Rewarding Performance – Comparison of Alternative Reward Systems

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Introduction

Reward systems are the programs that are set up by different firms to recognize and appreciate the individual’s work in the organization. The main purpose for this is motivation. The concept of reward system comes from the fact that employees need to be motivated to work and this is achieved either by intrinsic or extrinsic rewards.

All reward systems revolve around the assumptions of attracting, retaining and motivating individuals. Reward systems are not only based on the financial needs since there are other factors required to motivate employees and increase their level of performance (Ledford, 1995).

Organizations have adopted alternative reward systems so as to increase both, the domestic and international competition. Normally, performance-based compensation is considered in designing most reward systems because companies are aimed at cutting costs, restructuring and improving performance (Lawler, 1995).

Therefore, in order to ensure the effectiveness and efficiency of reward systems, it is vital to ensure that they are based on performance. Hence, management should embrace the fact that rewarding performance is a continuous process that is essential for current and future employee performance.

A reward system is a major contributor to shaping employment relationships. However, there are various forces that have an impact on the pay systems. The impact of the reward system will be felt in changing the work design and organization as a whole.

This is as a result of putting emphasis on the individual performance. However, all reward systems have two elements that contradict each other. These include tensions and conflict between employer and employee (Hamel and Heene, 1994).

Alternative reward systems are normally linked to employee participation programs and are embraced by employers as strategies that are necessary in the current global competitive marketplace.

This can be seen from the point of view that compensation for work done by the employees has been changing. In the past, it was referred to as payment. It was later referred to as remuneration and now, as reward.

Reward systems

The basic types of reward systems include direct financial compensation (salaries/wages), Indirect financial compensation – other financial rewards, other than wages and salaries (for example, medical cover, insurance cover and paid leave) and Non-financial compensation – most are intangible and they are relate to the satisfaction that an individual gets from performing his duties.

They can be as a result of meaningful jobs or a good environment (Schuster, 1992).

Financial rewards are based on three criteria. They include the base salary, pay incentives and employee benefits.

All of these can be categorized as extrinsic rewards, which are aimed at meeting the basic needs of individual and non-financial rewards are based on two things; intrinsic rewards – revolving around individual work and recognition rewards, which are given to employee by their superiors.

A reward system normally has three main objectives. The objectives include attracting new work force to the firm, showing exemplary work performance and inducing commitment to the organization (Quinn, 1987).

Attracting new employees is based on the fact that reward systems are designed with packages that aim at marketing individual reputation as desirable in the job market. It also gives employers confidence that employees will perform effectively.

Performance is achieved by the use of a reward system since it motivates the individual to work extra hard. This is because they are promised a bonus or pay increase. This can be channeled in three different ways. This could apply for individuals, team or the entire organization.

However, the individual performance-related pay could be challenging because it is based on the assumption that the pay, by itself, motivates workers.

Reward systems boost and strengthen the psychological contract. It brings out the behavior that organization values the most. Psychological contract, in a way, determines the perception of employees concerning what they believe in. This is in terms of the reward they receive for the work they do.

Without the psychological contact, the management cad face problems with the employees. The remuneration system should be able to attract and retain people of the right caliber. It gives rewards that will increase the workers’ motivation (Senge, 1990).

Financial compensations for employees are different for different companies. They are affected be various factors. One of the factors is the type of the organization. This depends on whether the organization is a profit making or not, whether it is private or under public ownership and many more.

The size of the organization, type of industry, importance of the employee’s job, level of the job, contribution to profit, span of control, the employees education and experience, competition and supply or demand also affect the type of compensation employed (Spencer and Spencer, 1995).

Direct versus indirect pay

Direct pay is normally what the employees of an organization will receive in the bank account. This could be in terms of basic pay, overtime, paid leave, commission, merit pay or firm profit sharing.

On the other hand, indirect pay is commonly referred to as benefits, and it is the additional package that an individual gets on top of the direct pay. They include things like the health cover, insurance cover, company car, entertainment, club membership, mobile phone and retirement plans (Collins, 1994).

Salaries versus Bonuses

A fixed monthly payment is the main financial incentive for employees. It is usually adjusted and reviewed to reflect employee’s development. A salary is advantageous for both, the firm and the employees. For the firm, it makes it easy to administer.

For the employee, it provides security. One can budget for it since he or she is sure it will be provided. However, salary is not closely related to performance and sometimes, it leads to complacency on the part of the employees.

Most firms supplement a salary with a bonus. A bonus is directly related to the results achieved. It is a sum of money given, usually at the end of the year or additionally to the salary. It is usually used by profit making firms. Bonus may be based on contribution to profit, waste reductions, sales increase and reduction in absenteeism.

Profit-Sharing versus Stock ownership

In profit sharing, the employees are given a certain percentage of profit. The profit sharing may be in form of cash or it may be kept in a fund and given out at a later stage. This could be at an agreed date or particular age. Profit sharing can help reduce turnover and attract better employees as well as help increase morale on the part of employees, leading to increased group co-operation.

In stock ownership, some companies do sell shares to their employees. This gives employees a personal stake in the company and can make them more willing to improve the company’s performance.

Pension plans

The firm invests funds for its employees and this is disbursed back to them when they retire. Pension plans help employees stay longer in the firm. It helps meet the employees need for security and this means that it can boost their morale.

The advantages of these reward systems include encouraging greater effort of employees, helping boost their morale, helping in problem solving (for example, it could help reduce waste of material, it could be of help where bonus is based on reduction of waste and encourages harmony at work, especially when employees receive group bonuses).

However, this reward system can be disadvantageous in the various ways. Firstly, it is difficult to measure each individual’s contribution (in terms of sales or profits), it is expensive to administer, it takes time and makes management even more complex. When it is a group bonus, the high performers may feel discouraged when they are rewarded using the same rate as the low performers.

Alternative Reward systems

Alternative reward systems have two main corporate goals. Firstly, they provide a reward for the employees who are able to compete against their fellow employees in the same department. Secondly, they seek to enhance the removal of the general wage increase that is based on collective power and it replaces them with one of the payments based on individual or group performance standards. This increases the conflict between the system and the union in which some employees may be part of.

Traditional wage compensations are straightforward and can easily be the measure for paying employees. The system can be useful when the employees’ wage and benefit packages are to be calculated to get the present and future values with some degree of accuracy.

On the other hand, nontraditional lump sum payment can never be at par with the economic value of a general wage increase. Wage increases produce a constantly increasing income flow, which is accumulated each year (Torrington et al., 2005). Alternative reward systems can be categorized in the following payment schemes.

Profit Sharing versus Gain sharing

Profit sharing is normally a great disadvantage to employees. This is because there are numerous factors that affect profitability. They are normally out of the employee’s control.

Management decision making and overall economic conditions have different roles in determining the profit or loss of a company. In addition, the huge profits are not always beneficial for the employees in the present economy (Zingheim, 1995).

On the other hand, gain sharing – as a reward – is not as bad as profit sharing. In many instances, it results in cutbacks in the employment levels as employees share their knowledge with their superiors so as to increase the overall productivity.

Pay for Knowledge versus pay for performance

This form of reward is used in most organizations. It revolves around the management’s plan to improve the employees’ work. It makes it more flexible and simplifies their job classifications. However, this system normally results in reduced employment and increased job stress. This is because the employees try to generalize their work and end up specializing in none (Roth, 2000).

Pay for performance, also known as merit pay system, is said to cultivate favoritism since it is not entirely based on fairness. This makes the system conflict greatly with the union movement. Critiques say that, in most cases, it is purely based on the manipulation of the management.

Factors Influencing Basic Reward System and Practices

One factor is the demand and supply of labour and labour markets. The law of demand and supply must be considered. The higher the supply of laborers in the labour market in relation to demand, the lower the salaries and wages paid.

However, when there is scarcity of labour, there will be less supply of labour in relation to demand. This means that the wages and salaries will go up. Hence, to achieve external consistency of wages and salaries, the organization’s wage and salary policies must take into account labour market conditions and prevailing wage rates.

Union Pressures – Labour union pressures exert considerable influence upon the wage and salary issues. Generally, the more powerful a union is or the stronger the bargaining power (as measured by its membership and leadership strengths), the greater the possibility of higher wages and salaries.

Job requirements in terms of knowledge and skills – Various jobs in an organization are graded according to the relative skills, efforts, responsibility or job conditions. The wages or salaries of the employees increase with the difficulty of the job (Ruona and Roth, 2000).

The size or ability of organization to pay – larger organizations have higher chances of making good profits. Large companies or organizations tend to pay higher wages and salaries relative to smaller organizations because of their ability to pay (Scherer, 1980).

Product competitiveness and prospects for higher profits – If an organization’s product (goods or services) is highly competitive and profits are good, the wage level in the organization is likely to rise. Hence, the market leaders in terms of products or services will make more profits and pay better than their competitors pay since their quality will be higher (Scherer and Ross, 1990).

Psychological and Sociological or Ethical factors – These factors exert a considerable influence on the company’s wage levels because if the employees are dissatisfied with wages and salaries paid to them, a sizeable pressure for wage or salary increase will be developed frequently. This at times may not be justified on purely economic grounds.

Psychologically, individuals perceive the level of wages and salary as a measure of satisfaction, security and status in life. Wage or salary differentials serve to depict social hierarchies. This is seen in the way individuals rate themselves using their salaries. Ethically, individuals feel that wages and salaries should be commensurate with their efforts.

Government policy and action in wage determination – similar to the pressures from trade unions, the government exerts pressure on the wage and salary practices.

Acting in the public interest, government may pass legislation, issue executive orders or establish commissions with a view to regulate compensation policies and practices for the purpose of attaining specific social and economic objectives such as elimination of exceptionally low wages (Shavell, 1998).

Cost of living or consumer price index – This is often regarded as an automatic minimum pay criterion. Due to the high cost of living resulting from increased prices, various organizations increase their wages and salaries. This leads to an increase in Productivity (Taylor, 2005).

Conclusion

Alternative reward systems should aim at attracting the most qualified employees and motivate them individually and collectively. This would make them more efficient and effective. A good reward system must have the four things that follow:

The organization must consider the system in its entirety. The firm should be looked at as a system that is interrelated. Besides the money, there should be good leadership, appreciation, respect and growth.
Secondly, they should be related to the performance of employees so that they do not feel exploited. Good performers must be compensated well.
Thirdly, the reward system must be reviewed and amended frequently. It may be adjusted to reflect changes either in the firm or on the part of the employees. Examples include increased responsibilities, rise in cost of living and development of skills.
Fourthly, it must be fair, simple and objective. It should be also simple and not costly to administer (Bratton, 2007).

References

Bratton, J & Gold, J 2007, Human resource management: Theory and practice, Palgrave Macmillan, Hampshire, UK.

Collins, JC & Porras JI 1994, Built to Last: Succesful Habits of Visionary Companies, HarperCollins, New York.

Hamel, G & Heene A 1994, Competence-Based Competition, John Wiley & Sons, New York.

Lawler, EE 1995, ’The New Pay: A Strategic Approach’, Compensation & Benefits Review, Vol. 3, pp. 14-22.

Ledford, GE 1995, ’Designing Nimble Reward Systems’, Compensation & Benefits Review, Vol. 4, pp. 46-54.

Ruona, WE & Roth, G 2000, ‘Philosophical foundations of human resource development practice’, Advances in Developing Human Resources, Vol. 3, no. 2.

Scherer, FM 1980, Industrial Market Structure and Economic Performance, Houghton Mifflin, Boston.

Scherer, FM & Ross, D 1990, Industrial Market Structure and Economic

Performance, Houghton Mifflin, Boston.

Schuster, JR & Zingheim PK1992, The New Pay: Linking Employee and Organizational Performance, Lexington/Macmillan, New York.

Senge, PM 1990, The Fifth Discipline: The Art and Practice of the Learning Organization, Doubleday New York.

Shavell, S & Ypersele V 1998, Rewards versus Intellectual Property Rights, Cambridge University Press, Cambridge.

Spencer, LM & Spencer SM 1993, Competence at Work: Models for Superior Performance, John Wiley & Sons, New York.

Torrington, D, Hall, L & Taylor, S 2005, Human resource management, Prentice-Hall,Essex, U.K.

Quinn, JB, Baruch JJ & Pawuette P 1987, ’Technology in Services’ Scientific American, pp. 50-58.

Zingheim PK & Schuster JR 1995, ’Moving One Notch North: Executing the Transition to New Pay’, Compensation & Benefits Review, pp. 33-39.

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