REWARD STRATEGIES AND ORGANIZATIONAL PERFORMANCE

Contents
1.0. 1.1. 1.2. 1.3. 2.0. 3.0. 4.0. 4.1. 5.0. 6.0. INTRODUCTION ............................................................................................................... 4 Reward Strategies ............................................................................................................. 4 A Strategic approach towards Reward Management ....................................................... 5 Elements to be considered before framing a Reward strategy ......................................... 5 Total Reward System ....................................................................................................... 6 Reward Strategies and Recruitment of the Employees .................................................... 8 Reward Strategies & Performance of the Employees ...................................................... 8 Theoretical Models of Pay and Performance: Equity theory (Adams, 1963) .............. 9 Reward Strategies & Retention of Employees ................................................................. 9 Conclusion ......................................................................................................................... 12

2.0.

PART 2

Six dangerous Myths about Pay ........................................................... 13

2.1. Introduction ............................................................................................................................ 13 2.2. Myth no 1 Labour Cost and Labour pay ............................................................................ 13 2.3. Myth no 2 Low Labour Rates can cut Labour Cost ........................................................... 13 2.4. Myth no 3 Labour Cost is Significant portion of overall cost of business ........................ 13 2.5. Myth no 4 Labour Cost easy way to achieve competitive advantage ................................ 14 2.6. Myth no 5 Individual Incentive Pay Performance ............................................................. 14 2.7. Myth no 6 People not only work for Money ...................................................................... 14 2.8. Conclusion ............................................................................................................................. 16

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TABLE OF FIGURES Figure 1 Model of Total Rewards Strategies .............................................................6 Figure 2 Characteristics of Reward Strategies ...........................................................7 Figure 3 Extrinsic Reward Strategies for Employee Retention ...............................10 Figure 4 Intrinsic Reward Strategies for Employee Retention ................................11

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1.0. INTRODUCTION
The competitive business environment, increasing challenges and importance of Human Capital has compelled the employers to think of Effective Reward System. The Effective Reward System can be explained as that type of reward system which not only provide extrinsic rewards to the employees but also motivates them to perform well by giving them intrinsic rewards. Effective Reward Strategies are a step towards success; it ensures high performance and makes it easy for the organization to achieve its objectives in an efficient manner. There are short and long term benefits associated with an Effective Reward system. In this study, importance and

implication of Reward Strategies on Organizational performance is being focused.

1.1.

Reward Strategies

Reward systems are the system by which Organizations reward their employees on their performance. The meaning of reward system is more than bonus plans and stock options. The reward system often includes monetary and non-monetary benefits. An ideal reward system fairly includes business objectives aligned with the motivation of the employees. It encourages the employees to maximize their input and efficiency and meet the organizational objectives as well. In the above figure an Ideal Reward System is displayed. It explains that an effective reward system is designed by keeping in mind all the important factors such as strategic vision of the business and objectives of the business. Compensation is considered at all levels equally. It is not focused to target customer or organization side only but employees are considered equally. There is a fixed compensation at all the levels. This makes it more effective to achieve organizational objectives and motivate the employees as well. In recent times the traditional approach of Reward system has failed and it has become very critical. A good and flexible reward system is needed to adjust according to the changes occurring in the business environment. There are many driving factors which lead towards framing a new and strategic reward system. A good and effective reward system is needed by the
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organization to attain competitive advantage. It must align the objectives of the organization with the needs of its employees as well.

1.2.

A Strategic approach towards Reward Management

One of the important factors that enhance the effectiveness and efficiency of the employees is the reward system. It strongly influences the behaviour of the employees. There is no one reward system which can be considered as the best one because the situations differ in organizations therefore it is needed that a strategic approach must be adopted to frame a reward system for an organization. There are many variables which have an impact on the Reward system in an organization. These variables are different in different industries. 1.3. Elements to be considered before framing a Reward strategy

There are various elements which must be considered before framing a Reward system in organization. It is very important that reward system must be aligned with the vision, mission and objectives of an organization. But it is important to understand The values of the organization Its position in the market Strategies that are used by the organization The critical success factors of the organization Demographics of the Organization The perception of employees regarding remuneration and pay Talent pool available and constraints of it in the market The nature of the market where the organization is operating and its complexities Understanding the environment where an organization is functioning (Beaven, 2000).

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2.0.

Total Reward System

All these factors must be considered by an employer before framing a Reward Strategy. It is the quality of an effective Reward Strategy that it inculcates all the important factors and takes into account the operational goals of the company. It must balance the short term goals of an organization with operational and strategic goals aligned with it.

Figure 1 Model of Total Rewards Strategies

Source: (Pulse, 2012) In the Figure above, Total reward system is derived from the culture of the organization, its Strategies and human resource strategy. It is a combination of extrinsic and Intrinsic rewards such as compensation, work-life, Performance and Recognition of an employee in a work setting. All these factors jointly retain, recruit and motivate employees. With this effect employees can be rather motivated to perform better or they can feel dissatisfied. The business results in this model are dependent on the effect of the reward system for the employees.
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Figure 2 Characteristics of Reward Strategies

Reward Strategies Characteristic s

Source: Developed by Researcher

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3.0.

Reward Strategies and Recruitment of the Employees

Reward System also helps in the Recruitment of the Employees. As existing employees are happy with the policies and reward system they will most probably invite and tell other people about the well being of the organization. Right systems of rewards are the best indication of the success of the organization. People normally chose those organizations where they get the best reward of their efforts. In this way a virtuous circle is formed and it becomes an attractive place for people to work (Wyatt, 2006).

4.0.

Reward Strategies & Performance of the Employees

There are several purposes of the Reward System in an Organization. One of the most important contributions of the Reward System in an Organization is that it improves performance in an organization. It helps to increase motivation in the employees. Human Capital is the most important asset of today's business life it is vital to make a company successful and helps to maintain the efficiency in the organization (Perrins, 2007). It is possible that due to the effective Reward System, Employee might be able motivated to gain skills and competencies which are important for organizational growth and their professional growth. For instance, employees can be offered to take courses for which they will be paid. These courses are useful for the organization but are fulfilling two purposes; one is to give a better opportunity to the employee for growth in their area and secondly maintaining a Human Capital for the Organization. Employees might not be interested in taking up the courses which are not paid, but when the reward is given to them for their learning they happily avail the opportunity (San et al., 2012).

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4.1.

Theoretical Models of Pay and Performance: Equity theory (Adams, 1963)

According to the Theoretical Model of Pay and Performance of Adams which is also called Equity Theory has some assumptions such as People tend to develop beliefs about what is right and what is wrong according to them and what should be given in return of a reward program an Exchange People compare the reward given to them with the others If an employee thinks that he is not being treated fairly and is inequitable, he will do something about it, most probably he will find justice to address the issue. The formula of the Equity theory is Is/OS versus Ir/Or employees contribution employee who judges the

O = Outcomes: the type of rewards received, I = Inputs: R = Referent: person in comparison with the S = Subject: fairness of the exchange

Improper use of Reward Management can lead to various problems and these problems can have a debilitating effect on the performance of the employees. Managers must be able to understand the perception of employees about the Reward System and what they are expecting from a Reward System. A clear communication must take place between employees and employers about this matter (Sohail & Salem, 2012).

5.0.

Reward Strategies & Retention of Employees

Employee retention is a big challenge for Organization these days. Lately it has well understood by the Organizations that it is very essential for the Organization that Human Capital is very valuable (Malven et al., 2010). It is very important to look on the factors which are causing Turnover of employees. The causes of turnover must be observed in a deep manner to know and rectify the root cause of it. With extensive Competition in the market it is essential to reaffirm the strategies to retain the employees, as it is very essential to save the recruitment cost (Ramlal,
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2003). With the help of proper Reward Strategies it is possible to retain the employees and further motivate them to perform better. There are two types of Rewards which could be part of Reward Strategy for employee retention.

Figure 3 Extrinsic Reward Strategies for Employee Retention

Performance based pay

Bonuses

Extrinsic Rewards

Increments

Perks

Source: Developed by Researcher

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Figure 4 Intrinsic Reward Strategies for Employee Retention

Morale Boosting

Career Positioning and Two Way Value Proposition

Intrinsic Rewards

Orientation and OnBoarding

Competitive Compensation

Source: Developed by Researcher

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6.0. Conclusion
After above analysis it is concluded that Reward Strategies play an important role in shaping up the performance of the employees. It depends a lot on the Reward system that how it helps the employee to work happily in his workplace. Employers must understand the importance of Extrinsic and Intrinsic reward system. Effective Reward Strategies not only helps to enhance employee performance but also helps to retain the employees. This saves the cost of Recruitment and training cost of the new employees.

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2.0.

PART 2

Six dangerous Myths about Pay

2.1. Introduction
Jeffrey Pfeffer in his article Six Dangerous myths about pay has discussed Reward System in an effective manner. An article was published in June 1998. The article discusses about the Reward Strategies used by the leaders and its effect on the employees performance. In this article six common myths about are discussed. These myths mislead the managers and they make wrong decisions regarding pay and compensation system. 2.2. Myth no 1 Labour Cost and Labour pay

There is clear difference between Labour Pay and Labour cost. Labour pay is the wage paid to the worker divided by the hours he spends working. Labour Cost, whereas is the amount of return or rate of production of employee in a workplace. Most of the time, these two concepts are misunderstood by the managers. 2.3. Myth no 2 Low Labour Rates can cut the Labour Cost

When managers believe in the first myth described above, they also believe that by lowering the cost of labour they can reduce the labour rate. It is important to understand that Labour cost is related to productivity and labour rate. It is possible that sometime Labour Cost is increased by lowering labour rates. 2.4. Myth no 3 Labour Cost is Significant portion of the overall cost of business

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This Myth is true sometimes but it varies from industry to industry. In some Industries, it is possible that Labour cost is the biggest cost incurred by the company, but most of the time it is not a significant portion of the cost of business. 2.5. Myth no 4 Labour Cost easy way to achieve competitive advantage

By reducing Labour costs, employers can easily achieve competitive advantage in a market. There are other ways of achieving competitive advantage but this is a most effective weapon to do this.

2.6. Myth no 5 Individual Incentive Pay Performance

Individual Pay Performance is a best tool to enhance the performance of an individual. It proves that pay is not only related to the performance but helps to build a right attitude and personality enhancement.

2.7. Myth no 6 People not only work for Money

It is a common myth that people work only for money, whereas it is not true. People work for fun and their satisfaction. Companies and manager thinking that people work for money are on mistake and pay for this attitude in the long run. Employees who work for the managers having this Perception, end up having a lack of commitment and loyalty in employees. These myths have been conceived from many of the economic models as well. Many of the theories have presented human being as commodity, who will not move unless and until is not provided with some compensation. It is being portrayed with the help of these theories that the employees only seeks for self-interest and have different interest than of their employers (Jiang et al., 2009). Theories like Agency theory and Transaction cost theory clearly states that the

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employee will make false promises and statements to achieve their objectives. This compels the manager to think on lines that employees can only perform well when they will be rewarded. There is an increasing trend in industry to outsource the employees; this is done to find employment at low rates. This has made turnover rate quite high. The industry is only struggling to find the employee at the rate at which they can decrease their labour cost without realizing that it affects the efficiency of the Organization as well. Reward Strategies must be framed in a manner that could help the employee to associate themselves with the organization. Companies which overlook this aspect are facing very difficulties in retaining their employees and waste a lot of money in recruiting and training of the new employees as a result (alikan, 2010). Individual incentives and Pay practices have increased since 1990s. It is being surveyed by fortune 1000, and has revealed that companies that focus on the share profit concept have fewer turnovers as compared to the companies practicing Pay practices and Individual Incentives. Performance Management plans and Individual Merit Pay have less effect on performance of the employees. It has been observed after many surveys conducted by the consulting companies that people who are being offered by Individual Merit Pay have not performed very well, it has no effect on their performance and has created numerous problems. People think in short terms instead of staying for a long period of time with the companies and teamwork is not promoted through it (Yun-Sun et al., 2007). The majority of the Employees when asked about Performance base system said that these systems do not promote any effectiveness of the performance and it creates no value for the employees. Overall view about the performance base system was that it wastes a lot of time of management and makes people unhappy (zutku, 2012). It is being thoughts that the Collective pay system is not fair as it also pay the individual who work less than their peers in a group, thus promote free riders. However, research has shown that People working in a group develop a bond with each other, they rely on each other and teamwork is supported like this. A lot of pressure is built for the employees in the Performance Based pay system. SEARS Company in USA confronted many problems regarding its commission system and had to eliminate it. Employees in a struggle to get more commission on the after sale services, were personally offering services to the customers, which were not offered by the company.

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It will not be true to say that compensation and Performance Management System do not work to improve the situation of the employees and People work for more than monetary reasons. Employees prefer working at places where they have more learning opportunities, their work is appreciated and they have fun. So it would be right to say that high extrinsic rewards are not the only tool to address the issues. They put pressure on the employee and he loses his creativity. Sense of being loyal to the firm is taken away from the employee. Excessive extrinsic Rewards also hinder motivation in the employees (lawler & Christopher, 2006).

2.8. Conclusion
After reading the article and other literature available on the topic it would be right to say that there must be a combination of Extrinsic and Intrinsic Reward system. Managers who think that they can influence employee performance only by giving them Individual-based merit pay system and compensation is not right. People need a feeling from their employer that they are being taken care of and it is not all about money. Compensations must be offered on a collective basis, as it inculcates team work in the employees and they tend to relate with each other. There must not be a payment system which would reward one individual more than the rest of the team. This contradicts the statement and notion given to the employees to work collectively. Therefore, it would be right to say that Pay system should not be designed considering extrinsic reward only but it should also inculcate intrinsic Rewards as well.

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References Beaven, S., 2000. Reward Strategy 10 Common Mistakes. Institute for Employment Studies. alikan, E.N., 2010. The Impact of Strategic Human Resource Management on Organizational Performance. 6(2), pp.110-16. Jiang, Z., Qian, X., Henan, Q. & Lei, X., 2009. Total Reward Strategy: A Human Resources Management Strategy; Going with the Trend of the Times. International Journal Of Business Management, 4(11), pp.177-83. lawler, E.E. & Christopher, G.W., 2006. Winning support for organizational change: Designing employee Reward System that keep on Moving. IVEY BUSINESS JOURNAL;Improving the Practice of Management, pp.1-5. Lin, A., 2011. Performance Management and Rewards. [Online] TWC Available at: http://www.pwc.tw/en/services/people-and-change/performance-management-andrewards.jhtml [Accessed 13 April 2013]. Malven, W.C., Micheal , O.S. & Crispen, C., 2010. An Examination of Employee Retention Strategy in Private Organziation in Zimbawe. African Journal of Business Management, 4(10), pp.2103-09. zutku, H., 2012. The Influence of Intrinsic and Extrinsic Rewards on Employee Results: An Empirical Analysis in Turkish Manufacturing Industry. Business and Economics Research Journal, 3(3), pp.29-48. Perrins, T., 2007. Reward Management:Closing a Growing Say/Do Gap. Reward Challenges Survey Report. Pulse, J., 2012. Total Rewards: Moving Beyond Compensation and Benefits; Jobs Pulse. [Online] Available at: http://content.timesjobs.com/?p=1216 [Accessed 24 Apr 2013]. Ramlal, S., 2003. Managing Employee Retention as a Strategy for Increasing Organizational Competitiveness. Applied H.R.M. Research, 8(2), pp.63-72. San, O.T., Yip, M.T. & Teh, B.H., 2012. The Reward Strategy and Performance Measurement (Evidence from Malaysian Insurance Companies). International Journal of, 2(1), pp.211-23. Sohail, M.S. & Salem, M.A.-G., 2012. The Relationship Between Strategy, Reward and Organisational Performance: An Empirical Investigation. Middle-East Journal of Scientific Research, pp.1436-71.

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Watson, T., 2011-12. The Talent Management and Rewards Imperative for 2012; Leading Through Uncertain Times. The 2011/2012 Talent Management and Rewards Study, North America, p.23. Wyatt, W., 2006. Strategic Rewards and Pay Practices: The Need for Execution. Watson Wyatt. Yun-Sun, L., Samuel, A. & Kenneth, S.L., 2007. High-Performance Human Resource practices, Citizenship behavior, and Organizational Performance : A Relational Perspective. Academy of Management Journal, 50(3), pp.556-57. Zakaria, Z. et al., 2011. The Relationship between Reward Practice and Employees Performance: An Empirical Study. In 011 International Conference on Management and Artificial Intelligence. Bali, Indonesia, 2011. IACSIT Press.

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