Reward Management

Definition:

Armstrong and Murlis (1994):

Reward management is about the design, implementation, maintenance, communication

and evolution of reward processes which help organisations to improve performance and
achieve their objectives.

Aims of reward management

• Improve individual and organisational performance

• Encourage value-added performance
• Support culture management
• Achieve integration
• Support managers
• Empower individuals and teams
• Compete in the labour market
• Motivate
• Increase commitment
• Achieve fairness and equity
• Support new developments
• Enhance quality
• Promote teamworking
• Encourage flexibility
• Provide value for money

1
 Pay Structures

HRM and Payment Systems: Changing trends in the determination of pay.

External determination , i.e TU, government. Internal influences, i.e profit, performance, value
added.
Collective determination Emphasis on the individual

Pluralism Unitarism

Measurement of personality Measurement of performance

Short-term emphasis, i.e bonuses for certain levels of Long-term emphasis, i.e profit sharing, PRP related
production. to long-term organisational objectives.

Input measures - qualities such as loyalty, hard work, Input measures such as skills, competencies and
length of service. commitment to organisational objectives.

Output measures - ‘hard’ objective measures of Output measures - ‘softer’ subjective criteria,
performance such as measured output in terms of measurement of effectiveness/contribution.
product made or service given.

Manual workers: measuring tasks Manual workers: measuring output

Measuring pure output Measuring output plus quality and, where

appropriate, customer service.

Skill-based pay
A payment method in which pay progression is linked to the number, kind and depth of
skills which individuals develop and use. Involves paying for horizontal acquisition of
skills required to undertake a wider range of tasks, and/or for the vertical development of
the skills needed to operate at a higher level, or the development in depth of existing
skills.
Why skill-based pay?

• Raise the skills base

• Need for flexibility
• Increased pressure for efficiency and effectiveness
• Quest for commitment
• Culture change
• Drive towards self-management

2
Competence-based pay
Basing pay on the level of competence required in a job - pay is related to the process
aspects of a job – the behaviour required in converting inputs into outputs and outcomes.
Types of competence-based pay structures

1. Narrow-banded structure
2. Broad-banded
3. Competence and performance pay curves

Narrow-banded structure

A conventional graded structure where a ladder of competence levels is developed and

each grade is defined accordingly. Alternatively, a skill matrix job evaluation scheme
can be used.

Broad-banded structure

May incorporate only three or four grades each of which can have a pay range extending
to as much as 300% above the minimum. Thus leaving much more scope for rewarding
people according to their competence and contribution.

Competence and performance pay curves

Provide different pay progression tracks along which people in a family of jobs can move
according to their levels of competence and performance.

Performance-Related Pay (PRP)

PRP links pay progression to a performance and/or competence rating. It is an increase

in base pay governed by a rating against such criteria as performance and contribution
outputs and skill and competence inputs.

Though generally individual in nature, more attention to performance criteria related to

team work are being introduced.

3
Objectives of PRP

Overall objective : Provide incentives and rewards which will improve the performance
of organisation by improving individual performance.

To fulfil its overall objective, PRP aims at:

• motivating all employees

• delivering a positive image about the performance expectations of the
organisation
• focusing attention and effort on the key performance issues
• differentiating rewards to people consistently and equitably according to their
contribution and competence
• helping to change culture where they need to become more performance and
results oriented or where the development of other key values such as quality
and customer service needs to be encouraged
• reinforcing existing cultures and values which foster high levels of
performance, innovation, quality and teamwork
• emphasising the importance of teamwork as well as individual contributions
• improving the recruitment and retention of high quality employees who will
expect PRP as part of a well-managed working environment
• flexing pay costs in line with organisational performance

Assumptions behind PRP

• Money is best, if not the only, motivator.

• Fair to pay people according to their contribution.

• A lever for cultural change in the direction of accountability for results and
orientation towards high performance.

Arguments for PRP

• It is right and equitable to reward people according to their contribution.

• Provides a tangible means of recognising achievement.

• Means of ensuring that everyone understands the performance imperatives of

the organisation.

• Works as an incentive because money is the best motivator.

4
Arguments against PRP

• Effectiveness as a motivator questionable.

• Financial incentives may work for some people as opposed to others in

relation to the expected and received reward.

• Measuring individual performance objectively can be very difficult.

• Encourage people to focus narrowly on quantifiable tasks to the expense of

those concerned with innovation, long-term and quality.

• Undue emphasis on individual performance, teamwork will suffer.

• Can lead to pay rising faster than performance if proper control not exercised.

Introducing PRP

The introduction of PRP in an organisation will depend on:

• its culture
• the extent to which it believes that a scheme can be developed and maintained
to meet the objectives set for PRP and overcome reservations about PRP.

Readiness for PRP

The degree to which the organisation is ready for PRP should be assessed initially
according to the following issues:

• Culture
• Process
• Attitudes
• Skills and resources
• Impact

Sequence of activities in a PRP development programme

• Assess reasons for PRP

• Assess readiness for PRP
• Decide whether or not to introduce PRP
• Brief, consult and involve employees
• Design scheme
• Brief and train
• Implement
• Evaluate

5
6
The constituent elements of Pay and Pay systems

Pay comprises different elements, ‘fixed’ and contractual and some ‘variable’ and at
management’s discretion (pay linked to individual performance).

Total pay = basic pay (wages, salaries), additional elements (such as performance pay)
and benefits (such as private health care).

New pay orthodoxy v/s traditional approaches

• Focus on individual rather than collective

Basic pay applied collectively is enhanced by those payment systems that seek to
differentiate between individuals in some way.

• Management keen to control costs and gain financial flexibility, strive for payment
systems that are discretionary and variable.

• Stakeholder philosophy argues for an approach to pay that recognises different

interest groups, preferably in a cooperative rather than conflictual way.

• In general composition of pay and payment systems is characterised by change and

diversity.

• Basic pay: wages, salaries and harmonised pay

Basic pay is time-based payment and is essentially a standardised rate for the job.

Wages, salaries and harmonised pay are the terms used to describe that part of pay which
the employer contractually agrees to give the employee at regular intervals in return for
the provision of a special number of hours of labour over a given period, i.e. ‘fixed’ and
contractual.

Wages = weekly pay, frequently in cash, to manual workers.

‘Salaried’ employees = degree of job security and access to other benefits, e.g pension.

Harmonised pay = harmonisation of pay between white- and blue-collar workers and
move towards single status, thus blurring traditional divide between wages and salaries.

• Additions to basic pay

Payments above basic pay, variable and discretionary or fixed and contractual, focusing
on the individual carrying out the job or the work group or the organisation as a whole.

7
New pay orthodoxy = growth in variable and discretionary elements linked especially to
performance (at individual, group or organisational level).

1. Allowances

Used by employer to acknowledge a variety of circumstances, e.g an allowance for the

inconvenience of shift working, or adding extra money for being based in a high cost
area.

Management may make these allowances contractual and fixed, or discretionary and
variable (payment for accepting one-off individual additional responsibilities).

Over time allowances can become cumbersome and rationalised in basic wage/salary via
a substantive issue in CB.

• Overtime

A time-based payment linked to basic pay and employment status.

Wage earners have traditionally been paid overtime at an enhanced basic rate.

Salaried employees, at least at managerial level, have been expected to undertake unpaid
overtime, reflecting the differences in psychological contract

Overtime = achieving flexibility in working hours but can result in rising costs and
inefficiency

• Bonuses, incentives and commission

Payments based on output rather than input (i.e hours worked)

• Variable payments seeking to increase output by offering financial incentives to

employees
♣ Bonus = lump sum payment at management’s discretion and will vary from year to
year
♣ Incentive payments = offered to employees in return for meeting specified and
quantified targets, contractual and fixed, targets and accompanying payments are
agreed in advance by management and employees or their representatives.
♣ Commission payments associated with sales staff and tied to sales turnover, more
commonly additions to basic pay and on average 1/3 of earnings. Commission can
lead to what is described as ‘churning’ where a salesperson will seek to gain financial
advantage by inducing the customer to buy unnecessarily or inappropriately.

8
• Profit sharing and share options
Additions to basic pay, linked to performance of the organisation as a whole.

• Seek commonality of interest between individual employees and the company as a

whole and provide an incentive for the employee to work harder and remain
committed to the company.
♣ Variable payments in line with annual profits and discretionary, typically based upon
a predetermined formula setting minimum levels.
♣ Use share options as a way of adding to basic pay and encouraging employee
commitment.
♣ Pay share option entitlement to a formula of performance criteria, making the link
between pay and performance transparent.

♣ Performance related pay

Reward employees for individual performance and recognise the individual contribution
to organisational success by linking pay increases and/or progression within pay scales to
meeting performance targets, both quantitative or qualitative.

• Payments discretionary and variable, affording management financial flexibility

♣ Union perspective PRP undermines collective intervention in that it focuses on the
individual aspects of the employment relationship.
♣ PRP seen by managers as a way to attract potential employees (i.e it had a market
value), contribute to retention by sending ‘messages’ about which employees were
valued and it motivated by direct reference to performance.
♣ Operational difficulties – selection and use of performance criteria, subjectivity of the
assessment, financial constraints under which managers operated

♣ Skills and competency-based pay

Skills based pay: explicit link between skill acquisition and additional payment

♣ Employers pay additional specified amounts for demonstrable skill acquisition and/or
may link that with pay progression.

♣ Initiatives management-led in response to competitive pressures and to demands for

quality and functional flexibility.

♣ Offer financial flexibility and encourage employees to increase depth and breadth of
their skills.

♣ Form part of collective agreements. It is a relatively cooperative approach to pay and

appears to recognise that skill acquisition is of mutual benefit to employer and
employee. Therefore fits within stakeholder framework.

9
Competency-based pay: differs crudely from skills based pay in that it seeks to link pay
not just to skills, which can be seen as an ‘input’ factor in performance, but more broadly
to job behaviours and their outcomes.

♣ Discretionary and variable pay systems, offering organisation financial flexibility

♣ New pay orthodoxy = emphasis on the individual, the strategic importance of such a
pay approach and the link between individual competencies and organisational
objectives.

♣ Competency based pay schemes are typically linked to a competency framework,

which may well have been introduced already within an organisation as a basis for
competencies.

Competency frameworks

♣ core competencies = those judged by management to be common and central to a

given cluster of job
♣ focus on a combination of skill areas and common behaviours
♣ include additionally specific objectives or targets.

Successful competency-based pay schemes need to meet demanding criteria, including

the requirement for ‘well researched and analysed competence frameworks’.

Four main reasons for concern:

• The performance criteria used to measure competency are often invalidated, based for
e.g on appraisal results of the subjective views of senior managers about what
constitutes effective performance.
♣ There is the question of whether all competencies should be equally rewarded under a
payment scheme regardless of variables such as the length of time required to develop
individual competencies or how important they are to the organisation or in labour
market terms.
♣ There is the problem of identifying relevant competencies during periods of
organisational change.
♣ Managers may be biased.

From a collectivist stance there is likely to be the same kind of unease about competence-
based pay as there has been about PRP.

10
♣ Team-based pay

Individual focus of PRP criticised for running counter to team spirit which is very
important in many work organisations and institutionalised in new labels attached to their
structures, e.g team leader.

♣ Links pay to team ethos.

♣ A discretionary and variable payment systems

New pay orthodoxy = though not focused on the individual, team-based pay is seen as an
initiative within this spirit rather than traditional approaches to pay.

Team based pay = a bonus pool is allocated to a working group as an incentive, and as a
reward in recognition of reaching performance or output targets, or making operational
savings; that bonus is then distributed to the group using an agreed formula.

Problems arising:

♣ Proving a direct link between pay and enhanced performance

♣ Tensions around individual and collective interests

Introduction of team-based pay is probably more linked with cultural and structural
issues, and symbolism within an HRM framework (i.e reinforcing unitarist perspectives,
marking out and strengthening work units, and sending messages about the importance of
contribution).

From collectivist stance the same concerns about performance-related pay are applicable
to team-based pay.

• Benefits

Describe part of the pay package which can be broadly categorised as either payments in
kind (e,g subsidised meals, social functions) whose ‘consumption’ is essentially optional,
or social welfare provision (e.g contribution to pension, sick pay above minimum state
entitlement, life insurance) which may be deferred until retirement, etc. or contingent
upon a particular set of circumstances (e.g ill health).

♣ Paid holidays = benefits package

2. Used to escape the tax net – ‘cat and mouse game’ between company’s tax advisers
and tax department.

♣ Employers may offer benefits generally in line with competitors to attract staff but
their motivational value in terms of encouraging particular behaviours receives hardly
enough consideration.

11
♣ Changing nature of the workplace and patterns of employment may have an impact
on benefits, e.g structural changes in workforce = more women, more part-timers =
less long term employment within the company, therefore less value placed on
‘deferred gratification’ of longer term benefits and limited take up of others, etc.
Therefore move towards flexible benefits (cafeteria benefits) in which employees
were allowed to choose from a menu to suit individual needs.

♣ For harmonisation purpose, benefits need to be reviewed to eliminate the

‘upstairs/downstairs’ culture, e.g company car = a sliding scale of makes and models
reflected employee’s position in the hierarchy = principle of status divide.

♣ Unions historically saw themselves as providers of benefits which may place

employee benefits higher on pay agenda for both employees and employers.

12