Reward Management Flashcards
What is reward managment?
How much and in what form are employees paid (part of organisation’s total cost)
Why is Reward management so important?
- central to employment relationship
- reward policy determines profitability and competitive advantage
- Incentivise employee motivation and discretionary effort
- Recruit/retain effective stand in competitive labour markets
Aim of reward management
Design competitive reward packages that serve to attract, retain and motivate staff whilst keeping attention on costs to ensure financial visibility
Consequences of bad reward management
Demotivate, departure of good performers, higher absences, less effort and decay of employee relations climate - all lead to damage to org performance/effectiveness
Factors that shape reward management approach
- Contextual factors: international, national and corporate level
- Theories: economic theories, institutional theories, human capital theories
International level - how it influences reward management
- Extent of global competition within markets (global competition for talent)
- Increase desire for flexible work
- Differing cultural and institutional norms (MNCs)
National level - how it influences RM
- Changing demand for skills
- Working landscape: fragmented, moved towards contingent forms of reward
- Legislation (NMW, equal pay and pension auto-enrolment)
Corporate level - how it influences RM
- Ability to pay (financial position)
- Maintain position i market and reward level
- Whether/how reward strategies may be used to bring organisational change
- How individual pay rises and bonuses are best calculated
Economic theories - how it influences RM
Wages are determined based on balance of supply and demand for labour
Institutional theories - how it influences RM
Argue for an ‘open-systems’ approach
Human capital theories - how it influences RM
Workers invest in themselves through learning and training - different levels of reward used to attract workers depending on their level of accumulated capital
2 elements of the reward package (above base pay)
- Incentive payments
2. Employee benefits
5 core objectives - how to apportion monies between elements
- Need to attract and retain staff of desired calibre, experience and qualification
- Motivate workforce to maximise organisational performance
- Direct effort and enthusiasm in specific directions to encourage employee behaviour
- Underpin and facilitate mgmt of organisational change
- Minimise expenditure on wages and salaries over long term
Categories of rewards (Armstrong & Brown, 2009)
- Transactional (tangible)
- Relational (intangible)
- Individual
- Communal
- Each has equal potential as source of reward from employee perspective
Transactional (tangible) rewards
Financial
- Pensions
- Holidays
- Health care
- Perks
- Flexibility
Communal rewards
Leadership, organisational values, voice, recognition, achievement, job-design, work-life balance
Relational (intangible) rewards
Learning and development (as human being and as a professional), training, career development
Individual rewards
Base pay, contingent pay, bonuses, incentives, shares, profit-sharing
Total reward - define
Reward policies and practices extending beyond realms of payment - equal account of tangible and intangible rewards
2 key decisions of RM strategies
- How much should we pay each person
- How should payment package be made up
Setting base pay using external relativities - alternatives
- Estimation of ‘going rate’ for particular job
- ‘Market value’ of particular individual
Pay systems that focus on external market rates - pros
- allows employer to recruit ppl with required skills/experience
- helps retain ppl
- allows vacancies to be filled quickly
- helps employers project positive labor market image
- enhances motivation and satisfaction at work
- inexpensive and straight-forward method of determining pay rates
Alternative tools/approaches to obtain external market rates
Many sources, which is simple and inexpensive:
- Published data
- commercial salary surveys
- web-based sources
- bespoke salary surveys
- Salary clubs
- informal methods
Reasons against external relativities
- Viable alternative approaches are available
- Labour markets are imperfect
- Equal value argument
- Affordability issues
3 major alternatives to ‘going rate’
- Internal Labour markets
- Job Evaluation
- Collective bargaining
Internal labour markets - what?
Focused on internal differentials
Lazear (1995)
Level of base pay for each level in organisation’s hierarchy should be set according to similar principles. Level of pay for particular job should be set at a level which maximises performance lower down the hierarchy among employees competing for promotion - actual performance of the individual receiving pay is less important
Job Evaluation
System that is used to measure size and significance of all jobs in organisation
Process of job evaluation
- each job is scored with number of points, establishing a hierarchy - e.g. Amount of knowledge/experience and responsibility required
- each job has relative worth and payment distribution
Core principles of job evaluation
Fairness and objectivity:
Wage budget divided among employees on basis of assessment of nature/size of job
Job evaluation in the UK
Increased in recent years - 40% of UK orgs (CIPD, 2012)
- Incomes policies between 1965-74 encourage JE
Misunderstandings of JE
- Concerned with job, not performance of employee, individual merit is not assessed
- Technique is systematic (not scientific), depends on judgement of ppl - doesn’t produce infallible results
- Doesn’t eliminate collective bargaining where unions are recognised - determines differential gaps between incomes (doesn’t determine pay levels or annual pay rises)
- Only structure of pay rates is produced, other earning elements are not determined by this method
Methods of JE (Armstrong & Murlis, 2007)
- Non-analytical/whole job scheme: panel of assessors examine each job
- Analytical schemes based on points-rating systems: jobs examined using factors, each factor is given a weight
- Computer-assisted JE systems: info gathered from job analysis questionnaires
- Points values from each job plotted on graph and listed from highest to lowest: matched with cash amounts
Collective bargaining
Using collective negotiations with trade unions or employee representatives
What factors are considered?
- Mgmt side reference to external labour market rates, established internal pay, size of jobs
- Both sides refer to balance sheet
- Other factors such as inflation and hardship in employee’s life
Why is it different from other approaches?
Presence of industrial muscle, strong unions able to ensure cause is heard and taken into accounts, secure better deals compared to market rates
Issue with collective bargaining
Rise of service sector and lower union membership means bargaining arrangement only cover minority of UK workers
What do each side want from it?
Employers: argue that profit margins are too tight to afford rises
Union: seeks to gain share of increased profits for employees
Best approach for determining base pay
Taking both external relativities and internal differentials:
- treating different layout markets differently
- treating most talented employees differently
- using both mechanisms together (maybe collective bargaining too)
- Also depends on what approach labour market competitors take
Performance-related pay
Discretionary bonus/pay rise linked to individual’s performance in a role determined with reference to performance over a period (i.e. Year) - based on theory of expectancy
2 alternatives of Schemes
- Merit-based
2. Objective-based
Factors within schemes (PRP)
- based on practice of formal appraisal
- differ in type of payment they generate (bonus, pay rise, etc)
- % of salary that is performance-related or ‘at risk’
Advantages of PRP
- Attracting/retaining good performers
- Improve performance
- Improve motivation
- Clarifying job roles and duties
- Link effort to organisational objectives
- Improve communication
- Reinforcing mgmt control
- Identifying developmental opportunities
- Reinforcing employment relationship
- Reduce trade union influence
- Reasonably fair and objective method (distributing rewards)
- Means of rewarding without promoting them into unsuitable jobs
PRP disadvantages
- Psychologists: demotivating and team-destructive
- Sociologists: management control
- Feminists: gender inequality
- Most workers perceive their performance to be better than managers do
- Disappoints employees, which demotivated good (not outstanding) staff
Why does PRP schemes remain popular?
- management control (most effective/efficient way to enhance control)
- Fringe initiative (should not be used in isolation)
- Least-worst system (less harmful than others)
PRP considerations
- It works better in some job-groups and sectors than in others
- Works best for ppl engaged in managerial work, where clear personal objectives can be set and meet SMART criteria
