Reward System

• Reward System consists of interrelated processes & practices that

combine to ensure that reward management is carried out effectively
to benefit the organization & people who work there.
• Focuses worker attention on the specific behaviors the organization
considers necessary to achieve it desired objectives and goals.

• Includes anything that an

• employee may value and desire and

• employer is able and willing to offer in exchange for employee
contributions.
 How A Reward System Operates :
Environment Business HR Environment
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Strategy Strategy

Reward
Strategy

Reward
Policy

Reward Reward Reward

Practices Procedures Processes
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Reward system is based on the reward strategy, which flows from the
business strategy, for example to gain competitive advantage, and
the HR strategy, which is influenced by the business strategy but
also influence it.
The HR strategy may, for example, focus on resources but it should
also be concerned with satisfying people as well as business needs.
All this aspects of strategy are affected by the environment.
Reward strategy direct the development and operation of reward
practices and process and also form the basis of reward policies,
which in turn effect reward practices, process and procedure.
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 Reward Strategies : what the organization tends to do in the longer

term to develop and implement reward policies, practices, processes
and procedures that will further the achievement of its business and
HRM Goals
 Reward Policies : these set guidelines for decision making and action
 Reward Practices : these comprise the scheme, structures and
techniques used to implement reward strategy and policy.
 Reward Processes : the ways in which policies are implemented and
practiced;
 Reward Procedure : operated in order to maintain the system and to
ensure that it functions efficiently and flexibly and provides value for
money.
 Components of reward system

• Business strategy • Contingent pay

• Reward strategy • Service-related pay
• Reward policy • Pensions & employee
• Basic pay benefits
• Job evaluation • Allowances
• Market rate analysis • Performance
management
• Grade & pay structure
• Non-financial rewards
• Pay progression
• Total remuneration
• Total reward
 REWARD SYSTEM
Non-financial rewards Recognition, responsibility,
achievement, autonomy,
Job Evaluation development, growth

Grade and pay

structure

Market Rate Analysis

Business/HR Reward Total

Base pay Total reward
strategy Strategy/policies remuneration

Pay Progression

Contingent pay

Service Related Pay

Pension & benefits

Allowances

Performance
management
 Components of Reward System :
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 Business Strategy : the starting point of reward system is the

business strategy of the organization. This identifies the business
drivers & business goals. These drivers are unique to any
organization but often includes items such as high performance,
profitability, productivity, innovation, quality, cost, leadership, etc

 Reward Strategy : Reward Strategy flows from an analysis of the

business drivers. The strategy will define longer-term intentions in
such areas as pay structures, contingent pay, employee benefits,
steps to increase engagement and commitment and adopting total
reward approach.
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 Reward Policy – will cover the matters like

 Level of Reward : this will be related to the view on how internal
rates should be compared with market rates;
 External Competitiveness versus internal equity : the balance between
being market driven, whereby pay levels are governed by market rates
& being more concerned with the extent to which equal pay is
provided for work of equal value
 Transparency : how much information will be released about pay
policies and levels
 Pay Decision : fixing rates of pay on appointment or promotions
 Assimilation : how employees will be incorporated to revised grade
and pay structures
 Protection : how employees whose pay is above maximum for their
grade should be protected from a reduction in salary

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Base Pay or basic pay
 Base rate is the amount of fixed salary that constitutes the rate for the job. It
may vary according to the grade of the job or level of skill required
 Base pay get influenced by internal and external relativities. Internal
relativities will be measured by job evaluation, and external by tracking
market rates.
 Alternatively level of pay may be agreed through bargaining with trade unions
or by reaching individual agreements.
 Base pay management can be achieved through grade and pay structures
 It can be expressed annual, weekly, hourly.
 Pay that is related to value of the job rather than person is known as job-based
pay.
 Base rate that can be enhanced by payment related to the person’s level of
competency or skill is known as person based pay.
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 Job Evaluation :
 It’s a systematic process for defining the worth or size of jobs within
an organization in order to establish internal relativities and provide
the basis for designing an equitable grade structure, grading jobs in the
structure and managing relativities.
 It does not determine the level of pay directly
 Job evaluation can be analytical or non analytical
 It is based on the analysis of jobs or roles, which lead to the
production of job descriptions or role profiles
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 Market Rate Analysis : it’s a process of identifying the rates of pay in the
labour market for comparable jobs to inform decisions on levels of pay within
the organization and on pay structures. A policy decision may be made on how
internal rates of pay should compare with external rates.
 Pay Progression : takes place when base pay advances through pay brackets in
a grade and pay structure or through promotions or upgradings
 Progression through pay brackets may be determined formally through a
contingent (conditioned) pay scheme or my means of fixed increments.
Informal progression takes place when there is no contingent or incremental
pay scheme and increases arbitrary
 Contingent pay progression is typically but not inevitably governed by
performance ratings, which are often made at the time of performance
management review but may be made separately
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 Grade and Pay structure: this is a hierarchy of job grades, bands or levels into which
groups of jobs are broadly comparable in size are places.
 Pay ranges are attached to grades taking in account market rates & provide scope for
pay progression based on performance, contribution, competence or services. Main
types of structure:
 Multi Graded structure : One consisting of 10 or more job grades into which jobs of

broadly equivalent value are places. The pay span in each grade may be fairly small.
Known as narrow – graded structure
 Broad – banded structure : structure with a small number (4 or 5) bands

 Broad – graded structure : with 6 to 9 grades

 Job – family : structure consisting of a number of separated job families. Each family

may constitute a market group in which rates of pay are related to market rates and
may differ from that of equivalent jobs in other family. (A job family consist of a
group of jobs in a function or occupation that are related through the activities
carried out and the basic knowledge and skills required, but in which levels of
responsibility, knowledge, skills and competency levels are differ)
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 Career Family : a structure consisting of separate job families. If is

different from a job family structure by having the same level of pay
for equivalent jobs in different families. The emphasis is on defining
career paths or ladders as well as providing a pay structure.
 Pay Spine : a structure consisting of a series of fixed increments
extending from the lowest to the highest paid jobs covered by
structures. Progression is usually based on service but scope is
sometimes given for it to be related to performance contribution.
The pay spine may be divided into grades
 Spot rate : the rate or a job or an individual that is not fitted into a
grade or band in a conventional grade structure and does not allow
any scope for pay progression
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 Contingent pay for performance, contribution, competence & skill

 Individual Contingent pay schemes provide additional financial rewards related to levels
of performance, contribution, competence or skill
 Contingent pay may be related to team or organizational performance (profit sharing,
gain sharing, etc)
 It can be added to base pay i.e. consolidated or may be paid as cash bonuses i.e. variable
pay. The contingent scheme for individual are as follows:
 Performance related pay : which provides individual with financial rewards in the form
of increase in base pay or cash bonus that are linked to assessment of performance
 Contribution related pay : which provides financial rewards related to both outputs
(performance) & inputs (competence)
 Competency related pay : rewards people by reference to the level of competence they
demonstrate in carrying out their roles
 Skill based pay : which provides employees with a direct link between their pay
progression and the skills they have acquired & use effectively
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 Service related Pay: these are fixed increments paid annually on the basis of
continued service either a job or grade.
 Increment may be withheld for unacceptable performance and some structures have a
“merit bar” that limits increments unless a defined level of merit has been achieved
 Service related pay is supported by many unions because they perceive it as being fair –
every one is treated equally.
 It is felt that linking pay to time in the job rather than performance or competence avoids
the partial and ill informed judgments about people that managers prone to make.
Some arguments against service related pay:
 It is inequitable in the sense that an equal allocation of pay increases according to service
does not recognize the fact that some people will be contributing more than others and
should be rewarded accordingly
 Does not encourage good performance; indeed it rewards poor performance as well
 It is based on the assumption that performance improves with experience;
 It can be expensive – everyone may drift to the top of the scale, especially in times of low
staff turnover, but the cost of pay is not justified by the added value they provide
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 Pensions & Employee Benefits :

 such as sickness pay, insurance cover, company car & number of other perks

comprise elements of remuneration additional to the various forms of cash

pay, and also include provisions for employees that are not strictly
remuneration, such as annual holidays.
 Flexible benefit scheme allow employees to decide on the make up of their

benefits package within certain limits

 Allowances :
 Allowances are paid in addition to basic pay for special circumstances or

features of employment.
 They may be determined unilaterally by the organization but they are often

subject of negotiation
 The main type of allowances are location allowance, overtime, shift,

working condition allowance, etc

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 Non Financial Rewards : these do not involve any direct payments and often
arise from the work itself, eg. Recognition, achievement, autonomy, scope to use
and develop skills, training, career development, development opportunity, etc
 Performance Management : it defines individual performance and
contribution expectations, assess performance against those expectations, provide
for regular constructive feedback & result in agreed plans for performance
improvement, learning and personal development. They are a means of providing
non – financial motivation
 Total Remuneration : it is the value of all cash payments – base pay,
contingent pay & allowances, i.e. total earnings) plus the pensions and benefits
received by employees

 Total Rewards : they are the combination of financial and non financial
rewards available to employees
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