INTRODUCTION TO REWARD

MANAGEMENT

Ian

Reward Management Defined

Could you add one more like this but with a woman rather than a man?
Thanks

Michael

Reward management deals with the

strategies, policies and processes
required to ensure that the contribution of
people to the organization is recognized
by both financial and non-financial means.

THE REWARD MANAGEMENT FRAMEWORK

Fundamental concepts:
Resource-based view
Human capital management
HR process advantage
Motivation theory
Principal agent theory
The psychological contract

Primary aims:
Support achievement of
business goals
Develop performance culture
Reward people fairly

Engage people:
job design
work system
leadership
reward

Value jobs:
internally
equitable
externally
competitive

Pay level concepts:

Economic theories of
pay
Principal agent theory
Human capital theory
The effort bargain
Tournament theory
Equitable pay

Total reward

Financial rewards:
Contingent pay
Benefits

Non-financial rewards:
Recognition
Learning and
development
Work environment

High performance
work system

Job evaluation
Market rate analysis
Grade and pay structure

Performance management

Manage rewards:
Plan
Evaluate
Control

Strategic integrated reward:

vertical integration
with business strategy
horizontal integration
with other HR strategies
internal integration
of reward practices

Contextual factors:
Internal: culture, sector,
technology, people, social
and political pressures
External: globalization,
market pay, unions,
legislation

THE REWARD SYSTEM

Non-financial rewards

Recognition, responsibility,
achievement, growth

Market rate analysis

Grade and pay
structure
Job evaluation
Business
strategy

Reward
strategy

Base pay

Contingent pay
Employee benefits

Allowances
Performance
management

Total
remuneration

Total reward

Aims of Reward Management

The aims of reward management are to:

support the achievement of business goals;

reward people according to the value they create;
align reward practices with employee needs;
define what is important in terms of behaviours and
outcomes;
reward people according to what the organization values
and wants to pay for;
help to attract and retain the high-quality people the
organization needs;
increase motivation, engagement and commitment;
develop and support a high performance culture.

Equity & Fairness

A fair reward system is one which operates according to
distributive & procedural justice.
Distributive justice Refers to how rewards are
distributed. People will feel that they have been treated
fairly if they believe that their rewards are appropriate in
relation to their contribution, if they receive what was
promised to them and if they get what they need.
Procedural justice People will feel that they have
been treated justly if managements reward decisions
are fair, consistent, transparent and non-discriminatory
and properly consider the views and needs of
employees.

Fundamental Concepts
Resource-based view
The view that it is the range of resources in an
organization, including its human resources, that produces
its unique character and creates competitive advantage.
HRM delivers added value and helps to achieve
sustainable competitive advantage through the strategic
development of the organizations rare, hard-to-imitate and
hard-to-substitute human resources.
Human Capital Management
The process of obtaining, analysing and reporting on data
relating to employees that inform HRM decisions.

Fundamental Concepts (contd)

Human Capital Advantage
The achievement of competitive advantage by employing
people with valuable knowledge and skills that cannot be
imitated or substituted by business rivals.

Human Process Advantage

The achievement of competitive advantage by establishing
difficult-to-imitate, highly evolved HR processes within the
firm.

Effective Reward Management

An effective reward management system;
Contributes to achieving organisational goals

Is appropriate to the culture of the organisation

Is fair, equitable, consistent and transparent
Includes a process for valuing jobs and rewarding
effort
Influences performance

Effective Reward Management Contd

Builds the employee value proposition
Assists recruitment & retention
Is competitive
Comprises a total rewards approach
Communicates to all how system works
Includes a review mechanism
Allows some discretion to line managers

TOTAL REWARD

Total Reward Defined

Total reward includes all types of reward

non-financial as well as financial, indirect as
well as direct, intrinsic as well as extrinsic.

These embrace everything that people value

in the employment relationship and are
developed and implemented as an integrated
and coherent whole.

EXAMPLES OF TOTAL REWARD DEFINITIONS

Centrica
Mix extrinsic and intrinsic rewards to encourage
employees discretionary effort.
Nationwide
A mixture of pay elements, with a defined cash value,
benefits that have an intrinsic value, a positive and
enjoyable work environment, and opportunities for
learning and development; all designed to make
Nationwide an employer of choice.

Unilever
Total reward encompasses all the elements of what
it means to come to work.

RATIONALE

Why A Total
Approach?
FOR Rewards
TOTAL REWARD
Creating a fun, challenging, and empowered
work environment in which individuals are able
to use their abilities to do meaningful jobs for
which they are shown appreciation is likely to
be a more certain way to enhance motivation
and performance even though creating such
an environment may be more difficult and take
more time than simply turning the reward lever.
Jeffrey Pfeiffer

The Rationale For Total rewards

The concept of total rewards combines the impact of the
two major categories of reward:
Transactional rewards
Tangible (financial) rewards arising from transactions
between the employer and employees concerning pay and
benefits. These are all extrinsic.

Relational rewards
Intangible (non-financial) rewards concerned with the work
environment (quality of working life, the work itself, work
life balance), recognition, performance management and
learning and development.

Total Reward Model Armstrong

Base pay
Transactional
rewards

Contingent pay

Total
remuneration

Employee benefits

Total reward
Learning and development
Relational
rewards

The work experience

Recognition, achievement, growth

Non-financial
rewards

Benefits of Total Rewards

Greater Impact on motivation & engagement
Improved employer/employee relationship
Flexible application allows individual tailoring

Improves psychological contract and so assists in

attraction & retention

Total Rewards Model Towers Perrin

TRANSACTIONAL
(TANGIBLE)

PAY AND REWARD

BENEFITS

base pay

pensions

contribution pay

health care

shares/profit sharing

perks

recognition

flexible benefits

LEARNING AND DEVELOPMENT

WORK ENVIRONMENT

workplace learning

core values

training

leadership

performance management

employee voice

career development

job/work design

RELATIONAL (INTANGIBLE)

Total Rewards Model World at Work

Total rewards are all the tools available to the employer that may be used to
attract, motivate and retain employees. Total rewards include everything the
employee perceives to be of value resulting from the employment relationship.

Hay Group Engaged Performance Model

Total Reward Model Watson Wyatt

Business Strategy

Human Capital Strategy

total reward strategy

fixed reward costs

performance-based rewards

environment-based rewards

fixed costs of employment

variable costs of employment

intrinsic rewards

value of role to organization

contribution made by individual

employment deal

effective delivery through focused communication, greater flexibility and use of technology

Total Reward Framework

Norwich Union Insurance
reward

performance
recognition

pay

progression,
performance
and pay

benefits

development

brand-supporting
behaviour
challenging work

career framework

learning opportunities

career opportunities

personal development

meaningful job content

STRATEGIC REWARD

Strategic Reward Defined

An approach to the
development and
implementation over the
longer term of reward
strategies and the guiding
principles that underpin
them.

Reward - The New Realism (1)

a good strategy
is one
that works

plan with
implementation in
mind

align reward
strategies

ensure best fit

Reward - The New Realism (2)

meet individual as
well as business
needs

flexibility within
a framework

focus on
engagement
not fads

evolutionary process

Reward Management 3 Questions

Where do we
Want to be?
Where
are we
Where are
now?
we
now?

This resource is part of a range offered free to academics and/or students using Armstrongs Handbook of Reward Management Practice, 3rd edition, as part of their course. For more academic resources and
other FREE material, please visit www.koganpage.com/resources and then click on Academic Resources.

Aims of Strategic Reward

To support the achievement of the organizations
business objectives.
To provide a sense of purpose and direction.
To develop a way of thinking that can be applied to
any reward issue arising in the organization, to see
how value can be created from it.
To reward people according to what the organization
values in terms of behaviours and outcomes.
To ensure that reward and HR practices are
integrated and mutually supportive.

Criteria For Reward Strategy

Supports the achievement of business goals.

Takes account of stakeholder needs.
Based on detailed analysis
Has clearly defined and achievable objectives
Sets out reward goals to provide direction over the
longer-term.
It is coherent and integrated including components
that fit with and support each other
Provides a framework within which reward systems
can be planned and implemented.
Operates flexibly in response to changed
circumstances.

Developments In Reward Management

Business-driven focus

Aligning rewards with

business strategy AND
employee needs

Isolated initiatives

Integrated reward management

Focus on financial rewards

and incentives

Focus on total rewards,

engagement and commitment

Reward system: mechanistic,

inflexible, over-complex

Reward process: organic,

variable, relatively simple

Best practice

Best fit

Inform (perhaps),
management decides

Communicate and involve

Developing A Reward Strategy

Analyse business/HR strategy

Analyse present
arrangements

Identify future
reward needs

Assess needs of
stakeholders

Develop integrated total reward strategy

Consult and
involve senior
management and
line managers

Guiding principles
Define, justify and
agree intentions:
job evaluation
market position

grade/pay structure
contribution pay
pensions and benefits

Consult, involve
and
communicate
with employees

The Structure of Reward Strategy

Rewards structures may vary but all contain;
A declaration of intent
A defined rationale

Well defined guiding principles

An operational plan including how, when, who etc

Developing An Integrated Reward System

BUSINESS STRATEGY
Innovation

Continuous
improvement

Operational
effectiveness

Market
development

Cost
control

HR STRATEGY
Resourcing/talent management
Total reward

Learning and development

Employee relations

Performance
management
Work
environment

INTEGRATED STRATEGIC REWARD AT GLAXOSMITHKLINE

Business strategy
To be the indisputable leader in the pharmaceutical industry
Portfolio build the best pipeline (the time it takes to bring a
drug to market).
Product commercialization developing products from a
molecule into a blockbuster drug.
Global competitor having a global mindset where
appropriate.
Operational excellence to be the best-managed
organization. Processes should be slick, smooth and efficient.

HR strategy

We want GSK to be a place where

the best people do their best work.

Reward strategy
Stress pay for performance.
Increase the proportion of pay
at risk.
Emphasize total reward
total cash, life style benefits, and
savings choices.

INTEGRATED STRATEGIC REWARD AT LANDS END

Business strategy
Enhance the brand drive sales through stronger
alignment of merchandizing, creative and marketing.
Put the customer first.
Execute focused strategies source better quality products
for the best value.
Be a great place to work.
Entrepreneurial growth through new business development.

HR strategy

Based on the principle that staff who are

enjoying themselves, are being supported
and developed, and who feel fulfilled and
respected at work, will provide the best
service to customers.

Reward strategy
Based on total rewards rather than just pay.
Focus on physical, emotional, intellectual,
social, spiritual and occupational rewards that
represent different aspects of the whole person.
Seven key strands: financial rewards, career
development, pride, appreciation, make work
challenging and fun, good leader relations,
involvement.

INTEGRATED STRATEGIC REWARD AT B&Q

Business strategy
To improve productivity and profitability and maintain B&Q as the
number one home improvement retailer in the UK.

HR strategy

Enhance employee commitment and

minimize the loss of B&Qs best
people.
Position B&Q as one of the best
employers in the UK.

Reward strategy
Develop new reward philosophy
which sends the right signals on
corporate values and beliefs.
Create a new employment value
proposition which makes B&Q an
employer of choice.
Introduce new store team bonus.
Develop family-friendly benefits.
Introduce recognition programmes.
Introduce new pay and progression
arrangements.
Provide total reward statements.

Guiding Principles
Guiding principles define the approach
organization takes to dealing with reward.

an

They express the reward philosophy of the

organization its values and beliefs about how
people should be rewarded.

REWARD GUIDING PRINCIPLES: TESCO

We will provide an innovative reward package that is valued by

our staff and communicated brilliantly to reinforce the benefits of
working for Tesco.
Reward investment will be linked to company performance so
that staff share in the success they create and, by going the
extra mile, receive above average reward compared to local
competitors.
All parts of the total reward investment will add value to the
business and reinforce our core purpose, goals and values.

DECIDING ON THE APPROACH:

STRATEGIC REWARD AT DIAGEO

1.

Fit what is done to the firm's unique characteristics.

2. Keep it simple, but simple isn't easy!

3. Ensure that the human resource department is not developing
policies and practices on its own, which are then tagged as just
another HR initiative rather than as something which is owned
by the organization as a whole.
4. Explain the planned changes, the rationale behind them, and
how they affect people.
Nicki Demby, Performance and Reward Director, Diageo

DEVELOPING REWARD STRATEGY:

SEVEN KEY LEARNING POINTS AT BT

1.
2.
3.
4.
5.
6.
7.

Business sponsorship and ownership is essential.

Dont underestimate resistance.
Understand implications of present arrangements.
Project management skills are critical.
Cost can restrict speed of change.
Engage, engage, engage!
Clear and consistent communication.

DEVELOPING REWARD STRATEGY:

NINE SUCCESS CRITERIA AT CENTRICA

1.
2.
3.
4.
5.
6.
7.
8.
9.

Partnership.
Preparation.
Business engagement.
Employee engagement.
Union engagement.
Financial modelling.
Communications.
Project administration.
Business-as-usual administration.

SETTING THE DIRECTION:

REWARD STRATEGY DEVELOPMENT AT LLOYDS TSB
Developing reward strategy
Ongoing five-year reward vision expressing what the company thinks the
reward goals should be and why.

Developed reward strategy clarifying what vision means for reward.

Redesigned reward programmes

Fundamental overhaul of total approach to reward.
Replace multi-grade structure with eight broader bands where each job is
linked to a wide salary range.
Market-based approach to pay.
National pay scales replaced with local market-driven pay system.
Switch from central to local administration.
Entitlement mentality challenged pay increases tied to knowledge,
experience, competencies, overall performance and movements in market
rates.

A Final Word
You cannot succeed without focusing on business goals and
understanding what these mean for your core people goals.
Shareholder value was our ultimate objective. But we unbundled this
objective and examined how we would generate shareholder value
through our reward strategy.

We wanted to recruit, retain and engage good people. You might do

that in the short term by throwing more money at them but we wanted
a long-term solution that really focused on individuals and their
contribution within the business.
Meeting individual needs by providing flexibility within a framework
has enabled us to generate significant value for both employees and
the company alike.

Tim Fevyer, Senior Manager, Compensation and Benefits, Lloyds TSB