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Human Resource

Employee remuneration and

Understand basic trends in pay setting

Articulate the differences between

Payment by Results (PBR), Performance
Related Pay (PRP), Profit Sharing

Be aware of the advantages and

disadvantages of PRP
Reward Management Defined
Reward management is concerned with the
formulation and implementation of strategies
and policies the purposes of which are to
reward people fairly, equitably and
consistently in accordance with their value to
the organisation and to help the organisation
to achieve its strategic goals (Armstrong and
Stephens; 2005:3)
The Importance of Reward
It constitutes an economic exchange
Reward is important in forming an employees
notion of fairness
What employees believe is expected from them and
what they expect in return
Reward systems teach employees what is
For example by incentivizing particular types of
performance, eg increased sales
Reward Policy Addressing the Issues
Level of reward which may depend on:
Levels of performance
Employee benefits
External competition versus internal equity
Job evaluation may be used to determine internal
Will market supplements be paid in addition?
Achieving equal pay
Is it necessary to undertake an equal pay review?
Reward Policy Addressing the Issues
Approach to total reward
Scope for contingent rewards related to
performance, competence, contribution or skill
Role of line managers
To what extent is responsibility for reward devolved?
To what extent is pay secret?

(Ref: Armstrong and Stephens; 2005)

Selection of Pay System Should be Based on 3
Questions Below
What are the organisations pay objectives?
Organisational commitment through profit sharing?
Team ethos through group bonuses?
Individual performance through merit pay?

What pay system furthers these objectives?

Is the payment system right for the
Nature of work
Organisation culture
Individual Payment by Results
Positive impact of linking financial reward
to quality and/or quantity is recognised by
many motivational theories
Arguments in favour:
Increase in management control?
Less supervision needed?
Opportunities to achieve high earnings
Create a joint appreciation of the need to
increase profit for mutual benefit
Criticisms of Payment by Results
Relationship between effort and reward is
portrayed too simplistically
Workers can develop routines of
Changes in working practices may be
resisted if bonuses are threatened
Collective Payment by Results
Collective schemes seem to be most
effective when:
Groupings are stable and mature
Identifiable as a performing unit
Composed of people who are
Made up of people who are flexible, multi-
skilled and good team players
Problems with Collective PBR
Demotivation of high performers
Resistance to transfers out of high-
performing teams
Resistance to change from an
individualistic culture
Performance Related Pay (PRP)
Individual performance related pay relates pay
progression to the assessed performance of
individuals (Armstrong, 2003)
Torrington, Hall and Taylor divide PRP schemes
Merit based schemes based on performance
Goal based schemes based on achievement of
Individual Performance Related Pay-
Reasons for Introducing PRP
To increase the motivation of employees
To encourage certain behaviours
To help in recruitment and retention
To facilitate change in organisational culture
To encourage the internalisation of performance
To weaken trade union power
Increased control of line manager
Moral justification
Possible Problems with PRP
Motivation is influenced by factors other than
Employees may focus only on certain
Cohesion of the work group may be
Financial constraints may limit PRP increases
See article by Lewis (1998)on financial
services, Marsden and Richardson (1994) on
Inland Revenue, Brown (2001) on public sector
Questions to be Answered Before
Installing PRP (Armstrong, 2003)
Will the proposed scheme motivate people?
Is there an effective performance management
process in place?
Can managers be trained to rate performance
fairly and equitably?
Will there be enough money available to
provide worthwhile rewards?
Flexible Benefits
Offering benefits on a job for life assumption is
How do employees perceive benefits?
Are benefits valued and appropriate to company
and employee needs?
Offer choice within and between benefits
Increase some benefits and decrease others
Use pay to buy new benefits
Decrease benefits and take cash released
Flexible Benefits
Advantages Disadvantages
Addresses needs of Benefits must be
different sections of the accurately costed
workforce Administration
Spend money on benefits problems
perceived to be valuable Individuals may
Employees gain make wrong
appreciation of the value choices
of the benefit package
Armstrong, M.(2003) A handbook of Human Resource Management
Practice. Kogan Page, London
Armstrong,M. and Stephens,T. (2005) A handbook of reward
management and practice, Kogan Page, London
Brown,M. (2001) Merit pay preferences among public sector
employees, Human Resource Management Journal, Vol 11, No 4,
CIPD (2006) Reward Management Survey, CIPD, London
Lewis,P. (1998) Managing performance related pay based on evidence
from the financial services sector, Human Resource Management
Journal, Vol 8, No 2, pp66-77
Marsden,D. and Richardson,R. (1994) Performing for pay? The effects
of merit pay on motivation in a public service, British Journal of
Industrial Relations, Vol 32, no 2, pp243-261