Reward systems management

Introduction

When people decide to take up a job, there are various factors they consider such as working conditions, the reputation of the organisation, training opportunities, and security of tenure and perhaps most importantly, reward for the job, that is, how the attractive the job is in terms of monetary and non-monetary compensation. Although the attractiveness of the reward package depends on personal perceptions, the higher the reward the better the chance of attracting, utilising, and retaining the best human resource in the organisation. This chapter provides a general overview of reward systems in an organisation and how managers can use different strategies and techniques to reward employees as part of the efforts to improve employees’ commitment.

Therefore, at the end of the topic, the learner is expected to:

·         Recognise and appreciate various types of rewards.

·         Be aware of factors which determine pay packages.

·         Use job evaluation methods to determine pay.

·         Appreciate the role of effective reward methods in improving job performance.

Reward management

Under HRM philosophy, rewards are financial and non-financial means used in order to get the best effort and commitment from the employee as a partner in business. As observed by McKenna & Beach (2002), and rightly so, that while the financial aspect of rewards relates to extrinsic motivation meant for the satisfaction of basic needs of life, the non-financial rewards are more intrinsic, in that, they are meant for the satisfaction of psychological needs including job variety and challenging people, achievement, recognition, employee development and involvement in determining the affairs of the organisation. These ideas are well developed by various motivation theories including Maslow’s hierarchy of needs and Herzberg’s two factor and expectancy theories (Bratton & Gold 2007). Armstrong in all of his works on HRM takes the position that reward management is the design, implementation, maintenance, communication and evolution of reward processes, which helps organisations to achieve high performance. Other scholars with American influence or ‘personnel management’ use the term ‘employee compensation pay system’ (Gomez-Mejia et al. 2005; Dessler 2005).

Reward systems are put in place in order to improve an organisation’s performance. The assumption is that reward packages motivate employees for total commitment to the organisation’s effectiveness. Since the organisation’s high performance also depends on significant improvement in all its aspects, there are also other specific objectives when rewarding employees, which can be subdivided into the categories of the organisation, individual, employees and teams and also employee representatives (Trade Unions).

At the level of the organisation, reward management is expected to:

·         Help the organisation recruit the required number and quality of staff.

·         Employees have their needs and expectations from the employer with regards to pay. This includes the demands of the job, market rates elsewhere, comparison to other jobs, pay in the organisation and the cost of living. The employer rewards staff in order to meet these expectations and hence make them feel that they are justly rewarded.

·         Harmony in the work place cannot be ensured if there is a conflict between employees through their trade unions and management when demanding better pay and working conditions. Conflicts are counterproductive to performance. Better pay also means better relationships with trade unions and less conflict.

Reward systems

Although many scholars use the phrase reward system to mean compensation packages for the recognition of the job done and the way they are provided, Bratton & Gold (2007) who are well supported by BPP Learning Media (2009) conceptualise reward systems as a mixture of extrinsic and intrinsic rewards provided by the employer. It also includes the integrated policies, processes, practices and administrative procedures for implementing the system within the framework of the human resource strategy and the total organisation’s system. This understanding of the reward system is critical in designing effective human resource reward packages and in particular, the recognition that the institutional framework that supports rewards is crucial in the employees’ perception of the quality and quantity of the reward provided. Armstrong (1995) has provided a detailed description of rewards, their purpose and how they are expected to encourage employees’ commitment to the job and the overall organisation’s performance. The description covers both the financial and non-financial aspects of rewards.

Financial

·         Wages and Salaries. Wages refer to total emolument paid to a worker for contribution to the organisation. Wages are paid weekly or fortnightly. Deductions are made for non-attendance while salary is paid monthly, and expressed as an annual figure. It is unlikely to deduct for non-attendance in some days or hours although deductions are becoming increasingly common in multinational companies operating in Tanzania.

·         Wages could be paid as piece rate (upon finishing the agreed piece work) or time rate based on the number of hours.

·         Incentives: payments made for the achievement of the previously set and agreed targets – result oriented.

·         Bonus rewards for the successful performance and paid out as a lump sum. Paid for recognition of outstanding performance – result oriented.

·         Additional allowance – e.g. responsibility.

·         Premium – paid due to inconveniences, shifts, etc.

·         Overtime – paid for extra time spent.

·         Competence pay – paid due to achievement of defined levels of competence.

·         Profit sharing based on profit generated.

Non-financial rewards (intrinsic and extrinsic rewards)

Although there is a general consensus in the literature that the task done by a worker can be the source of reward, there are also those who believe that the environment within which a task is performed can be a source of reward. For decades, now the centre of the debate is the extent to which intrinsic and extrinsic motivation are a source of rewards for different professions and staff. Intrinsic rewards are attached to the direct relationship between the work and the task done including the feeling of achievement, accomplishment, challenges met and competence derived from performing the job. On the other hand, extrinsic rewards are achieved through motivation from factors outside the job itself. Apart from financial rewards, as already explained, the others are fringe benefits, company policies, supervision, office and a comfortable working environment.

Pay structure

The development of an effective pay structure is not an easy task because it involves systematic data collection, careful analysis and interpretation and prudent decision making (Redman & Wilkinson 2009). It involves the following processes:

1. Selecting an area of industry, a firm or an organisation. Listing key jobs and positions common to most firms in the survey for comparison.

2. Preparing a schedule of information required, for example, salaries, scale/grades, supplementary pay etc.

3. Collecting data through instruments such as interviews, questionnaires and suchlike.

4. Compiling the data for each job.

Factors for consideration

·         Ability to pay: An organisation cannot afford to pay more than what is earned from labour, total costs of production and the profit margin.

·         Cost of living: This is based on the cost of living index usually computed by a country. Sometimes, indices may be computed based on the data collected from the area where the organisation is located.

·         Government regulations: Government policies and regulations on income do change from time to time. Organisations cannot afford to go against national policies and laws on minimum wage and employees’ entitlements to retirement benefits.

·         Internal and external Equity: Salaries and wages have to be seen to be fair for each employee working in the organisation depending on the job category, rank and competencies required and disposed.

·         The power of collective bargaining: In countries and organisations where trade unions are strong, they tend to influence the reward systems. However, with increasing contract based employment, the power of trade unions in collective bargaining has decreased.

·         Demand and supply for labour: Like any other factor of production, when the labour supply is scarce, it also becomes expensive and hence the employers who can reward more are the only ones who would be able to recruit and retain. In an ideal situation, the pay package should strike a balance between the employee and employer expectations. However, although common sense would dictate that rational means should be used to reward staff, quite often decisions on rewarding, particularly in public service, depend on a rule of thumb even if salary commissions may have been created to advise the government on the pay structure.

·         Job evaluation: It appears quite logical that fairness in rewarding job should be the most important concern of employers and employees. The fairness can mostly be achieved by objective evaluation of the worthiness of a particular job relative to others and hence reward accordingly. ACAS (1984) has defined job evaluation quite well saying that it is concerned with assessing the relative demands of different jobs within an organisation in order to provide the basis for comparing jobs and hence pay.

There are different job evaluation methods, some of which are highly judgemental while others are more systematic and rational, although some kind of value judgement is not easy to eliminate completely (Torrington et al. 2005; Hook & Foot 2008. The most common job evaluation methods are:

·         Job ranking. Comparing the job as whole rather than different aspects of the job. For example, a job of a senior economist with procurement manager or chief internal auditor.

·         Job grading/classification. In this case, jobs are assigned grades e.g. A, B, C etc. by taking into account key skills, competencies and responsibilities required by the job to be done effectively.

·         Grade. A job may be the one with just simple tasks which do not require higher education or experience.

·         Skill-based evaluation. This is a method that grades jobs according to the level of skills or expertise required in performing those jobs. The method focuses on individuals and the inputs they are capable of providing. Therefore, skills compared between different jobs are the main decisive factors in determining the worthiness of a particular job against another.

·         Competence Approach (Harris 2005). Measuring the size of jobs by preference to the level of competence required for the accomplishment of performance and which include attributes such as:

- Ability and willingness,

- Leadership,

- Innovation,

- Creativity,

- Risk taking,

- Team working, and

- Other personal traits necessary for performing jobs.1

·         Market pricing. This is basically a micro economic approach to determining the value of labour under the principle of the free market where the forces of demand and supply determine the value of products and services. In this case, the higher the supply of labour the lower the demand and hence the lower the price and vice versa. Therefore, market pricing relates internal rates of pay to market rates.

·         Point factor rating. This is an analytical method of job evaluation, which is more systematic and job centred than the other methods. For example, in a manual job the main important factors could be centred around knowledge and skills, effort, responsibility and working environment with the following sub components for consideration: level of education, working experience, initiative, physical strength, mental engagement, supervision, use of plant and equipment, safety, extent of hazard and noise environment (ACAS 1984).

These ten job factors could be considered in a chart ranging from ‘0’ to ‘120’. Where 0 is no factor present for the job, and 120 implying that the factor is fully present in the job and hence it matters for the job by one hundred percent. Table  summarises the evaluation.

Table ; Job factor analysis

Data in Table  suggest a scenario whereby some aspects of the job under job factor are more important for the performance of a particular job category than in other jobs and hence should be more rated and weighted than other aspects. For example, when the job of let say artisan is split into 4 factors and eight levels as exemplified in the column rows, and each level having a different need of a certain factor, we can predict that for an artisan initiative under knowledge category is very important and it should be rated very high (120) which is the maximum. Where there are no scores, it means that particular factor at that specific level is not important for the performance of that job. All these factors can be weighed for different categories of jobs. The job with the highest weight should also deserve the highest reward package and vice versa. Of course, before the decision to reward is taken, other factors presented in the previous sections should be considered.