MMS SEM III (HR Elective)

Employee Rewards Management

Jyotsna Golhar

PURPOSE

Reward management is one of the strategies used in organizations

to improve organizational performance.

SCOPE

SYLLABUS

REFERENCE BOOKS
Dynamics of Personnel Management by
Prof Mn Rudra Basavraj Himalaya publishing
A Handbook of Employee Reward Management
and Practice by Michael Armstrong
Personnel and Human Resource Management
by George T Milkovish and John W Boudream,
Published by All India Traveller Bookseller

CONTENTS : Unit 1
Reward Management: Definition, Aims of
reward management, achieving the aims,
reward system, elements of reward
system, factors affecting reward system,
policy
and
practice,
impact
of
environment, internal & external

Reward Management
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 nonfinancial means.
It is about the design, implementation and maintenance of
reward systems (reward processes, practices and procedures),
which aim to meet the needs of both the organization and its
stakeholders.
The overall objective is to reward people fairly, equitably and
consistently in accordance with their value to the organization
in order to further the achievement of the organizations
strategic goals

Reward Management
Reward management is not just about pay
and employee benefits.
It is equally concerned with non-financial
rewards such as recognition, learning and
development opportunities and increased
job responsibility.

Aims Of Reward Management

To reward people according to the value they create;
align reward practices with business goals and with employee
values and needs;
reward the right things to convey the right message about what
is important in terms of behaviours and outcomes;
help to attract and retain the high-quality people the
organization needs;
motivate people and obtain their engagement and
commitment;
develop a high-performance culture.

THE REWARD SYSTEM

Reward strategies, which set out what the organization intends to do in the
longer term to develop and implement reward policies, practices, processes
and procedures that will further the achievement of its business goals. For
example, an organization may have a strategy to maintain competitive rates
of pay.
Reward policies, which set guidelines for decision making and action. For
example, an organization may have a policy that sets the levels of pay in the
organization compared with median market rates.
Reward practices, which consist of the grade and pay structures, techniques
such as job evaluation, and schemes such as contingent pay used to
implement reward strategy and policy. For example, the policy on pay
levels will lead to the practice of collecting and analysing market rate data,
and making pay adjustments that reflect market rates of increase.

THE REWARD SYSTEM

Reward processes, which consist of the ways in which policies
are implemented and practices carried out, for example the
way in which the outcomes of surveys are applied and how
managers manage the pay adjustment and review process.
Reward procedures, which are operated in order to maintain
the system and to ensure that it operates efficiently and flexibly
and provides value for money. For example, a procedure will
be used for conducting the annual pay review.

ELEMENTS OF
A REWARD
SYSTEM

FACTORS AFFECTING REWARD

MANAGEMENT POLICY AND PRACTICE

The internal environment consists of the organizations culture and its

business, technology and people
The external environment The features of the external environment are
competitive pressure, globalization, and changes in demographics and
employment
Total reward provide for a holistic approach to be adopted to reward
management, which ensures that all aspects of reward are treated as a
coherent portfolio of policies and practices. Human capital management
Human capital management (HCM) is concerned with obtaining, analysing
and reporting on data, which informs the direction of value-adding people
management strategic, investment and operational decisions at corporate
level and at the level of front-line management. An HCM approach to
reward management will assemble data on the effectiveness of reward
management policies but in a more advanced form will attempt to assess the
impact of remuneration policies on people and the business, thus informing
strategic plans

FACTORS AFFECTING LEVELS OF PAY

Motivation is important as a guide to the use of contingent pay
and the non-financial elements of total reward.
Engagement and commitment The concepts of job engagement
and organizational commitment also provide guidance on total
reward policies and contingent pay .
The psychological contract is necessary to understand what
the psychological contract is and its significance when
formulating and implementing reward policy as a key aspect of
relationships with employees.

THE DEVELOPMENT OF REWARD

MANAGEMENT
The development of the concept of reward
management and the reward system as
described above has taken place over a
number of years.
An analysis of the overall developments is
given in Figure

THE DEVELOPMENT OF REWARD MANAGEMENT

Overall
developments
in reward
management

Contributions Of The More Influential Authors

Strategic pay (Lawler)
Lawler (7) emphasized that when developing reward policies it
is necessary to think and act strategically about reward.
Reward policies should take account of the organizations
goals, values and culture and of the challenges of a more
competitive global economy. New pay helps to develop the
individual and organizational behaviour that a company needs
if its business goals are to be met.
Pay policies and practices must flow from the overall strategy
and they can help to emphasize important objectives such as
customer satisfaction and retention and product or service
quality.

Contributions Of The More Influential Authors

The new pay (Schuster and Zingheim)

Lawlers concept of the new pay was developed by Schuster and Zingheim
(8), who described its fundamental principles as follows:
Total compensation programmes should be designed to reward results and
behaviour consistent with the key goals of the organization.
Pay can be a positive force for organizational change.
The major thrust of new pay is in introducing variable (at risk) pay.
T he new pay emphasis is on team as well as individual rewards, with
employees sharing financially in the organizations success.
Pay is an employee relations issue employees have the right to determine
whether
the values, culture and reward systems of the organization match their own

Contributions Of The More Influential Authors

Dynamic pay (Flannery, Hofrichter and Platten)
Flannery, Hofrichter and Platten (10) expounded the concept of dynamic pay
and
suggested that the nine principles that support a successful pay strategy are:
1. Align compensation with the organizations culture, values and strategic
business
goals.
2. Link compensation to the other changes.
3. Time the compensation programme to best support other change initiatives.
4. Integrate pay with other people processes.
5. Democratize the pay process.
6. Demystify compensation.
7. Measure results.
8. Refine. Refine again. Refine some more.
9. Be selective. Dont take to heart everything you hear or read about pay.

Contributions Of The More Influential Authors

Pay people right (Zingheim and Schuster)

Zingheim and Schuster (11) have laid down the following six principles for
paying people right:
1. Create a positive and natural reward experience.
2. Align rewards with business goals to achieve a winwin partnership.
3. Extend peoples line of sight between effort and outcome, motivating smart
working over simply expending extra effort.
4. Integrate reward with strategic aims and the kind of contribution desired.
5. Reward individual ongoing (input) value to the organization with base pay.
6. Reward results (outputs) with variable pay.

Contributions Of The More Influential Authors

Armstrong and Brown (14) have suggested the following approach to reward strategy,which more
realistically fits the UK scene. This has the following characteristics:

appreciating that a good strategy is one that works and therefore focusing on implementation
programmes;
planning with implementation in mind recognizing during the design process that plans have
to be converted into reality and taking steps to anticipate the problems involved;
aligning reward strategies with the business and HR strategies;
ensuring that reward strategy fits the culture and characteristics of the organization, meets
business needs and takes account of individual needs and preferences;
being aware of good practice elsewhere but not being seduced by the notion that it is best
practice, ie universally applicable and easily replicated;
paying more attention to using strategic reward initiatives to support the engagement and
commitment of people so that they are motivated and productive, rather than focusing on the
mechanics of new reward fads;
bearing in mind that the development and implementation of reward strategy is an evolutionary
process it is about doing things better at a manageable pace rather than extraordinary new
developments;

Contributions Of The More Influential Authors

providing flexibility within a framework, ie developing a flexible

approach to the reward of different people but always within a framework
that provides for consistent treatment;
appreciating that implementing reward strategy will require a
comprehensive change management programme;
recognizing the importance of the part played by line managers in
implementing reward strategy and the need to ensure that they are
committed and have the necessary skills;
paying close and continuous attention to communicating with employees
and involving them in the development as well as the implementation of
reward strategy;
being absolutely clear about the objectives of the strategy and resolute
about evaluating its effectiveness.

Internal Enviornment
Reward policy and practice will be affected by
the characteristics of the organization with
regard to its purpose, products and services,
processes, sector (private, public, voluntary or
not-for-profit) and, importantly, culture, which
is influenced by all the other characteristics.

1. Corporate culture

Corporate or organizational culture consists of shared values, norms, attitudes and

assumptions, which influence the way people act and the way things get done. It is
significant because it is rooted in deeply held beliefs and reflects what has worked
in the past.
A positive culture can work for an organization by creating an environment
conducive to performance improvement, the management of change and a sense
of identity and unity of purpose. It can help to shape behaviour by giving guidance
on what is expected.
The wrong culture can work against an organization by erecting barriers that
prevent the attainment of reward strategic objectives. These barriers include
resistance to change and lack of commitment.
the most important aspect of culture that needs to be taken into account is the
core values of the organization. Values are expressed in beliefs as to what is best
for the organization and what sort of behaviour is desirable.

e.g.
Tesco

http://www.tescoplc.com/index.asp?pageid=10

2. The business of the organization

Can be manufacturing, profit-making service, not-for profit
services, public sector services, education will govern its
ethos and therefore core values. It will influence the type of
people it employs and the degree to which it is subject to
turbulence and change. All these factors will contribute to the
reward strategy.
For example, in the public and voluntary sector the tradition
of paying service-related increments rather than progressing
pay according to performance or contribution dies hard,
although successive governments have driven the adoption of
performance pay in the Civil Service.

e.g.

e.g.

3. Technology
It exerts a major influence on the internal environment how work is
organized, managed and carried out.
The introduction of new technology may result in considerable
changes to systems and processes.
Different skills are required; new methods of working and therefore
reward are developed. The result may be an extension of the skills
base of the organization and its employees, including the use of
knowledge and expertise, and multiskilling (ensuring that people
have a range of skills that enable them to work flexibly on a variety of
tasks, often within a team working environment).
Traditional piecework pay systems in manufacturing industry have
been replaced by higher fixed pay and rewards focused on quality
and employee teamwork.

4. People
The type of people employed and therefore the approach to reward
will clearly be dependent on the type of business and its technology,
for example the growing importance of knowledge workers.
But what has become increasingly recognized by management is that
people make the difference and that unique competitive advantage
is achieved by having better people who are capable of doing better
things than those in other businesses.
The aim is to acquire, develop, motivate and retain people who
possess distinctive capabilities (competencies) that arise from the
nature of the firms activities and relationships.

e.g.
As Nicki Demby, formerly Performance and Reward
Director at Diageo, observed to e-reward :
It is our people who deliver our performance, which
is why release the potential of every employee is at
the heart of our growth strategy.
Alongside what we deliver, every bit as important is
how we deliver.
Our people are judged against global leadership
capabilities: edge, emotional energy, ideas, people
performance, and living the values.

5. Business strategy
Where the business is going (the business strategy) determines
where reward should go (the reward strategy). Integrating reward
and business strategies means combining them as a whole so they
contribute effectively to achieving the mission or purpose of the
organization.
The process of linking strategies is the best way of achieving vertical
integration, or internal fit, in the sense that business and reward
strategies are in harmony it is necessary to see that reward goals are
aligned with business goals and reward strategies are defined in a
way that spells out how they will contribute to the achievement of
the business plan.

6. The employees point of view

Reward management policies should take account of the aspirations,
expectations and needs of employees as stakeholders in the
organization. Consideration has also to be given to the needs or views
of other stakeholders, especially owners in the private sector and
governments, local authorities and trustees elsewhere.
Employee involvement is crucial to the development of reward
policies and programmes.
The wishes of employees need to be ascertained. Their comments on
existing practices should be listened to and acted upon.
They should be involved in the development of new reward
processes, for example job evaluation, performance management
and contingent pay. They should continue to be involved in the
implementation and evaluation of these processes.

External Environment
The external environment in the shape of
globalization, increased competition, government
interventions, the industrial relations scene and the
characteristics of the organizations sector can all
influence reward policies and practices.
The features of the external environment are
competitive pressure, globalization, and changes in
demographics and employment

1. Globalization
Globalization requires organizations to move
people, ideas, products and information
around the world to meet local needs

2. Employment trends
An increasing demand for skills and qualifications is
taking place, especially for managerial and
professional workers, knowledge workers, customer
service staff, technical and office staff and skilled
manual workers.
This, coupled with the skill shortages associated with
low levels of unemployment, influences reward
strategies designed to attract and retain people

3. Demographic trends
As Armstrong and Brown emphasize: Resourcing
and reward strategies which are heavily focused on
either recruiting young dynamic staff and getting
rid of old employees at a fixed retirement date or
before; or the opportunistic poaching of staff with
the requisite skills and experience from competitors,
are therefore becoming increasingly outdated and
undesirable from both an employer and national
perspective.

4. Rates of pay in the marketplace

The external environment exerts a major
influence on rates of pay and pay reviews
within organizations.
Market or going-rate levels and movements
have to be taken into account by organizations
if they want their pay to be competitive. Some
organizations are affected by national
agreements with trade unions

5.The industrial relations scene

The trade unions influence reward practices at national level through
national pay negotiations, pronouncements on such issues as the pay
of top executives, and exerting pressure to achieve equal pay. They
produce policies and advice for their members on such matters as:

the use of job evaluation (they are in favour of analytical schemes while emphasizing
the need for involvement in their design);
pay structures (they tend to be against broad-banded structures);
contingent pay (they are universally hostile to it, preferring the traditional service related
incremental scales);
protection policies (they accept limited periods but want these to be four or five
years);
the use of equal pay audits and questionnaires;
employee benefits and pension schemes (they object to the move towards defined
contribution schemes).

6.The National Government scene

The Cabinet Office develops policy guidelines for implementation by government

departments and agencies, although departments and, especially, agencies have some
freedom to develop their own pay structures.
The pay modernization agenda of the government consists of the following elements:
simplified grading structures based on job evaluation;
harmonized scales for different groups of staff;
new integrated bargaining structures;
national pay spines;
equality proofing in pay, progression and promotion;
single-status terms and conditions;
harmonizing the length of the working week;
shortening scales to aid retention;
aiding skilled people to stay in the front line;
introducing a target rate for the job.

The Voluntary And NotNot-for

for--profit Sectors
The voluntary and not-for-profit sectors are very diverse and it is
difficult to detect any general trends in the development of pay
systems. Most of the big charities have traditionally adopted public
sector schemes with pay spines consisting of service related
incremental scales.
In recent years, however, a number of the larger charities and
housing associations have introduced broad-banded structures and
some form of contribution pay.
In two examples (the Peabody Trust and the Shaw Trust) the
contribution pay scheme has involved an arrangement of four or five
steps to a target rate or reference point with progression based on
competence. Above the target rate, bonuses are given for special
achievements, which can be consolidated if the high level of
achievement is sustained.

Thought..
Previously the deal was Ive been here so Ill get an increase or
Ive been here and Ive done a good job so Ill get a good
increase. Actually, now our philosophy is that you are paid to
do a good job, and if you are paid the right rate you only get
more if you are contributing more or because the market has
moved. Otherwise you are being paid the right price.

References

Lawler, EE (1990) Strategic Pay, Jossey-Bass, San Francisco

Schuster, JR and Zingheim, PK (1992) The New Pay, Lexington Books, New
York
Lawler, EE (1995) The new pay: a strategic approach, Compensation and
Benefits Review, November
Flannery, TP, Hofrichter, DA and Platten, PE (1996) People, Performance, and
Pay, Free Press, New York
Zingheim, P and Schuster, JR (2000) Pay People Right! Breakthrough strategies
to create great companies, Jossey-Bass, San Francisco
Armstrong, M and Brown, D (2005) Reward strategies and trends in the
United Kingdom: the land of diverse and pragmatic dreams, Compensation
and Benefits Review, July, pp 15563

QUESTIONS