contribution of people to the organisation is recognised by both financial and non financial means.
Michael Armstrong (2002, p.24) “Reward management is concerned with the development, implementation, communication and evolution of processes which deal with the assessment of relative job values, the design and management pay structures, performance, competence, skill or contribution(contingent pay), providing employee benefits and pensions, and managing reward procedures”.
Michael Armstrong (2007, p.3) “the overall objective is to reward people fairy, equitably and consistently in accordance with their value to the organisation in order to further the achievement of the organisation’s strategic goals”.
Michael Armstrong (2007, p.3) points out, ‘Reward management is not just about pay and employee benefits but it is equally concerned with non financial rewards such as recognition, learning and development opportunities and increased job responsibility’.
Aims of reward management
The aims of reward management according to Armstrong (2007, p.4) is to reward people according to the value they create; align reward practices with business goals and with employee values and needs; reward the right things to convey the right message about what is important in terms of behaviours and outcomes; help to attract and retain the high-quality people the organization needs; motivate people and obtain their engagement and commitment and develop a high-performance culture. When applying reward management organizations have to be well informed about aim of reward management in order to benefit from it. This can also improve individual, team and organisational performance leading to higher competitive advantage.
The concepts of reward systems
An employee reward systems according to Armstrong (2002, p.4) “consists of an organisation’s integrated policies, processes and practices for rewarding its employees in accordance with their contribution, skill and competence and their market worth”. “It is developed within the framework of the organisation’s reward philosophy, strategies and policies, and contains arrangement in the form of processes, practices, structures and procedures which will provide and maintain appropriate types and levels of pay, benefits and other forms of rewards” Armstrong (2002, p.4). The components of a reward system include financial rewards, employee benefits and non-financial compensation.
Armstrong (2002, p.3) defines reward as ‘how people are rewarded in accordance with their values to the organisation”. It consists of both financial and non financial rewards and comprises of the philosophies, strategies, policies, plans and processes used by organisations to develop and maintain reward systems.
Types of rewards
There are different types of rewards that an organisation can put into practice to achieve his goals and objectives. This can be illustrated as follows in figure1.1.
Types of rewards
Intrinsic and Extrinsic rewards
Intrinsic rewards are those that employees derive as a result of job satisfaction, achievement, responsibility, variety and challenge whereas extrinsic rewards are usually controlled by the organisation like financial, material and social rewards (e.g. recognition, praise) as they originate in the environment.
Financial rewards and Non Financial rewards
A reward system consists of both financial and non financial reward. Both help in attracting, retaining and motivating employees. Financial reward is associated with direct payment to employees in relation to their merit. It is a fundamental aspect and companies should get it right to retain key talent employees. Financial reward can encourage an employee to perform to his best of his own ability and it is considered as the most well known and longest enduring concept in the workforce. Usually, there is an increase in financial rewards resulting from annual economic adjustment and merit increments and are paid across the board to all employees. Financial reward consists of base pay, variable pay, share ownership and benefits, which together comprise of total remuneration.
Michael Armstrong (2002.p 5) states that base or basic pay is the level of pay (the fixed salary) or wage that constitutes the rate for the job. The basic pay varies according to the grade of jobs and level of skills required. The base pay will be influenced by some form of job evaluation, market rates, trade unions and individual agreements. It may be expressed as an annual, weekly or hourly rate.
Variable pay is related to performance, competence, contribution, skill and experience. Such pay is added to the base pay.
This is a common incentive for either all employees or selected employees like senior managers who are given shares in the company rather than a straightforward bonus or membership of a profit sharing scheme. This means that some staff is shareholders and this motivates them to work harder. It can also reduce corruption among those who have big deals with the company’s money.
An employee benefit is also known as indirect pay and includes pensions, sick pay, insurance cover and company cars. They include elements of remuneration, additional to the various forms of cash pay and also consist of provision for employees that are not sternly remunerated, such as annual holidays.
Total remuneration consists of the financial reward that is the value of all cash payment represented by total earnings plus the value of benefits received by the employees.
According to Armstrong’s 2002 including both the financial and non-financial rewards in the reward system is recognition by the employer that non-financial rewards may play an important part in attracting and more particularly retaining employees. Non-financial reward can be a motivational tool for some employees who can bring positive employee attitude and behaviour in the organisation. The term Non-financial reward relates to non direct payment to employees and includes any rewards which focus on the need people perceive to varying degrees for achievements, recognition, responsibility, influence and personal growth. It is usually subjected to management discretion. Non-financial reward can include recognition, opportunities to develop skills, career opportunities and quality of working life.
Reward and Recognition
Recognition is viewed as one of the most potential method of rewarding people. The needs of recognition are related to the esteem needs in Maslow’s hierarchy of needs. Employee recognition can be used as a communication tool and can have several outcomes. Most of the time feedback from managers and supervisors show recognition to staff and team members so that they repeat the task effectively. The kind of recognition and reward that most employees want is personal praise, written praise, public praise, and electronic praise, which make them feel valued. Reward and recognition can also be achieved through promotion, allocation to a high profile project, enlargement of jobs, status symbols of one kind or another, sabbaticals, treats, trips abroad and long-service awards. However, recognition should be managed with care so that one person’s recognitions do not imply an element of non-recognition to others.
The total reward approach used in reward management take into consideration all aspects of reward that is linked with other HR initiative intended to attain the motivation, commitment, engagement and development of employees. Paul Thompson 2002 cited Michael Armstrong, 2007, p.32 suggest that: ‘Definitions of total reward typically encompass not only traditional, quantifiable elements like salary, variable pay and benefits, but also more intangible non-cash elements such as scope to achieve and exercise responsibility, career opportunities, learning and development, the intrinsic motivation provided by the work itself and the quality of working life provided by the organisation’. The total reward approach can be beneficial as it has a greater impact on motivation and commitment on employees. It helps to enhance employee’s relationship, meet individual special needs and it can help to attract and retain talented people that the organisation needed. The total reward approach is different for organisations, employee group or individual employee. The figure below shows the components of total reward.
Source: Michael Armstrong, 2002, p.10
What is reward strategy?
According to Armstrong (2007, p.52) reward strategy is a business-focused description of what the organisation wants to do about reward in the next few years and how it intends to do it. The aim of reward strategy is to provide the organisation with a sense of purpose and direction from the reward programmes that helps to achieve the business goals and high level of performance.
Ed Lawler (1994 cited Michael Armstrong, 2002, p.83) defines “reward strategy as an integrated approach, linking company strategy, pay systems and employee behaviours”.
Rewards aims from an organisation’s point’s of view
From the organisation’s point of view, the specific aims of employee reward according to Armstrong (2002, p 14) are to:
Help to attract, retain and motivate high quality people
Play a significant part in the communication of the organisation’s values, performance, standards and expectations.
Encourage behaviour that will contribute to the achievement of the organisation’s objectives and reflect the balanced score card of the key performance drivers of customers, finance, processes and people- two of the basics questions to be answered when developing reward systems are what sort of behaviour do we want? and how can reward processes promote that behaviour?
Underpin organisational change programmes concerned with culture, process and structure
Support the realisation of the key values of the organisation in such areas as quality, customer care, teamwork, innovation, flexibility and speed of response
Provide value for money: no reward initiative should be taken unless it has been established that it will add value, and no reward practices should be retained if it does not result in added value
Aims of Reward system from an employees’ point of view
From the employees’ point of view according to Armstrong (2002, p 14) the reward system should:
Treat them as stakeholders who have the right to be involved in the development of the reward policies that affect them
Meet their expectations that they will be treated equitably, fairly and consistently
Be transparent- they should know what the reward policies of the organisation are and how they are affected by them.
To achieve these aims an organisation should be internally equitable and externally competitive.
In order to manage the reward system a good reward strategy should be used.
Reward and business strategy
As Lawler (1995 cited Michael Armstrong, 2002, p.87) emphasises: ” The business strategy, in particular, serves as a crucial guide in designing organisational systems because it specifies what the company wants to accomplish, how it wants to behave, and the kinds of performance levels it must demonstrate to be effective”. Reward strategy starts with a consideration of business strategy. Thus, by implementing a reward strategy, the organisation infleunce and bring into change the employee behaviour. That is the reward strategy should be in consistent with what the organisation is seeking to achieve through its business strategy. The reward strategy flows from the business and HR strategy as shown in the figure below:
The development of reward strategy
Satisfy needs and expectations of stakeholder
Provide added value to customers
Obtain, developed and retain the skilled, motivated and committed people the organisation needs
Define what the organisation wants and is prepared to pay for
Encourage and support desired behaviour
Develop and maintain competitive pay policies which will attract and retain high quality people
Adopt a total rewards approach which includes a mix of rewards which best meets business and individual needs
Figure 4: Source: Michael Armstrong (2002, p84)
Integrating reward and business strategies according to Armstrong (2002, p.88) “means combining them as a whole so that they contribute effectively to achieving the mission or the purpose of the organization”. The process of linking strategies is the best way of achieving integration, or fit. But, it is essential to see that, reward goals are aligned with business goals.
Content of reward strategy
The content of a reward strategy statement can include the intention of rewarding people by developing new methods for high quality performance, the purpose to achieve something and a measure to determine the extent to which the purpose has been achieved.
The feature of an effective reward strategy
Brown (2001 cited Michael Armstrong, 2002, p.85) states that it is necessary to recognise that effective reward strategies have the three components:
They have to be clearly defined goals and a well defined link to business objectives.
There have to be well designed pay and reward programmes, tailored to the needs of the organisation and its people, and consistent and integrated with one another.
Perhaps most important and most neglected, effective and supportive HR and reward processes must be in place.
Additionally, the organisations should ensure that HR makes the goals of the reward program clear and easy to understand. The HR should provide the line managers with the necessary tools and back up to help them effectively communicate the benefits of the reward program to employees. Finally, the reward system should be monitored and evaluated continuously by analysing data.
Communicating the reward to employees
Every individual in an organisation should know about the reward policies the organisation is adopting. Effective communication of the reward strategies may lead to various positive job outcomes. Michael Armstrong (2007, p499, 500) “employees and their representative should be informed about the guiding principles and policies that underpin the reward system and the reward strategies that drive it. They should understand the grade and pay structure, how grading decisions are made, including the job evaluation system, how their pay can progress within the structure, the basis upon which contingent pay increases are determined and policies on the provision of benefits including details of a flexible benefits scheme if one is available.” Additionally, the reward system should be transparent and fair in order to be effective. The organisation can use their line managers to communicate the total value of the reward program by using individualised total rewards statements.
Reward management and performance management
Performance management plays a vital role in reward management. It can motivate people if it is carried out properly. According to Michael Armstrong (2007, P.395) performance management provides rewards in the form of recognition through feedback, opportunities to achieve, the scope to develop skills, and guidance on career paths. Using performance related pay can encourage job engagement and promote commitment. Performance management is associated with pay by generating the information required to decide whether there should be an increase in variable pay or bonuses related to performance, competence or contribution.
Total Reward Strategy impacts on desired job outcome
Referring to the WorldatWork Total Reward Model (figure 1) it can be explained that total reward strategy has an impact on motivation, attracting and retaining employees, job satisfaction, engagement and performance of the business.
Reward management impact on motivation
One of the main reason of using reward management as a tool in organisations is to motivate employees so as to produce the best result. According to WorldatWork Total Reward Model, the total reward strategy will motivate employees to work harder. Therefore, it is important to understand the factors that motivate people and how in the light of these factors, reward processes and practices can be developed that will enhance motivation. Thus, motivation theories can be used a guide to develop effective reward systems.
Theory of motivation
According to Michael Armstrong (2007, p.119) “Motivation theory is concerned with what ‘moves’ people to do something – what in¬‚uences people to behave in certain ways.”
Types of motivation
There are two types of motivation as originally described by Herzberg et al (2) (1957 cited Michael Armstrong 2007, p.121):
This was defined by Herzberg et al (2) (1957 cited Michael Armstrong 2007, p.121)) as motivation through the work itself. Intrinsic motivation arises when people are motivated when they feel that the work they are doing is interesting, challenging and important. This constantly results in higher performance levels. However, intrinsic motivation is linked with factors that include an employee’s sense of achievement, respect for the whole person, trust, appropriate advancement opportunities and others (WorldatWork 2007, p.12)
Extrinsic motivation takes place when the organisation motivate the employees by giving them rewards such as increased pay, recognition, praise or promotion, and punishments such as disciplinary action, withholding pay or criticism.
The total rewards meets the evolving needs of today’s employees (WorldatWork 2007, p.15) and this can be depicted as follows:
Source: WorldatWork 2007, p.15
The role of rewards and incentives in motivation
Both financial and non financial reward can act as a motivator to encourage people to work hard if they are fair and equitable. They can have deeper and longer-lasting impact on the motivation and commitment of employees. The diagram below can explain how effective reward system can increase employee’s effort and hence lead to higher performance.
Source: Motivation model (Porter and Lawler) 1968 cited Michael Armstrong 2007, p.126
The Porter-Lawler model explains how employees make more effort and perform well when they are fairly and desirably rewarded. However, reward can act as a de motivator if it is perceived as unfair and unequal. This can lead to dissatisfaction of employees and results in poor performance. Thus, an effective reward system will motivate employees which will ultimately lead to several positive job outcomes
Reward management help to attract employee
One way for an organisation to be successful is to attract the right kind of talented people in the organisation. This is important for the survival of the organisation. Nowadays, due to a shortage of skill people, organisations are designing effective reward strategies to attract high quality people. Attracting talented employees is one of the key policies of business strategy. Michael Armstrong (2007, p.4) stated that the aim of reward management is to attract and retain the high quality people the organisations need. Thus, one way to attract talented people according to the WorldatWork Total Reward Model (figure 1) is to adopt the five key element of the total reward strategy. Extrinsic reward like compensation will help to attract people for a limited period while intrinsic reward like benefits, work-life, performance, recognition, development and career opportunities may have a long-term and deeper impact (WorldatWork Total Rewards Model 2008, p.5).
Reward management help to retain and reduce absenteeism
Today organisations success depends upon the ability to retain his key and talented employees. Organisation should have a targeted retention strategy in order to be both proactive (must reach out to key employees) and reactive (should focus on reducing turnover) (Linda J.Bilmes &W.Scott Gould 2009, p.160). Retention also means reducing job turnover. Job turnover and absenteeism is a complex phenomenon that affects productivity and increase cost of organisations. In order to deal with this problem most organisations used reward management as a tool. Organizations can use total rewards strategy as a recruitment retention tool by presenting the total value of the employment package to prospective employees. Hence, by applying the total reward strategy from the WorldatWork Total Reward Model (figure 2), organisations can retain its talented staff. According to Linda J.Bilmes &W.Scott Gould ( 2009, p.160) “the key of retaining good workers is to provide an environment that is rewarding and flexible both financially and personally”. Thus, effective reward strategy in an organisation can reduce turnover. Studies have found that if the reward is valued and well communicated there will be greater job satisfaction and lower job turnover. Rewards can keep the employees happy, motivated and helps reduce turnover which in turns cuts costs and vice versa. The model below shows how pay dissatisfaction lead to turnover and absenteeism.
source : www.geocities.com/…/3126/htmlcompens.html
Conversely, not all retention is desirable and thus a retention strategy with appropriate steps is essential. Total reward strategy can also discourage poor performers from leaving voluntarily
Consequently, the reward strategy can help to reduce absenteeism. Susan R.Rhodes (1990, P.70) stated that “the first major technique for controlling absenteeism relies on reward systems for good attendance”. If fair reward is being given, it motivates the employee to work hard and avoid unnecessary absenteeism. A variety of reward like public recognition of employee of good attendance, employee bonus for perfect attendance, allow employees to accumulate a paid absence bank which can be cashed in a percentage at latter date, or added to next year’s vacation time, perfect or good attendance banquet and the attendance lottery or poker system can be used to reinforce good attendance Susan R.Rhodes (1990, P.70). However, to achieve good attendance the reward should be well communicated. Conversely, the reward that is being used to reduce absenteeism can cost a lot for the organisation for example the attendance lottery and finally when the reward is been removed the desired behaviour ceases.
The impact of Reward management on job satisfaction and engagement
Organisations these days are putting a lot of emphasise on job satisfaction and engagement as it has an impact on the organisational effectiveness. Managers, supervisors, human resource specialists, employees, and citizens in general are all concerned with ways of improving job satisfaction (Cranny et al 1992 cited M Gautam, K Mandal and RS Dalal 2006). Job satisfaction can be defined as the “extent to which a person derives pleasure from a job” (Muchinsky, 1993, p. 290) or “as a pleasurable or positive emotional state resulting from the appraisal of one’s job” (Friday & Friday, 2003 as cited in Locke, 1969) (cited Michelle Romilla Gordi 2006). According to (Byars & Rue, 2000, p. 301-303) the five major components of job satisfaction are:
â€¢ Attitude towards work group.
â€¢ General working conditions.
â€¢ Attitude towards the company.
â€¢ Monetary benefits.
â€¢ Attitude towards management.
According to WorldatWork Total Reward Model (figure 1), implementing the five key element of the total reward strategy motivate employees which lead to job satisfaction and employee commitment. Overall job satisfaction can be assessed by simple questions such as `Choose one of the following statements which best tells how well you like your job: I hate it, I dislike it, I do not like it, I am indifferent to it, I like it, I am enthusiastic about it, I love it’ (Hoppock, 1935 cited Argyle Michael 1992). Herzberg et al. (1959 cited Michael Argyle 1989) stated that (positive) satisfaction is due to good experiences, and that these are due to `motivators’ – achievement, recognition, the work itself, responsibility and advancement. Dissatisfaction is due to bad experiences caused by `hygiene’ factors – supervisors, fellow workers, company policy, working conditions, and personal life (Herzberg et al., 1959 cited Michael Argyle 1989)
Thus, if an employee performs well and is being rewarded by a healthy pay increase will more likely to experience a feeling of accomplishment and satisfaction rather than not being offered any increase in pay. The model below shows that the factors leading to dissatisfaction is poor pay, poor compensation, poor work condition, lack of promotions, poor benefits offering, lack of job security.
Source : talentedapps.wordpress.com/2008/04/
Hence, we can note from the above description that reward is a useful tool that can help employee to have a positive attitude toward work and increase employee satisfaction as well. When employee receives a reward they feel more secure about their job and gradually they are more satisfied. Conversely, satisfaction will only be achieved if rewards are viewed as fair, equitable, consistent and transparent as well as reasonable in terms of the rewards of others such as friends or colleagues. It should be noted that any feeling of satisfaction resulting from pay increases is likely to be short-lived compared with the long-lasting satisfaction from the work itself.
The most significant challenges for any management team is to encourage employees to work and be committed toward achieving organizational goals and objectives .One of the aims of reward management is to obtain employee engagement and commitment. According to Michael Armstrong (2007.p136) “Engagement, sometimes known as job engagement, is concerned with people and their work. It happens when people are caught up in and interested in, even excited about, their jobs and are therefore prepared to exert discretionary effort in getting them done.” According to WorldatWork Total Reward Model (figure 1), the five key elements of the total reward strategy will help to engage employees effectively. According Trevor Blackman cited Michael Armstrong, Duncan Brown 2006, ‘Reward done well can drive engagement throughout the organization’. An employee is said to be committed if he retains himself in the organisation due to positive reasons, if he thinks highly enough of the organisation to recommend others to join it and if he actually do something to improve the business results. The basics of reward that have the greatest impact on employee commitment levels are career development or promotion opportunities, increased ¬‚exibility and a pay-for-performance culture. It should be noted that only a well constructed reward scheme will motivate employees to increased commitment and effort. The reward should be at the same time consistent and transparent. If these rewards are not being given employees tend to feel de-motivated and unsatisfied with their work and finally no commitment.
Reward management lead to higher performance and productivity
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