EMPLOYEE REWARD

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EMPLOYEE REWARD

• Norma Heaton
• School of Business Organisation and Management

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Employee reward

• Importance of reward
• Importance of pay in the context of performance
• How is pay determined?
• Traditional v new pay
• Evidence of pay practices

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Reward management defined

• Reward management is concerned with the
  formulation and implementation of strategies and
  policies the purposes of which are to reward
  people fairly, equitably and consistently in
  accordance with their value to the organisation
  and to help the organisation to achieve its
  strategic goals
• Armstrong and Stephens, 20053)

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The importance of reward management

• It constitutes an economic exchange
• Reward is important in forming an employees
  notion of fairness
• What employees believe is expected from them and
  what they expect in return
• Reward systems teach employees what is valued
• For example by incentivizing particular types of
  performance eg increased sales

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Importance of reward/remuneration management

• The satisfactory management of employment
  requires the satisfactory management of
  remuneration as a necessary, if not a sufficient,
  precondition
• Willy Brown, cited in Kessler (2003)

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The importance of pay

• Organisations can provide two types of reward
• Extrinsic (financial payments, working
  conditions)
• Associated with job context
• Intrinsic (enjoyment, challenge)
• Associated with job content
• Pay remains a central concern to most employees
• Alteration of the pay-performance relationship
  has a degree of risk

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Reward policy addressing the issues

• Level of reward which may depend on
• Levels of performance
• Competition
• Employee benefits
• External competition versus internal equity
• Job evaluation may be used to determine internal
  equity
• Will market supplements be paid in addition?
• Achieving equal pay
• Is it necessary to undertake an equal pay review?

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Reward policy addressing the issues (2)

• Approach to total reward
• Scope for contingent rewards related to
  performance, competence, contribution or skill
• Role of line managers
• To what extent is responsibility for reward
  devolved?
• Transparency
• To what extent is pay secret?
• Ref Armstrong and Stephens (2005)

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Person and performance

• Links
• Mechanistic for example based on commission,
  output
• Discretionary based on appraisal ratings
• Form of performance increase
• Consolidated which becomes part of future salary
• Non-consolidated bonuses

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The traditional approach?

• Repeated questions to managers and employees
  about why they pay and accept certain levels of
  remuneration usually result in replies which
  boil down to the same answer that is the pay
  level it has always beenor we dont really know.
  There are very few organisations where the answer
  is clear and positive
• Smith (1983) cited in Lewis, P. Reward
  management (2001)

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Traditional approaches to pay

• Recruit, retain and motivate
• Manual workers
• The going rate what do competitors pay?
• Payment by results
• White collar workers
• Job evaluation to establish job worth and a grade
  structure
• Annual increments to scale maximum
• Individual performance related pay (PRP)

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Pressures on the traditional approach

• Changes in organisation design
• Delayering impact on grading schemes
• Task flexibility
• Changes in industrial relations
• Pay systems vulnerable to unilateral change
• Changes in management motivation
• Use pay as a lever to improve skills

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New pay a strategic approach?

• The emerging paradigmpay as an integrating and
  signalling mechanism to achieve overarching
  business objectives
• Universal or High commitment approach?
• Fitapproach?

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The universal or high commitment approach

• Selective hiring and sophisticated selection
• Career ladders and progression
• High levels of functional flexibility
• Link pay to company performance through profit
  sharing and share ownership
• Link pay to individual and team performance
• Involve employees in management of quality

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Issues arising

• Are high-performing companies best able to
  introduce profit sharing or do these schemes help
  create high-performing companies?
• Operational difficulties with individual and team
  performance related pay
• How to set objective targets
• Avoiding subjectivity in appraisals
• Relating appraisal to meaningful pay increases
• Links between individual pay and organisational
  commitment

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The fit approach requires pay to fit in 3 ways

• Vertical fit
• Pay aligns with business objectives
• Horizontal fit
• Pay aligns with other HR practices
• Internal fit
• Pay aligns with other rewards

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Selection of pay system should be based on 3
questions below

• What are the organisations pay objectives?
• Organisational commitment through profit sharing?
• Team ethos through group bonuses?
• Individual performance through merit pay?
• What pay system furthers these objectives
• Is the payment system right for the
  organisation?
• Technology
• Nature of work
• Organisation culture

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Rewarding individual and team contributions

• Individual payment by results
• Collective payment by results
• Individual performance related pay
• Team-based performance related pay
• Profit sharing and share options
• Broad banding
• Employee benefits

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Individual performance related pay- reasons for
introducing PRP

• To increase the motivation of employees
• To encourage certain behaviours
• To help in recruitment and retention
• To facilitate change in organisational culture
• To encourage the internalisation of performance
  norms
• To weaken trade union power
• Increased control of line manager
• Moral justification

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Possible problems with PRP

• Motivation is influenced by factors other than
  pay
• Employees may focus only on certain objectives
• Cohesion of the work group may be undermined
• Financial constraints may limit PRP increases
• See article by Lewis (1998)on financial services
  and Marsden and Richardson (1994) on Inland
  Revenue

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Employee share schemes

• Share Incentive Plans (SIP) where companies can
  give shares to each employee
• Savings Related Share Option Schemes (SAYE) where
  participants can save on a monthly to acquire
  shares
• Motivation is involvement/giving a stake in the
  company
• See www.inlandrevenue.gov.uk/shareschemes

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Broadbanding

• Compression of a hierarchy of pay grades or
  salary ranges into a small number of wide bands
• Individuals allocated to bands on basis of
  generic job descriptions
• Higher pay ceiling provide opportunities for
  progression without promotion
• Progression tends to be based on
  skill/competencies rather than performance alone

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Broadbanding

• Advantages
• Speaks to personal growth
• Provides greater flexibility
• Offers pay increase opportunities

• Disadvantages
• Employees formerly in higher grades may feel
  devalued
• Requires commitment of training and
  communication resources
• May lead to escalating payroll costs

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Flexible benefits

• Offering benefits on a job for life assumption
  is unrealistic
• How do employees perceive benefits?
• Are benefits valued and appropriate to company
  and employee needs?
• Offer choice within and between benefits
• Options
• Increase some benefits and decrease others
• Use pay to buy new benefits
• Decrease benefits and take cash released

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Flexible benefits

• Advantages
• Addresses needs of different sections of the
  workforce
• Spend money on benefits perceived to be valuable
• Employees gain appreciation of the value of the
  benefit package

• Disadvantages
• Benefits must be accurately costed
• Administration problems
• Individuals may make wrong choices

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Evidence of take up of performance-related and
new practices (CIPD Reward Management Survey
2006)

• Team based bonuses
• Approx 25 usage
• Share ownership schemes
• Approx 39 usage (private sector)
• Broadbanding
• Approx 44 usage
• Flexible benefits
• 25 of respondents planning to introduce a
  voluntary or flexible scheme

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IPRP evidence from CIPD (2006) survey

• Pay progression wholly based on individual
  performance , used by
• 15 of respondents for senior managers
• 13 for middle/first line managers
• 13 for technical and professional employees
• Individual performance combined with other
  factors more common
• 58 used for senior managers, 53 for middle
  managers, 52 for technical and professional
  employees
• Factors include competency, market rates,
  organisational performance, length of service

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Conclusions from CIPD (2006) survey

• A minority of employers (35) have a reward
  strategy
• Relevance for public sector?
• Many employers do link pay progression, pay and
  bonuses to performance
• New benefits are being introduced by many
  employers to aid recruitment and retention

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References

• Armstrong, M.(2004) Reward Management, Kogan
  Page, London
• Armstrong,M. and Stephens,T. (2005) A handbook of
  reward management and practice, Kogan Page,
  London
• Bratton, J. and Gold, J. (2003) Human Resource
  Management, Palgrave, Hampshire
• CIPD (2006) Reward Management Survey, CIPD,
  London
• Holbeche,L. (2003) Aligning HR and Business
  Strategy, Butterworth-Heinemann, Oxford
• Kessler,I (2003) Pay and Performance in Towers,
  B. (ed) The Handbook of Employment Relations, Law
  and Practice. Kogan Page, London

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References ctd

• Lewis,P.(2006) Reward Management in Redman, T.
  and Wilkinson,A. Contemporary Human Resource
  Management, FT/Prentice Hall, London
• Lewis,P. (1998) Managing performance related pay
  based on evidence from the financial services
  sector, Human Resource Management Journal, Vol 8,
  No 2, pp66-77
• Marsden,D. and Richardson,R. (1994) Performing
  for pay? The effects of merit pay on motivation
  in a public service, British Journal of
  Industrial Relations, Vol 32, no 2, pp243-261
• Wood,S. (1996) High Commitment Management and
  Payment Systems, Journal of Management Studies,
  Vol 33, No 1, pp53-77