Chapter 7 – Rewards management

A reward can be anything that attracts an employee’s attention and stimulates

him/her to do better work.

Types of reward:

a) Intrinsic and extrinsic rewards:

Intrinsic rewards:
They are the satisfaction one gets from the job itself. These satisfactions
are self-initiated rewards. The examples are having pride in ones work,
having a feeling of accomplishment or being part of team. The techniques
of job enrichment, flex-time and job rotation can offer intrinsic rewards. It
involves providing interesting and challenging jobs and allowing employee
greater freedom etc.

Extrinsic rewards:
It includes money, promotion and fringe benefits. A special feature is that
they are external to the job. They come from an outside source. Such
rewards are necessary to fulfill lower-order needs such as physiological
and security needs of the employees.

b) Financial and non-financial rewards:

Financial rewards:
It means those direct and indirect payments that enhance an employees’
wellbeing. Financial rewards make the employee financially sound so that
he/she can fulfill his/her material desire. It may be direct such as salary,
wages, commissions, etc. and maybe indirect in the form of medical
insurance, sick leave etc.

Non-financial rewards:
These are those employee benefits that do not enhance an employees’
financial wellbeing. However, such rewards provide more job satisfaction.
These rewards make life on the job more attractive. Preferred lunch hour,
preferred office furnishing, personal secretary etc. are some of its
examples.

c) Performance based and membership-based rewards:

Performance based rewards:
They are implemented by the use of commissions, piecework pay plans,
incentive system, or other forms of merit pay plans. Performance based
rewards motivate the employee to do better. High performers will tend to
gain a large portion of rewards and thus be motivated to stay longer with
the organization.

Membership based rewards:

 The dominant/major basis for reward allocations in the organizations is
membership based. Rewards that go to all employees
regardless/irrespective of performance are known as membership-based
rewards. Membership based rewards include profit sharing, benefits and
salary increase according to labor market conditions, seniority or future
potential.

Qualities of effective reward

a) Importance to employees:
Never assume a particular reward is universally important to all employees.
For some individuals, especially young employees, paid vacation is essential
whereas, for old employees, medical insurance is important instead. Married
employees seek more holidays whereas unmarried need more cash
incentives. Hence, they should be rewarded with what they feel is important
for them.

b) Equitable distribution:
Rewards must be distributed in an equitable manner. Employees in the
organization doing similar jobs should be rewarded on the basis of their
contribution equitably.

c) Visibility:
A reward that is not visible to the employee may fail to get the desired
motivating effect from the employee. On the other hand, a truly visible
reward gets the attention not only of individual employees but also of their
peers/colleagues.

d) Flexibility/Performance based:
An effective reward is one that has the flexibility to differ with changes in
performance. With the increase in performance the reward increases and vice
versa.

e) Cost effective:
An effective reward should be cost-effective. It is important to compare costs
with the benefits before making any reward distribution.

f) Competitive:
The reward should be competitive with market rates and competitor’s rate. If
rewards are lower relative to the going market rates, competent employees
may leave the organization.
Need of reward system/Importance

a) Acquire competent employee

b) Retain effective workforce
c) Motivate employees
d) Improve productivity
e) Satisfaction of human resources
f) Enhance competency

Reward distribution criteria

a) Performance based:
This is the system of reward in which payment is related to factors in the
individual’s performance other than to the time spent. According to this,
there should be a formal relation between pay and output.

b) Effort based:
This is the method of reward based on mean rather than ends. This criteria is
essential where low caliber employees are working. By rewarding efforts, one
can be attracted to exert his/her efforts on the job to increase outputs.

c) Seniority based:
This is one of the traditional criteria of rewarding employees based on the
number of years of employment in the organization. In this case, any reward
will be provided on a tenure basis.

d) Skills held:
There are some skills required by the organization which is of very special
types. Organizations face a scarcity of these highly skilled employees. Such
employees are rewarded on the basis of skills they have.

e) Job difficulty:
Job difficulty also determines the way to allocate rewards. Simple and
repetitive jobs are less frequently rewarded than challenging jobs. For
example, workers repeatedly working in the factory are less frequently
rewarded, whereas managers are highly rewarded for their capacity to make
judgments and for doing knowledge-based jobs.

f) Discretionary time:
Jobs are also rewarded based on the time taken for decision making. More
time for decision making means there are greater chances of error and
therefore is a need for careful judgment. On the other hand, in programmed
or structured jobs all procedures are defined and it takes less time to decide.
 Thus, programmed jobs are not rewarded as well as those jobs that need
long discretionary time.

Factors determining rewards

a) Prevailing wages:
Most firms decide whether their wages are right or not by ascertaining what
other firms are paying for the same class of work in the same labor market.
The organization, in the long run, must pay at least equal to the going rate
for similar jobs in similar organizations.

b) Ability to pay:
The ability of employer to pay affects the general level of wages in an
organization. Within the same industry, firms that are enjoying good sales
and profit over the long run tend to pay higher wages than those having
difficulty.

c) Cost of living:
The cost of living of two employees living at different places may not be the
same and hence must be rewarded accordingly.

d) Productivity:
High productive industries and companies tend to pay higher wage rates than
do low productivity industries and firms.

e) Bargaining power of unions:

The bargaining power of unions, their strength and strategies affect the
reward to be distributed to employees.

f) Government laws:
Government establishes a minimum pay rate below which employer cannot
pay to employees. It aims to protect employees from exploitation of
employers. If they are found paying below minimum level, they are
penalized.

g) Supply and demand of labor:

High demand of labor tends to increase the pay amount and rewards given
by the employers whereas during high supply than demand, lower amount of
rewards will be given.

Employee benefits
Benefits are indirect rewards or non-cash compensation given to an employee or
group of employees as a part of organizational membership.

Types of employee benefits

a) Economic or financial benefits

They are intended to provide financial assistance to the employee and their
families. They are given specially in time of sickness, accidents, old age,
unemployment etc.

b) Recreational benefits:
They aim to provide employees with opportunities for the fruitful use of their
leisure hours. Examples are hiking, fishing, games, tour etc.

c) Professional services:
This is offered by the professional staff of the company because employees
generally can’t afford to pay these services outside. Examples are counseling
services, legal advice, education and development activities etc.

d) Family welfare services:

These are services given for employee’s family welfare and convenience. Examples
are physical and mental health checkup, family planning, insurance services etc.