Reward Reward ManagementManagement

The main question is:The main question is:how to achieve high work how to achieve high work

performance?performance?

Job characteristics and Job characteristics and ((physicalphysical)) work environmentwork environment

++Abilities and skillAbilities and skills s

++The willingness to performThe willingness to perform

Work performance is affected by:Work performance is affected by:

Rewarding EmployeesRewarding Employees Major strategic rewards decisions:Major strategic rewards decisions:

WhatWhat to to paypay employees employees HowHow to pay individual employees to pay individual employees What benefits What benefits to offerto offer How to construct How to construct employee employee

recognition programsrecognition programs

What to payWhat to pay Need to establish a pay structureNeed to establish a pay structure Balance between:Balance between:

Internal equity – the Internal equity – the value value of the job of the job forfor the organizationthe organization

External equity – the external External equity – the external competitiveness of an organization’s competitiveness of an organization’s pay relative to pay relative to a a pay elsewhere in its pay elsewhere in its industryindustry

A strategic decision with trade-offsA strategic decision with trade-offs

Definition of Definition of Reward Reward ManagementManagement

• This management discipline is This management discipline is concerned with the formulation and concerned with the formulation and implementation of strategies and implementation of strategies and policies, the purposes of which are policies, the purposes of which are to reward employees to reward employees fairly, fairly, equitably and consistentlyequitably and consistently in in accordance with their accordance with their valuevalue to the to the organisation.organisation.

• It deals with design, implementation It deals with design, implementation and maintenance of reward and maintenance of reward systems systems (processes, practices, procedures(processes, practices, procedures) ) that aim to meet the needs of both that aim to meet the needs of both the organisation and its the organisation and its stakeholders. stakeholders.

Philosophy of Reward Philosophy of Reward ManagementManagement

Strategic senseStrategic sense: long-term focus & it : long-term focus & it must be derived from the business strategymust be derived from the business strategy

Total Reward approachTotal Reward approach: considering all : considering all approaches of reward (financial or not) as approaches of reward (financial or not) as a coherent whole; integration with other a coherent whole; integration with other HRM strategiesHRM strategies

Differential Differential reward according to the reward according to the contribution contribution

Fairness, equity, consistency, Fairness, equity, consistency, transparencytransparency

Economic theories Economic theories (partially) explaining pay (partially) explaining pay

levelslevels Supply & DemandSupply & Demand: labor market factors: labor market factors Efficiency wage Efficiency wage theory: attraction of theory: attraction of

better employees, motivation, reducing better employees, motivation, reducing fluctuation leads to high wagesfluctuation leads to high wages

Human Capital Human Capital theory: productivity theory: productivity differences differences

Principal – Agent Principal – Agent Theory: inequality in Theory: inequality in the information leads to „agency costs”the information leads to „agency costs”

The effort The effort bargainbargain: collective bargaining: collective bargaining

Total Reward (Armstrong 2009)

All types of reward:• Non-financial as well as financial,

• Indirect as well as direct,

• Extrinsic as well as intrinsic.

Each element is developed, implemented and treated as an integrated and coherent whole.

Transactional(tangible) rewards

Relational(intangible)

rewards

Base pay

Contingent pay

Employee benefits

Learning and development

The work experience

Totalremuneration

Non-financial rewards

Recognition, achievement, growth

Total reward

Components of Total Reward (Armstrong 2009)

The 4Ps of RewardThe 4Ps of Reward

PayPay Salary, bonus, shares, etc.Salary, bonus, shares, etc.

PraisePraise Positive feedback, commendation, staff-of-the-Positive feedback, commendation, staff-of-the-

year award, etc.year award, etc. PromotionPromotion

Status, career elevation, secondment, etc.Status, career elevation, secondment, etc. PunishmentPunishment

Disciplinary action, withholding pay, or Disciplinary action, withholding pay, or criticism, etccriticism, etc

Business & HR strategy

Rewardstrategy Total RewardTotal

Remuneration

Job evaluation

Grade & pay structure

Market rateanalysis

Contingent pay

Employeebenefits

Non-financialrewards

Allowances

Performance management

DerivatiDerivation of on of TotalTotal

RewardReward

Strategic Reward Strategic Reward ManagementManagement

Where do we want our reward Where do we want our reward practices to be in a few years time? practices to be in a few years time? (vision)(vision)

How do we intend to get there? How do we intend to get there? (means)(means)

Reward StrategyReward Strategy

A declaration of intent that defines what the A declaration of intent that defines what the

organisation wants to do in the organisation wants to do in the longer term to longer term to

develop and implement reward policies, practices develop and implement reward policies, practices

and processes and processes that will further the achievement of that will further the achievement of

its business goals and meet the needs of the its business goals and meet the needs of the

stakeholders. stakeholders.

It gives a It gives a frameworkframework to other elements of reward to other elements of reward

management. management.

The structure & content of The structure & content of a a

Reward strategyReward strategy Environment analysis:Environment analysis:

Macro-level: social, economical, demographicMacro-level: social, economical, demographic Industrial levelIndustrial level Micro-level: competitorsMicro-level: competitors

Analysis of the „inner environment”: strategy, Analysis of the „inner environment”: strategy, job evaluation, financial conditions…job evaluation, financial conditions…

Gap-analysisGap-analysis Guiding principlesGuiding principles Broad-brush reward strategyBroad-brush reward strategy Specific reward initiativesSpecific reward initiatives

Job-evaluationJob-evaluationA systematic process

For defining the relative worth/ size of jobs/roles within an organisation

For establishing internal relativities For designing an equitable grade

structure and grading jobs in the structure

To give an input for reward considerations

Dimensions of job Dimensions of job evaluationevaluation

Relative or measured to an absolute scaleRelative or measured to an absolute scale RelativeRelative: compares jobs to one another : compares jobs to one another

within the companywithin the company AbsoluteAbsolute: compares to an „independent”, : compares to an „independent”,

external measureexternal measure Analytical or non-analytical (global)Analytical or non-analytical (global)

AnalyticalAnalytical: measures factors or elements of : measures factors or elements of the jobsthe jobs

Non-analyticalNon-analytical: measures the job as a whole: measures the job as a whole

Market pricing – jobs are placed in pay structures entirely on the basis of external relativities, ie market rates (a method of pricing jobs but not job evaluation as usually defined)

Analytical job evaluation (point-factor rating or analytical matching) – decisions on the relative value or size of jobs are based on an analysis of the degree to which various defined elements or factors are present in the form of demands on the job holder

Non-analytical job evaluation (job classification or ranking) – whole jobs are described and compared to slot them into a defined grade or place them in a rank order or without analysing them into their elements

Types of Job EvaluationTypes of Job Evaluation (Armstrong 2009)(Armstrong 2009)

Types of Job Types of Job EvaluationEvaluation

Non-analytical Non-analytical EvaluationEvaluation

Analytical Analytical EvaluationEvaluation

• Whole job Whole job rankingranking

• Points ratingPoints rating

• Paired Paired comparisonscomparisons

• Proprietary Proprietary schemesschemes

• Job classificationJob classification

FactorFactor Level Level 11

Level Level 22

Level Level 33

Level Level 44

Level Level 55

Level Level 66

ExpertiseExpertise 2020 4040 8080 100100 120120

DecisionsDecisions 2020 4040 6060 100100 120120

AutonomyAutonomy 2020 4040 8080 100100 120120

ResponsibilityResponsibility 2020 4040 8080 100100 120120

InterpersonalInterpersonalskillsskills

2020 4040 6060 8080 120120

60

80

60

60

100

Total score = 360

Job Evaluation: Scoring (Armstrong(Armstrong 2009)2009)

Hay proprietary schemeHay proprietary scheme AA group of role analysts, working as a panel assess the group of role analysts, working as a panel assess the

role (from an agreed job description and information) role (from an agreed job description and information) against a number of factors, which are known as the Hay against a number of factors, which are known as the Hay Guide Chart Profile.Guide Chart Profile.

1. Know – How 1. Know – How The level of knowledge, skill and experience required The level of knowledge, skill and experience required to perform to perform

the job successfully. the job successfully. 2. Problem Solving2. Problem Solving

The complexity of thinking requiredThe complexity of thinking required, both in the type of problems , both in the type of problems come across and the extent to which the jobholder has precedent come across and the extent to which the jobholder has precedent and/or assistance in solving them (applying their Know – How).and/or assistance in solving them (applying their Know – How).

3. Accountability3. Accountability The impact The impact the job has on the organization (i.e. the end result) the job has on the organization (i.e. the end result)

and the extent to which the jobholder acts and the extent to which the jobholder acts autonomously in autonomously in achieving achieving this.this.

Wage gapsWage gaps Wage gaps can occur in companies using Wage gaps can occur in companies using

international benchmarking in job evaluation. international benchmarking in job evaluation. The cause is simple:The cause is simple: The market of top managers is usually The market of top managers is usually

international: they earn international wages, or international: they earn international wages, or they leave the firmthey leave the firm

The market of workers with little or no qualification The market of workers with little or no qualification is local in (nearly) every case: they earn local is local in (nearly) every case: they earn local wages.wages.

In less developed countries this can lead to In less developed countries this can lead to enermous wage gaps between the „top” and enermous wage gaps between the „top” and „bottom” employees.„bottom” employees.

Components of Total Components of Total RemunerationRemuneration

Base payBase pay: Base pay is the fixed compensation paid to : Base pay is the fixed compensation paid to an employee for performing specific job an employee for performing specific job responsibilities.  It is typically paid as a salary, hourly responsibilities.  It is typically paid as a salary, hourly (or in some situations piece rate). There is a tendency (or in some situations piece rate). There is a tendency towards market orientation and the increasing role of towards market orientation and the increasing role of qualifications. qualifications.

Contingent payContingent pay: Individual contingent pay relates : Individual contingent pay relates financial rewards to the financial rewards to the individual performance, organisation or team performance,individual performance, organisation or team performance, competence, competence, service,service, contribution or contribution or skill of individual employees.skill of individual employees.Consolidated payConsolidated pay: built into the base pay: built into the base payVariable payVariable pay: provided in the form of cash bonuses (increasing : provided in the form of cash bonuses (increasing

role nowadays).role nowadays). Employee benefitsEmployee benefits: Elements of remuneration given in : Elements of remuneration given in

addition to the various forms of cash pay.addition to the various forms of cash pay.

Contingent payContingent pay Individual contingent pay is a good Individual contingent pay is a good

motivator (but to what extent?) for those motivator (but to what extent?) for those who receive it.who receive it.

It attracts and retains better workers.It attracts and retains better workers. It makes labour related expenditures more It makes labour related expenditures more

flexible.flexible. It can demotivate those who don’t receive it It can demotivate those who don’t receive it

(depends on performance measurement)(depends on performance measurement) Can act against quality and teamwork.Can act against quality and teamwork.

Types of individual Types of individual contingency payscontingency pays

PerformancePerformance-related: increases basic pay or -related: increases basic pay or bonuses related to assessment of bonuses related to assessment of performanceperformance

CompetenceCompetence-related: Pay increases related -related: Pay increases related to the level of competenceto the level of competence

ContributionContribution-related: pay is related both to -related: pay is related both to inputs and outputsinputs and outputs

SkillSkill-based: pay is related to acquisition of -based: pay is related to acquisition of skillsskills

ServiceService-related: pay is related to service-time-related: pay is related to service-time

Team based payTeam based pay Pay is related to team performancePay is related to team performance It can encourages teamwork, loyalty It can encourages teamwork, loyalty

and co-operationand co-operation It can be demotivating on individual It can be demotivating on individual

level (encourages social loafing)level (encourages social loafing)

Organisaton-wide Organisaton-wide schemesschemes

Profit-SharingProfit-Sharing Plans – organization-wide Plans – organization-wide programs that distribute compensation programs that distribute compensation based on an established formula designed based on an established formula designed around profitabilityaround profitability

Gain Sharing Gain Sharing – compensation based on – compensation based on sharing of gains from improved sharing of gains from improved productivityproductivity

Employee Stock Ownership Plans (ESOPs) Employee Stock Ownership Plans (ESOPs) – plans in which employees acquire stock, – plans in which employees acquire stock, often at below-market pricesoften at below-market prices

Employee benefitsEmployee benefits Attractive and competitive total Attractive and competitive total

remunerationremuneration Provide for the personal needsProvide for the personal needs Increase commitment toward the Increase commitment toward the

organisationorganisation Tax-efficientTax-efficient

Main types of Employee Main types of Employee benefitsbenefits

Pension schemesPension schemes Personal (and family) security: different types of Personal (and family) security: different types of

insurancesinsurances Financial assistance: loans, house purchase Financial assistance: loans, house purchase

schemes, discount on company services…schemes, discount on company services… Personal needs: holidays, child care, recreation Personal needs: holidays, child care, recreation

facilities, career breaks…facilities, career breaks… Company cars and petrolCompany cars and petrol Intangible benfits: quality of working life…Intangible benfits: quality of working life… Other benefits: mobile phones, notebooks…Other benefits: mobile phones, notebooks…

Cafeteria systemsCafeteria systems

Definition of the Definition of the psychological contractpsychological contract

““The perceptions of both parties to the The perceptions of both parties to the employment relationship, organization employment relationship, organization and individual, of the reciprocal promises and individual, of the reciprocal promises and obligations implied in that and obligations implied in that relationship”relationship”

The The statestate of the psychological contract is of the psychological contract is concerned with whether the promises and concerned with whether the promises and obligations have been met, whether they obligations have been met, whether they are fair and their implications for trust.are fair and their implications for trust.

The Psychological The Psychological Contract FrameworkContract Framework

(David Guest)(David Guest)

The Good Employer

&The High Quality

Workplace

TheDeal

SatisfiedAnd

ProductiveWorkers

Total remuneration in Total remuneration in recessionrecession

It It is is a good chance to rethink and a good chance to rethink and renew the remuneration systemrenew the remuneration system

Share of contingency payment should Share of contingency payment should increaseincrease

Employer benefits, that do not need Employer benefits, that do not need short term expenditure will increase:short term expenditure will increase: Company carCompany car Saturday-year or sabbaticalSaturday-year or sabbatical (free(free time)time) Share-optionsShare-options

Thank you for Thank you for your attention!your attention!