Impact of Reward Systems on Employee Performance

HR Project Report
3/6/2011

Submitted by RahulDalal DhawalSah Jayapriya R MS-12 MS-15 MS-19

Abstract: This report gives an overview of the impact of rewards systems on the performance of employees. A primary research has been taken which also emphasizes the same.

Contents
Impact of Reward Systems on Performance ................................................................................ 3 Rewarding Performance ...................................................................................................................... 3 Reward ................................................................................................................................................... 3 Types of Rewards ............................................................................................................................... 4 Case Study .................................................................................................................................................. 5 Primary Research ................................................................................................................................... 7 Methodology: ....................................................................................................................................... 9 Conclusion .............................................................................................................................................. 11 References .............................................................................................................................................. 12

Impact of Reward Systems on Performance

Rewarding Performance
A system of performance management designed to improve and sustain high performance is inevitably linked to rewards. Expectancy theory suggests these rewards must be extrinsic and valued by the employee. On the other hand goalsetting theory places more stress on the need for acceptance of the organizational goals per se so that rewards are more intrinsic. In many organizations the formal appraisal process is kept separate from the rewards process. The arguments for this are that linkage with pay inhibits employees from being self-reflective and open about training needs or problems they are experiencing with their work. It also interferes with the development objectives of the appraisal process. In practice, however, it is difficult to divorce the formal appraisal process from pay and reward decisions and in the civil service and many other parts of the public sector in the UK they are inextricably linked where performance related pay is used.

Reward
Employee reward systems refer to programs set up by a company to reward performance and motivate employees on individual and/or group levels. They are normally considered separate from salary but may be monetary in nature or otherwise have a cost to the company. Central to HRM philosophy is that rewards are an integral part of HR Strategy to obtain commitment, quality, performance and achievement of organizational goals and objectives. Rewards are seen as a means of changing or reinforcing the organizational culture. Reward systems can embody the core principles of pay for performance, market comparisons, sharing the success of the organization, rewards linked to skills attainment and harmonization to minimize status differentials. Basically the aims of reward systems are: To attract and retain staff. Reward performance. Motivate people. Reinforce the organizational culture.

Reward is a complex concept that encompasses pay, remuneration and compensation. It represents a portfolio of managerial practices where financial and non-financial elements are flexibly directed at enabling and rewarding employees who add value. When an employee joins an organization she/he enters into a contract which is partly legal and definite and partlypsychological. Employees have expectations about the rewards they will receive, which will include economic, status; social as well as psychological ones and the employer will also have expectations about effort/performance, attitudes, commitment, remuneration and 3

compensation. It is important that expectations are met on both sides or people will leave, be de-motivated, and productivity will be low.

Types of Rewards
Rewards can be intrinsic or extrinsic. Intrinsic rewards such as feelings of accomplishment and sense of achievement. These are internally mediated rewards, which one gives oneself and are therefore psychic rewards. In contrast extrinsic rewards are controlled by outside factors and externally mediated by the organization. These are less predictable although some such as incentive payments are predictable e.g. piece rates.

Rewards can also be unconditional or conditional. Unconditional rewards are not dependent on individual behavior but received because you are employed by the organization e.g. a member of the Civil Service. Conditional rewards are dependent upon individual behavior e.g. promotion or performance- related pay.

Finally there are instrumental system rewards and instrumental individual rewards. Instrumental system rewards are the benefits, which accrue to members of an organization. These are universal rewards to allemployees in a given classification which provide incentives to join or remain in a particular system e.g. good working conditions, pension etc. Instrumental individual rewards depend upon individual performance and are available if you reach the performance targets set i.e. differential performance achieves differential rewards.

Case Study
A case study on the relationship between the rewards and employee motivation on commercial banks of Pakistan gives the following abstract. Organizations have a greater challenge of retaining the workforce by satisfying them either through monetary rewards or other methods. There are different levels of motivation as follows: 1. The direction of an employees behavior. It relates to those behaviors which the Individualschoose to perform. 2. The level of effort. It refers to how hard the individual is willing to work on the behavior. 3. The level of persistence. It refers to the individuals willingness to behave despite obstacles. Human beings are motivated by requirements that fulfill their needs. These depend on manyfactors and vary by the individual requirements and necessary situation. Besides basic needs that rangefrom food, clothing, medicine and shelters, there is workplace that needs to be extended for acceptanceand self-esteem. The researcher has indicated that each individual experience these factors in differentlevel.

Correlation of Payment, promotion, recognition and benefits with work motivation.

The results reported in the above table show that payment (r = 0.78, p < 0.01) is significantly related with employee work motivation. Promotion variable of reward is also significantly related with employee motivation and play very important role in employee work motivation. As can be seen in above table (r =.86, p< 0.01). A statistically significant relationship was also observed between recognition and work motivation (r =0.65, p <0.01).

The results reported in Table show that all different variables of rewards namely payment, promotion, recognition and benefits are significantly related with employee work motivation in commercial banks of Pakistan which means that if the reward offered to employees were to change, there would be a resultant change in work motivation. Better the rewards, the higher the levels of motivation and greater levels of employee performance. To specify the nature of reward, it is recommended for human resource managers (HRM) to highlight the suggestions received from the employees of commercial banks of Pakistan.

Primary Research
We have also undertaken a primary research to confirm this factor regarding the rewards and its effect on the employees performance. Following are some of the important findings of the survey:

Importance of Reward Systems in Motivation

Series1, Disagree, 14%, 14%

Agree Series1, Agree, 86%, 86% Disagree

1. As shown above 86% of the correspondents felt reward systems motivated them to perform better at work. Ranking of Various Reward Measures in Enhancing Performance
Series1, Felicitations in Awards' Ceremony, 9%, 9% Series1, Time Off, 5%, 5% Series1, Praise .Recognition, 38%, 38%

Pay incentives Employee Benefits Series1, PayPraise .Recognition incentives, 43%, 43% Time Off Felicitations in Awards' Series1, Ceremony Employee Benefits, 5%, 5%

2. 43% of the correspondents said pay incentives encourage most to perform better. 3. A significant observation is that a vast majority of the correspondents (38%) felt that praise and recognition for a well-done job motivate them to perform better. Simplicity of Reward Systems
Series1, Disagree, 5%, 5%

Agree Series1, Agree, 95%, 95% Disagree

4. As shown above 95% of the candidates surveyed felt that simplicity in understanding the reward system in an organization is of paramount importance for its success. Complex reward systems tend to confuse people and fail to motivate them. Reward Systems Part of Compensation

Series1, Disagree, 16%, 16%

Agree Series1, Agree, 84%, 84% Disagree

5. 84% of the correspondents felt that reward systems have become an intrinsic part of todays corporate life.

Methodology:
A sample survey was conducted online amongst the people with work experience. The sample size was 37 correspondents. The respondents have given their choices for various factors related to performance motivation. The following questionnaire was floated to the respondents. ------------------------------------------------------------------------------------------------------------Age Group: (21-25, 25-30, etc.)? -Work Experience (in months)? -Company / Industry Currently Employed in: (Optional) ? Q.1. Are reward systems in your company effective in motivating employees? 1=strongly disagree, 2= disagree... 5= strongly agree Q.2. Are you satisfied with the design of your reward systems?? (Pay incentives, Bonus, Employee Benefits, Praise, Recognition, Time Off, Felicitations in Awards' Ceremony) 1=strongly disagree 2= disagree... 5= strongly agree Q.3. Do extra-pay and other reward systems actually motivate employees for BETTER work? (i.e., does it actually bring about a change in attitude towards work?) Yes/No? Q.4. Rank the reward systems according to their degree of motivation and effectiveness in building a positive attitude towards work (1=lowest to 5=highest). Pay incentives Employee Benefits Praise / Recognition Time Off Felicitations in Awards' Ceremony Q.5. Do you think other techniques (Pressure by Boss, Challenges set by Peers/Boss, Competitions across departments/groups) are more effective than reward systems?

Y/N/May Be Q.6.Which one will you prefer as a motivational tool? Pay incentives Employee Benefits Praise Recognition Time Off Felicitations in Awards' Ceremony Pressure by Boss Challenges set by Peers/Boss Competitions across departments/groups Q.7. Rewards reach the deserving employees? 1=strongly disagree 2= disagree... 5= strongly agree Q.8.What other better reward systems do you have for motivation in your company? Q.9. Simplicity in understanding a reward system is essential? Agree/Disagree? Q.10. Are reward systems becoming a necessary and compulsory part of compensation? Yes / No?

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Conclusion
The primary research clearly suggests that many employees, across different companies and industries, firmly believe that reward systems do achieve their purpose, and that they have become a necessary part of the compensation package of any company.

While a simple and easy to understand reward system is always a requisite, employees are rather specific in preference of the kind of reward offered. Monetary benefits and Praise & Recognition are the most preferred form of motivational tools by employees for aiding in superior performance.

Hence, after studying the case study and undertaking primary research, we can take a firm stance on the observation that all different variables of rewards namely payment, promotion, recognition and benefits are significantly related with employee work motivation. It means that if the reward offered to employees were to change, there would be a resultant change in work motivation, and hence employee performance.

Better the rewards, the higher the levels of motivation and greater levels of employee performance. To specify the nature of reward, it is recommended for human resource managers (HRM) to highlight the suggestions received from the employees of a particular company, since every company will have a specific reward system having a fit with the functioning of the company.

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References
Kalim Ullah Khan, Kalim Ullah Khan and Muahmmad Imran Ullah, The Relationship between Rewards and Employee Motivation in Commercial Banks of Pakistan Research Journal of Internatonal Studes - Issue 14 (May,2010):Retrieved from http://www.bizresearchpapers.com/22.Reena.pdf http://www.iqraisb.edu.pk/icbte/Proceeding_ICBTE_2010/Proceeding%20 Papers/109.pdf http://www.motivoperformance.com/pdf/Effects%20of%20Total%20Rewa rds%20on%20Engagement.pdf General trends and challenges regardingperformance evaluation of staff: The UK experience Ms. Sylvia Horton Portsmouth University United Kingdom (May 2006) : Retrieved from http://www.oecd.org/dataoecd/56/36/38665092.pdf The Impact of Performance-Contingent Rewards on Perceived Autonomy and Competence Nathalie Houlfort, Richard Koestner, Mireille Joussemet, Amelie Nantel-Vivier and Natasha Lekes(December 2002) The Impact of Rewards Programs on Employee Engagement Dow Scott, Ph.D., Loyola University and Tom McMullen, Hay Group (June 2010): Retrieved from http://www.worldatwork.org/waw/adimLink?id=39032

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