Reward management

Reward management is concerned with the formulation and implementation of strategies and
policies that aim to reward people fairly, equitably and consistently in accordance with their value to
the organization.[1]

Reward management consists of analysing and controlling employee remuneration, compensation

and all of the other benefits for the employees. Reward management aims to create and efficiently
operate a reward structure for an organisation. Reward structure usually consists of pay policy and
practices, salary and payroll administration, total reward, minimum wage, executive pay and team
reward.[1]

History

Reward management is a popular management topic. Reward management was developed on the
basis of psychologists' behavioral research. Psychologists started studying behavior in the early
1900s; one of the first psychologists to study behavior was Sigmund Freud and his work was called
the Psychoanalytic Theory. Many other behavioral psychologists improved and added onto his work.
With the improvements in the behavioral research and theories, psychologists started looking at
how people reacted to rewards and what motivated them to do what they were doing, and as a
result of this, psychologists started creating motivational theories, which is very closely affiliated
with reward management.[2]

Defining motivation as "the degree to which an individual wants and choose to engage in certain
specific behaviours", to which Vroom (quoted in Mitchell, 1982) adds that performance = ability x
motivation. To have an efficient Reward System then, is mandatory that employees know exactly
what their task is, have the skills to do it, have the necessary motivation and work in an environment
allowing the transformation of intended actions into an actual behaviour. From the company point
of view instead, an effective performance appraisal has to be present, in order to let motivation be a
major contributor to the rewarded performance.[3]

Objective

Reward management deals with processes, policies and strategies which are required to guarantee
that the contribution of employees to the business is recognized by all means. Objective of reward
management is to reward employees fairly, equitably and consistently in correlation to the value of
these individuals to the organization. Reward systems exist in order to motivate employees to work
towards achieving strategic goals which are set by entities as well as aligning the actions of
employees to reflect the culture, aims and beliefs a business or organisation wishes to uphold.[4]
Reward management is not only concerned with pay and employee benefits. It is equally concerned
with non-financial rewards such as recognition, training, development and increased job
responsibility.[5] Ultimately, Reward Management is a tool that uses various types of Employee
Motivation to align the strategic and cultural goals of an employee, or group of employees, with the
tactical targets set by a business or organisation.[4]

Kerr (1995) brings to attention how Reward Management is an easily understandable concept in
theory, but how its practical application results often differ. The author, in fact, points up how
frequently the company creates a Reward System hoping to reward a specific behaviour, but ending
up rewarding another one. The example made is the one of a company giving an annual merit
increase to all its employees, differentiating just between an "outstanding" (+5%), "above average"
(+4%) and "negligent" (+3%) workers. As the difference between the percentage increasing was so
slight, what the company obtained from the employees was indifference to the extra percentage
point for a superlative job or the loss of one point for an irresponsible behaviour. In the following
table other common management errors are summarised.[6]

Güngör (2011) discusses Reward Management Systems and its applications within organisations. A
firms Reward Management System may contain the organisation's processes, practices and policies
which correspond to the employees contributions or abilities. The application of these are the
relevant types of rewards which are given out to those who meet the criteria of the system. This
study in to employee performance found a significant and positive relationship between Reward
Management Systems and Employee performance [7]

Types of rewards

Rewards serve many purposes in organisations. They serve to build a better employment deal, hold
on to good employees and to reduce employee turnover.[8]

The principal goal is to increase people's willingness to work in one's company, to enhance their
productivity[9] and align their actions with the strategic goals and cultural beliefs of the Organisation
or Business.[4]

In its simplest form, reward is composed of three fundamental pillars. These being, Basic Pay,
Variable Pay and Benefits. The first fundamental of reward begins with basic pay or salary. This is
an agreed upon amount of money, awarded to an employee in exchange for an agreed upon service,
outlined within the relevant employment contract or Earnings Based Agreement (EBA). Basic pay is
fixed, consistent and guaranteed. Another form of reward is variable pay. Variable pay in a traditional
sense is a performance-based method of reward and can take many forms. Unlike basic pay,
variable pay may be inconsistent as suggested by its name. Variable pay may be linked to factors
such as output, attitude, or other Key Performance Indicators. Variable pay may come in the form of
commissions, bonus's, or profit-sharing plans. Benefits are also used as a reward. Benefits are
tangible items that may include company vehicles, shares in the company or holiday pay
entitlements to incentivise employees.[4] However, These three pillars of reward only apply to one
kind of reward, extrinsic reward.[10]

Extrinsic rewards: concrete rewards that employees receive.

Salary: A fixed payment amount, delivered on a consistent basis in exchange for the service
provided to a business or organisation.

Bonuses: Usually annually, Bonuses motivates the employee to put in all endeavours and
efforts during the year to achieve more than a satisfactory appraisal that increases the
chance of earning several salaries as lump sum. The scheme of bonuses varies within
organizations; some organizations ensure fixed bonuses which eliminate the element of
asymmetric information, conversely, other organizations deal with bonuses in terms of
performance which is subjective and may develop some sort of bias which may discourage
employees and create setback. Therefore, managers must be extra cautious and unbiased.

Salary raise: Is achieved after hard work and effort of employees, attaining and acquiring new
skills or academic certificates and as appreciation for employees duty (yearly increments) in
an organization. This type of reward is beneficial for the reason that it motivates employees
in developing their skills and competence which is also an investment for the organization
due to increased productivity and performance. This type of reward offers long-term
satisfaction to employees. Nevertheless, managers must also be fair and equal with
employees serving the organization and eliminate the possibility of adverse selection where
some employees can be treated superior or inferior to others.

Gifts: Are considered short-term. Mainly presented as a token of appreciation for an

achievement or obtaining an organizations desired goal. Any employee would appreciate a
tangible matter that boosts their self-esteem for the reason of recognition and appreciation
from the management. This type of reward basically provides a clear vision of the employee's
correct path and motivates employee into stabilising or increasing their efforts to achieve
higher returns and attainments. Monetary gifts, such as Gift cards are also more likely to be
used for luxury purchases and can build an emotional bond with the organisation.[11]

Promotion: Quite similar to the former type of reward. Promotions tend to effect the long-
term satisfaction of employees. This can be done by elevating the employee to a higher stage
 and offering a title with increased accountability and responsibility due to employee efforts,
behaviour and period serving a specific organization. This type of reward is vital for the main
reason of redundancy and routine. The employee is motivated in this type of reward to
contribute all his efforts in order to gain managements trust and acquire their delegation and
responsibility. The issue revolved around promotion is adverse selection and managers must
be fair and reasonable in promoting their employees.

Intrinsic reward: are satisfaction one gets from the job itself. these may include having pride
in one's work, having a feeling of accomplishment or being part of the team programmes like
job enrichment, shorter working weeks, flex time and job rotation that provide interesting and
challenging jobs can also offer intrinsic rewards.

Non financial reward: are desirable things that are at the disposal of the organisation for
employees. These rewards don't increase the employee's financial well-being but instead
make the employee's life on the job more attractive. Some of these rewards may include a
carpeted floor, a large walnut desk, a private bathroom, impressive job title and reserved
parking.

Other kinds of tangible rewards

Studies have proven that salespeople prefer pay raises because they feel frustrated by their inability
to obtain other rewards,[12] but this behaviour can be modified by applying a complete reward
strategy. A method of applying a complete reward strategy is by pairing the use of extrinsic rewards
with that of intrinsic rewards.

Intrinsic rewards: tend to give personal satisfaction to an individual.[13]

Information / feedback: Also a significant type of reward that successful and effective
managers never neglect. This type of rewards offers guidance to employees whether positive
(remain on track) or negative (guidance to the correct path). This also creates a bond and
adds value to the relationship of managers and employees.

Recognition: Is recognizing an employee's performance by verbal appreciation. This type of

reward may take the presence of being formal for example meeting or informal such as a
"pat on the back" to boost employees self-esteem and happiness which will result in
additional contributing efforts.

Trust/empowerment: in any society or organization, trust is a vital aspect between living

individuals in order to add value to any relationship. This form of reliance is essential in order
to complete tasks successfully. Also, takes place in empowerment when managers delegate
tasks to employees. This adds importance to an employee where his decisions and actions
 are reflected. Therefore, this reward may benefit organizations for the idea of two minds
better than one.

Intrinsic rewards makes the employee feel better in the organization, while Extrinsic rewards focus
on the performance and activities of the employee in order to attain a certain outcome. The
principal difficulty is to find a balance between employees' performance (extrinsic) and happiness
(intrinsic).[14]

Regardless of the form, the reward needs to be tailored according to the employee's personality. For
instance, a sports fan will be really happy to get some tickets for the next big match. However a
mother who passes all her time with her children, may not use them and therefore they will be
wasted.

When rewarding one, the manager needs to choose if he wants to rewards an individual, a team or a
whole organization. One will choose the reward scope in harmony with the work that has been
achieved.

Individual
Base pay, incentives, benefits

Rewards attendance, performance, competence

Team: team bonus, rewards group cooperation

Organization: profit-sharing, shares, gain-sharing

Motivation theories

An interpretation of Maslow's hierarchy of

needs, represented as a pyramid with the
more basic needs at the bottom[15]

Motivational theories are split into two groups as process and content theories. A basic definition of
motivation in employees is the capability to change behaviour and the drive that holds one to act
towards some goal.[16] Content theories endeavor to name and analyze the factors which motivate
people to perform better and more efficiently while process theories concentrate on how different
types of personal traits interfere and impact the human behavior.[17] Content theories are highly
related with extrinsic rewards, things that are concrete like bonuses and will help improve
employees' physiological circumstances whereas process theories are concerned with intrinsic
rewards, such as recognition and respect, which will help boost employees confidence in the work
place and improve job satisfaction.[18]

A famous content theory would be Maslow's Hierarchy of Needs,[19] and a famous process theory
would be the equity theory.[20]

Theories of motivation provide a theoretical basis for reward management though some of the best
known ones have emerged from the psychology discipline. Perhaps the first and best known of
these comes from the work of Abraham Maslow.[21] Maslow's Hierarchy of Needs describes a
pyramid comprising a series of layers from at the base the most fundamental physiological needs
such as food, water, shelter and sex, rising to the apex where self-actualisation needs included
morality and creativity. Maslow saw these levels of needs being fulfilled one at a time in sequence
from bottom to top. Employment and the resources it brings are classed under 'safety needs' (level
2) while the workplace may also contribute to a sense of 'belonging' (level 3) and recognition at
work can satisfy the need for 'self-esteem' (level 4).

Frederick Herzberg's motivator-hygiene theory, first published in 1959, argues that an employee's job
satisfaction or dissatisfaction is influenced by two distinct sets of factors and also that satisfaction
and dissatisfaction were not at opposite ends of the same continuum but instead needed to be
measured separately. The two sets of factors are motivator factors and hygiene factors. According
to Herzberg, real motivation comes from the work itself, from completing tasks, while the role of
reward is to prevent dissatisfaction arising.[22]

Expectancy theory is the theory which posits that we select our behaviour based on the desirability
of expected outcomes of the action. It was most prominently used in a work context by Victor
Vroom[23] who sought to establish the relationship between performance, motivation and ability and
expressed it as a multiplicative one – where performance equals motivation x ability. There are a lot
of attractions for this kind of approach, particularly for employers who can target their motivation
effort and anticipate a definable mathematical return for them. As this is a cognitive process theory
it relies on the way employees perceive rewards These three theories plus variants of them have
been used in countless research studies and continue to inform the practice of reward management
up to the present day.
Job evaluation

Job evaluation is closely related to reward management. It is important to understand and identify a
job's order of importance. Job evaluation is the process in which jobs are systematically assessed
to one another within an organization in order to define the worth and value of the job, to ensure the
principle of equal pay for equal work. In the United Kingdom, it is now illegal to discriminate workers'
pay levels and benefits, employment terms and conditions and promotion opportunities.[24] Job
evaluation is one method that can be adopted by companies in order to make sure that
discrimination is eliminated and that the work performed is rewarded with fair pay scales. This
system carries crucial importance for managers to decide which rewards should be handed out by
what amount and to whom. Job evaluation provides the basis for grading, pay structure, grading
jobs in the structure and managing job and pay relativities.[25]

It has been said that fairness and objectivity are the core principles using an assessment of the
nature and size of the job each is employed to carry out.[26]

There are many different methods of job evaluation which can be used, but the three simplest
methods are ranking, classification and factor comparison.[27] However, there are more complex
variations of methods such as the point method which uses scales to measure job factors. This
method does not rank employees against one another but looks at the job as a whole. A
disadvantage of these methods of job evaluation are that they are very static and it would be very
difficult to perform a job evaluation quickly if it was needed.

Acas has stated that there were five main reasons why employers look at performing a job
evaluation. These include: When deciding on a pay scale: Making sure that the current system is fair
and equal for employees, Deciding on benefits such as bonuses, Comparing pay against other
companies and reviewing all jobs after a major company pay change.[28] Employees need to feel
that they are being paid a fair wage compared to the same job with the competition. If this is true it
may help reduce staff turnover which is very beneficial for employers as it reduces the cost of hiring
new staff.

Research regarding job evaluation has mainly been conducted using qualitative data collection
methods such as interviews, large scale surveys and basic experimental methods. Therefore, there
is a large gap for research on job evaluation collecting quantitative data for a more statistical
analysis. A comparison between public and private sectors and the methods of job evaluation is
another area that should be considered for further research.
The effectiveness of an organization's performance and reward management system can have a
significant impact on employee motivation, morale, and ultimately, their productivity. According to a
2008 study, a poorly designed or implemented reward system can lead to counterproductive
behaviour and ultimately undermine the goals of the organisation. However, the "path-goal model"
highlights a positive relationship between a well-designed reward system and employee
performance. This model suggests that if employees perceive high productivity as a path to
achieving their personal goals, they are more likely to be more productive, whereas if they perceive
low productivity as a path to their goals, they are more likely to be less productive or even
counterproductive. In other words, a well-designed reward system can motivate employees to
increase their effort and productivity by rewarding their previous efforts.[29] Job evaluation should
take into account the design and implementation of performance and reward management systems
to ensure that they align with the organisations goals and contribute to a positive work environment

However, is job evaluation enough? Steinburg (1999)[30] stated that very few organisations take into
account that job evaluation should also look at emotional labour that may be used by employees.

Performance appraisal

Performance appraisal is the method in which an employee's job performance is evaluated and
reviewed.[31] This compares employee work behaviour with the organisations pre-set standards to
provide feedback on job performance. Performance appraisals are a form of motivation through
either positive or negative reinforcement, depending on outcome. Typically this information is
gained through interview and questionnaire functions annually, executed among management of
larger organisations primarily, as a method of motivation to gain full potential of staff.[32] The goal
of which is to align and manage all organisational resources "to achieve highest possible
performance" by improving your current staff through encouragement, setting targets and improving
on past mistakes.[33] Edward Lawler of the University of Southern California unveiled research
showing that 93% percent of companies use annual appraisal[34]

Performance appraisal was set up in the first place, as a justification for the pay of an employee. If
his performance was seen as insufficient, his pay would be cut down. However, if it was seen of a
higher quality, he could receive a pay rise. Performance appraisals have been described as a "flawed
system", One must ask, can an entire year's work be reviewed at one point in time? It has been
argued that the time, money and energy needed is not comparable to its effectiveness.[35] There are
various appraisal methods.

Some of these include « rank and yank » by which an organisation ranks its employees against each
other and terminates the employment of the employee who finishes at bottom place. That
corresponds to the yanking. Then there is the critical incident technique by which the organisation
collects information and observes human behaviour that have a strong impact either positive or
negative on an activity or procedure.

Each employee is different and can bring in something special to the organisation. Each employee
has a specific job to fulfil. Performance appraisals are needed in order to understand how every
employee can produce the best performance.

Improve performance: performance improvement is the notion of measuring the productivity of a

certain procedure, and then finding solutions in order for the productivity to rise, the capability of
the employees and their effectiveness.[36]

Increase motivation: Performance appraisal is used as a motivation tool. An employee's efficiency

can be proven if the targets he was set, have been achieved. The employee will be motivated to do
even better and his performance will rise in the near future.[37]

Identify training/development needs: The fundamental step of training and development is

establishing the organisational needs for the employees at this time and in the near future. A few
questions may be asked in the process: What can an employee learn in order to be more
productive? In which field is training most necessary? And finally who should benefit from the
training most?

The effectiveness of an employee is the key factor for the employer, because the profit the company
or organisation makes depends on the employees' productiveness.

The training and development needs should begin with an assessment of the company as it lies
currently, how it operates and what each employee is best at. This assessment will enable the
training to be based on certain factors which seem most important. Knowledge of the organisation's
strategic plan and its needs for the future must help the training to bring the company up a step on
the ladder.[38] In using a performance appraisal, an organisation can build an employee profile of
poor performances which allows a reduced risk of legal implications for redundancies. Seeing
additional benefit, as the company can decide who is worthy of promotion or bonus'.[35]

Manage careers: career management . Managing your career efficiently involves a list of various
factors which need to be referred to as often as possible: taking into account the goals you have
giving yourself all along your professional career, allowing yourself to have a comfortable lifestyle
and by feeling some level of personal accomplishment when you look back at what you have
done. These three factors are key to a productive career.

See also

Anger management
 Anger management
Employee recognition

Job evaluation

Justice

Management

Organizational behaviour

Organization development

Motivation

Psychology

Strategic management

Human relations movement

Reward system

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