Chapter Two

THE REWARD SYSTEM:

COMPENSATION AND NON-
COMPENSATION DIMENSIONS
Learning Outcome
 Dimensions of compensation system
 Dimensions of non-compensation system
 Need to combine skillfully the compensation
and non-compensation dimensions into an
effective reward system
 Reward System
 Different people have different sets of satisfaction that
they obtain from work. Receiving some form of reward
for services provided is one set of satisfaction.
 Employers use rewards to attract and retain those with
the required knowledge, skills aptitudes and attitudes.
 Reward systems are implemented to focus worker
attention on desirable behaviors considered necessary
to accomplish organizational goals.
 If rewards are to be stimulating, they must meet the
demands of the employees whose behaviors they are
intended to influence.
 Reward System
 How does reward affect motivation or modify behavior?
 Although theorists can explain behaviors, prediction has
been difficult as the value that individuals attach to a
specific reward may vary with time.
 Because of the variety of demands the task of designing
and managing a reward system is difficult and complex.
 The ideal reward system is one that an employee may
desire & value and that which the employer is willing to
offer in exchange for contribution.
 This is usually done by separating the compensation and
the non-compensation components of the reward
Reward System
 Rewards system includes anything that
an employee may value and desire and
that the employer is able or willing to
offer in exchange for employee
contributions.
 Rewards may be classified into
Compensation system
○ Monetary payments
○ In-kind payments
Noncompensation system
 Compensation System
 Compensation system results from the allocation, conversion
and transfer of a portion of and in-kind claims on goods and
services.
 Monetary claims are wages and salaries paid in the form of
money or a form that is easily transferrable to money.
 Wages and salaries are either earned and acquired at the
present time or not acquired till some future date – deferred
payment.
 In-kind claims are claims on goods and services made
available and paid either totally or in some percentage by the
employer – without immediate monetary gain.
 1. Pay for work and performance
 Payment for work and performance includes the disbursement
of money within a short-term period (weekly, monthly and
bonus/annual awards)
 The total amount of payment given to the employee will depend
on the following: -
Needs for the specified job. –
Results that meet or exceed the standards of quantity, quality or time. –
Innovations that lead to the increase in productivity, loyalty,
trustworthiness and a combination of some or all of these features.
 The components that are usually included in the payment for
work and performance are
basic pay,
premium and differences,
short-term bonus,
merit payment and certain allowances.
 2. Pay for time not worked
 The past few years have seen a
reduction in working hours.
 In addition, employees today enjoy more
official non- working days and longer
paid leave.
 Components of payment for non-
working days raise labor costs.
 On the other hand, such payment allows
for lifestyle change and enhancement of
the quality of life.
 3. Loss-of-job income

continuation
Job security has always been an important aspect of
employment.
 Employees need to be assured of their job and economic
security.
 Accidents, personal problems, work performances are some of
the reasons that will cause a temporary cessation of employment
or a permanent termination.
 The change in the current technological and economic climate
will limit, and at times eliminate, the need and demand for certain
products and services.
 This will lead to the reduction or disintegration of an organisation.
 Various components, like
unemployment insurance,
unemployment added-benefits and
Severance pay (salary during the severance period), have been
generated to assist affected employees who have neither been offered
any alternative position by the organisation, nor found other work.
4. Disability income continuation
 When an employee suffers from a disability due to
an illness or accident, he is unable to execute his
tasks effectively.
 In addition to paying for daily living expenses, the
employee also has to pay for the hospital bills.
 Employee compensation, in the form of medical
leave and short-term and long-term disability
plans, exists to assist an employee who is
incapable of working due to poor health.
 5. Deferred income
 Most employees depend on programs provided by their
employers to ensure a continuous income after retirement.
For example, Pension plans, Profit Sharing (long term),
Stock option plan.
There are two main reasons why such programs exist.
 First, most people do not have enough savings upon
retirement to enable them to continue enjoying the
comfortable lifestyle they were accustomed to when they
were working.
 Therefore, programs like the retirement allocation planning
program, savings and thrifty plans, annuities and additional
income plans are drawn up by organisations to provide
employees an ongoing income after their retirement.
 Secondly, the laws and tax regulations make the deferred
income plans more attractive to the employees.
6. Spouse (family) income
continuation
 Employees with families worry that they will
not be able to provide and care for and
support their dependents in the event of their
death or disability.
 To this end, certain plans have been created
to provide the dependents with the financial
means to go on if an employee dies or is
incapacitated due to temporary or permanent
disability.
 Pension plan, Social Security, Life insurance,
Group life insurance, Travel-accident
insurance, etc.
7. Health, accident and liability
protection
 Apart from income to sustain a comfortable
lifestyle, income for products and services
to heal an illness or disability is also of great
concern to employees.
 Therefore, organization offers various
insurance plans to assist employees in
paying for their medical care and treatment.
 Medical, hospital & surgical insurance,
Hospital services, workers compensation,
In-house medical service, Dental & Vision
care, etc.
8. Income Equivalent Payments
 Income equivalent payments are also known
as perquisites or perks.
 Some of these special benefits are exempted
from tax, and this is advantageous for
employers and employees.
 Examples of special benefits are provision of
credit cards, use of company car, allowance
to attend official meetings, subsidized food
and child care services.
 Non - Compensation systems
 More difficult to classify and are more complex.
 These are all the situation-related rewards not
included in the compensation packages.
 Any activity that has an impact on the intellectual,
emotional and physical well-being of the employee
and not specifically covered by the compensation
system is part of the non-compensation reward
system.
 But there is a close inter-relationship between
compensation and non-compensation rewards.
Non-compensation Dimensions
1. Enhance dignity and satisfaction from
work performed
 Least costly and one of the powerful
rewards is to recognize the person as a
useful and valuable contributor.
 Employee feels self-worth and pride in
making contribution.
2. Enhance physiological health,
intellectual growth and emotional
maturity
 Safe working environment may include
the provision of safe equipment, risk free
environment, minimum of noxious
fumes, avoidance of extreme heat, cold,
humidity.
 Ergonomic problems have become a
major health-related issue.
 Clean, decorated walls & floors and
reduction of noises provide a enjoyable
working environment.
3. Promote constructive social
relationships with co-worker
 The chance to communicate and
interact with others is an inexpensive but
valuable reward.
 Environment with trust, fellowship,
loyalty and love from top level to lower
level promote social interaction.
 Team-based operations is an example of
social interactions among employees.
4. Design jobs that require
adequate attention and effort
 Employee turnover, absenteeism, tardiness, minimal
concern for quality or productivity, waste of physical
resources, and even theft and malicious damage are
caused for unacceptable workplace and job design.
 Employee voice should be heard.
 Restructuring of job tasks and job responsibilities are
required.
 Flexibility in job requirements
 Freedom is given to employees to schedule the
workdays and workweeks
 Autonomy and empowerment may be given to
employees.
5. Allocate sufficient resources to perform work assignments

 Sufficient time will be given to accomplish the

task.
 Assist employees to gain knowledge, skills to
perform the assignment.
 Human, technical, physical resources will be
given to support employees.
6. Grant sufficient control over
the job to meet personal
demands
 Participate in decision making process.
 Some people want to be told what to do, others
want to tell top level management how to run
the organization.
 Flextime programs allows employees to have
flexible work schedules
 Telecommuting is allowed to work at home.
 Job sharing is seen where two part-time
employees share one full-time job and work
15-25 hours per week.
 Casual dress.
7. Offer Supportive Leadership and
Management
 Supportive leadership is demonstrated in
many ways: skill and interest in coaching,
and counseling, praise for a job well done,
and constructive feedback leading to
improvement of job performance.
 Leaders must be sufficiently flexible with
policies, rules, and regulations so that an
employee can meet job and non-job
responsibilities.