ARMSTRONG'S

HANDBOOK
OF REWARD MANAGEMENT
PRACTICE
Improving performance
through reward
3RD EDITION

Michael Armstrong

KoganPage
LONDON PHILADELPHIA NEW DELHI
 Contents

Introduction 1

Parti Essentials of Reward Management 3

1. An Overview of Reward Management 5

Introduction 6; Reward management denned 6; Characteristics of reward
management 7; The reward management framework 9; Aims of reward
management 9; Achieving the aims in general 11; Achieving the specific
aims 14; Contextual factors 16; Fundamental concepts 19; Pay level
concepts 22; Effective reward management 23; References 24

2. The Reward System 26

Introduction 27; How a reward system operates 27; Components of a
reward system 28; Reward systems in action 35; References 38

3. Total Rewards 39
Introduction 40; Total rewards defined 40; Underpinning concepts 41;
The elements of total rewards 42; The significance of total rewards 43;
Models of total rewards 44; Models of total rewards produced by other
consultants 47; Introducing total rewards 49; Total rewards in
practice 55; Conclusion 60; References 60

4. Strategic Reward 62
Introduction 62; Strategic reward management defined 63; The rationale
for strategic reward 63; The problem with the concept of strategic
reward 64; Characteristics of strategic reward 65; Reward philosophy 65;
Guiding principles 66; Reward strategy 72; Developing reward
strategy 79; Implementing reward strategy 84; References 85
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5. International Reward 87
Introduction 87; The international scene 88; International reward
strategy 89; Rewards for expatriates 92; References 96

Part II Performance and Reward 99

6. Performance Management and Reward 101

Introduction 102; The meaning of performance 102; Influences on
performance 103; How does reward impact on performance? 105;
High-performance cultures 106; High-performance work systems 108;
Impact of reward on individual performance 112; Impact of reward on
organizational performance 112; Managing organizational
performance 113; Managing team performance 117; Managing individual
performance 118; References 124

7. Engagement and Reward 127

Introduction 127; The meaning of employee engagement 128; Why
engagement is important 130; The factors that influence engagement 131;
Enhancing engagement 132; Developing engagement policies through
reward 133; References 135

8. Financial Rewards 136

Introduction 137; Incentives and rewards 138; The theoretical
framework 139; The role of money 143; Views about the importance of
pay 143; Research on the effectiveness of financial rewards 147;
Arguments for and against financial rewards 152; Criteria for
effectiveness 154; Conclusions 156; References 156

9. Non-financial Rewards 160

Introduction 161; The significance of non-financial rewards 161; Types of
non-financial rewards 161; Individual extrinsic rewards 162; Individual
intrinsic rewards 163; Collective extrinsic rewards 164; Collective
intrinsic rewards 165; References 166

10. Contingent Pay Schemes 167

Introduction 167; Objectives of contingent pay 168; Criteria for
success 168; Performance-related pay 169; Contribution-related pay 173;
Competency-related pay 180; Skill-based pay 181; Overall conclusions on
contingent pay 183; Summary of individual contingent pay schemes 183;
References 185 . •
 Contents v

11. Bonus Schemes 187

Introduction 187; Bonus schemes defined 188; Aims of bonus
schemes 188; Rationale for bonus schemes 189; Criteria for a bonus
scheme 190; Types of scheme 191; Designing a bonus scheme 193;
Introducing a bonus scheme 195; References 196

12. Team Pay 197

Introduction 197; Team pay defined 198; Aim of team pay 199; Rationale
for team pay 200; How team pay works 200; Requirements for team
pay 202; Advantages and disadvantages of team pay 202; Developing
team pay 203; NHS case study 204; References 205

13. Rewarding for Business Performance 206

Introduction 206; Types of schemes 207; Aims 207; Profit-sharing 208;
Share ownership schemes 209; Save-as-you-earn schemes 209;
Gain-sharing 210; References 211

14. Recognition Schemes 212

Introduction 212; Recognition schemes defined 212; Benefits of
recognition schemes 213; Principles of recognition 213; Types of
recognition 214; Examples of non-cash awards 216; Designing a
recognition scheme 216; Examples of recognition schemes 217

Part III Valuing and Grading Jobs 221

15. Pay Levels 223

Introduction 224; Determinants of pay 224; Pay levels within
organizations 229; Pay systems 230; Factors affecting pay levels 232;
References 233

16. Job Evaluation Schemes 235

Introduction 236; The purposes of job evaluation 236; Achieving the
purposes 237; Analytical job evaluation schemes 238; Non-analytical
schemes 242; Market pricing 245; Levelling 246; Job analysis for job
evaluation 248; Computer-aided job evaluation 249; Choice of
approach 251; Developing a point-factor job evaluation scheme 255;
References 263

17. Equal Pay 264

Introduction 264; Reasons for unequal pay 266; The equal pay legal
framework 268; Achieving equal pay 273; Risk assessment 275; Defending
an equal pay claim 276; References 278
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18. Market Rate Analysis 280

Introduction 281; The concept of a market rate 281; Job matching 282;
Use of benchmark jobs 283; Sources of market data 284; Interpreting and
presenting market rate data 286; Using survey data 289

19. Grade and Pay Structures 290

Introduction 291; Grade structures 291; Pay structures 292; Guiding
principles for grade and pay structures 293; Narrow-graded
structures 293; Broad-graded structures 297; Broad-banded
structures 301; Career-family structures 308; Job-family structures 314;
Combined career/job-family and broad-banded structures 318; Pay
spines 320; Spot rates 321; Individual job grades 321; Choice of grade and
pay structures 322; Developing a grade and pay structure 325;
References 332

Part IV Rewarding Special Groups 333

20. Rewarding Directors and Senior Executives 335

Introduction 336; Executive pay levels 336; Factors affecting the level and
nature of executive rewards 337; Why has executive pay grown so
much? 340; Corporate governance and executive remuneration 340;
Directors' and senior executives' remuneration 342; Benefits 345; Service
contracts 346; References 346

21. Rewarding Sales and Customer Service Staff 348

Introduction 348; Rewarding sales representatives 348; Salary only 349;
Rewarding customer service staff 354; References 358

22. Rewarding Knowledge Workers 359

Introduction 359; What motivates knowledge workers? 360; Approaches
to rewarding knowledge workers 361; References 364

23. Rewarding Manual Workers 365

Introduction 366; Factors affecting the pay of manual workers 366; Time
rates 367; Pay structures 367; Incentive schemes for manual workers 368;
Payment by results schemes 370; Contingent pay schemes 372; Collective
schemes 373; Assessment of schemes 373; Single status and
harmonization 377; References 378
 Contents vii

Part V Employee Benefit and Pension Schemes • 379

24. Employee Benefits 381

Introduction 381; Rationale for employee benefits 382; Employee
benefit strategies and policies 382; Types of benefit 383; Incidence of
benefits 385; Choice of benefits 386; Administering employee
benefits 386; Total reward statements 386; Reference 387

25. Flexible Benefits 388

Introduction 388; Reasons for introducing flexible benefits 388; Types of
flexible benefits schemes 389; Introducing flexible benefits 392;
Reference 393

26. Pension Schemes 394

Introduction 394; Why occupational pensions are provided 395; What
occupational pension schemes provide 395; The two main types of
occupational schemes 396; Other types of pension schemes 400; The state
pension scheme 401; Advising employees on pensions 401; Developing
and communicating pensions policies 402; Reference 403

Part VI The Practice of Reward Management 405

27. Developing Reward Systems 407

Introduction 407; The task of developing and implementing reward
systems 408; Objective setting 408; The approach to development and
implementation 410; The development and implementation
programme 413; Advice from practitioners 415; References 420

28. Managing Reward Systems 421

Introduction 422; Reward policies 422; Controlling reward 426;
Monitoring and evaluating reward policies and practices 427; Conducting
pay reviews 429; General reviews 429; Individual reviews 430; Reward
procedures 434; The use of computers in reward management 435;
Communicating to employees 437; References 439

29. Evaluating Reward Management 440

Introduction 440; Why evaluate? 441; Why don't people evaluate? 442;
What can be done about it? 443; Reward effectiveness reviews 444;
Evaluating the impact of reward innovations 449; References 451
viii Contents

30. Responsibility for Reward 452

Introduction 452; The role of the reward professional 452; Role of line
managers 455; Using reward consultants 456; References 457

Appendix A: Reward Attitude Survey 459

Appendix B: Employee Engagement Survey 461
Index 463

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