11/01/14 octorber,2013 1

EMPLOYEE BENEFITS AND COMPENSATION

PHILOSOPHY OF REWARD MANAGEMENT

Habibu Ayuba; B.Sc; PGDE; M.Sc; ACA in-view

08030527135

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OBJECTIVES OF THE PRESENTATION

At the end of the session the participants should be able to:

Define the philosophy of a reward management.

Understand the characteristics/qualities of the sound philosophy of the reward management.

Examine the factors influencing organizational philosophy of reward management.

Identify predetermined dangerous myths about employees’ pay.

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Philosophy of reward/compensation management

A philosophy is seen as a critical examination of the ground for the fundamental beliefs and analysis of the basic concepts employed in the expression of such beliefs.

Therefore, Philosophy of reward is a set of beliefs and guiding principles that are consistent with the value of the organization which is built in the companies’ compensation package and is aimed at achieving the following:

fairness, equity, efficiency consistency and transparency in the compensation system.

The philosophy emphases on investing in the human capital thereby a reasonable returns (Return on investment) as

required can be achieved.

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The philosophy assumes that the reward should be designed to reward employees differently in accordance with their contribution to organizational goal.

The reward policy must be strategic aimed at achieving longer term result with regard to how employee should be valued for what they do or what they achieve.

Its implementation always flows from the business strategy. The philosophy adopts total reward approach to compensation which is

aimed at achieving employees’ Motivation, Commitment, Engagement and Development.

It assumes to be acting as an integral part of a company’s overall Human resource management approach in managing people.

It is also affected by the organizational business strategy and human resources strategy. The formulation and survival of sound philosophy of reward management is relied on the external environment’s action and factors. These factors are herewith highlighted next.

Philosophy of rewards…cont….

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Factors influencing companies’ philosophy of reward management

Cost of living(inflation)

OrganizationalAbilityTo pay

OrganizationalOr

Technologicalchanges

Bargaining power of the

Trade unionCustom and

PracticeIn the

industry

Labor market condition

Productivity

comparability

GovernmentEconomic

Policy And

action

Government legislation

Philosophy Of

RewardManagement

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Characteristics/Qualities of the

Philosophy of Reward Management

Notably; managers are confronted with numerous challenges in determining how to reward employees.

There needs to balance the market competitiveness , internal equity, organizational performance and individual performance when designing attractive pay system that will shape organizational philosophy of reward management.

These qualities; as presented next; have been empirically determined as factors that contribute to and strongly related to/associated with employees'’ perception of pay, their attitude and pay/ job satisfaction.

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Fairnessas characteristic of the sound philosophy

Fairness: implies that the philosophy should be capable of being maintained to ensure that the compensation system treat all the stakeholders equally and without favoring any group (management versus subordinates, company versus staff etc) at the expense of another.

Reward programs, policies and practices that are not perceived as fair will not necessarily and successfully attract, retain and engage employees.

Reward fairness (Scott. D, McMullen. T, and Royal .M; 2011) have been found to be strongly related to employee attitude including pay satisfaction.

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Equity and justiceas characteristic of the sound philosophy

Equity: implies that not only justice according to natural law/right or freedom from bias or favoritism the system is free from but all jobs are categorized into job grades with reference to the job content and job sizes so as the same salary/pay range is apply to individuals of the same job grade.

Equity and justice are related concepts that have been determined as related constructs that are found to be strongly related to employees’ pay satisfaction.

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Efficiencyas characteristic of the sound philosophy

Efficiency: implies that an achievement of the compensation’ system principles is made at a reasonable cost and within the organizational budget.

Efficient compensation system is the package whose components are items that are related to employees’ pay only.

All other items of pay such as vouchers to assist someone, training allowance if it is not paid together with salary, Executive donation and gifts Etc; should not constitute part of compensation package.

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Consistencyas characteristic of the sound philosophy

Consistency: implies an ability of a reward system to be designed and prepared to maintain uniformity in pay structure thereby all similar items or individuals are treated equally over a long period of time.

It enhances employees’ feeling of equitably treated.

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Transparencyas characteristic of the sound philosophy

Transparency: implies that the compensation system is designed in such a way that all stakeholders can interpret it with minimum effort and is accessible to all stakeholders.

Transparent reward system enhances employees’ satisfaction on pay.

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Dangerous Myths about

Employees’ PayMyth is a popular belief/tradition that has grown up around

something/someone embodying the ideals and institutions of a society or its segment and usually is having an imaginary or

unverifiable existence.

The dangerous myths about employee compensation are as follows:

People works for money. Employee incentive pay improves his performance. Labor rates and labor costs are the same. Labor costs are lowered by cutting labor rate. Labor costs constitute a significant proportion of

organization's total costs. Low labor costs are a potent and sustainable competitive

weapon to organization

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Six Dangerous Myths

Managers are made to believe due to the much circulated conventional wisdom and public discussion about pay which are largely misleading, incorrect and sometime both. This results in business person and managers ended up adopting wrongheaded notions about how to pay employees and why. This belief serves as genesis of these six(6) dangerous Myths about Pay.

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Employees work for Money

Money is not a motivator as discovered. It is hygienic factor which only make employees to experience job no satisfaction.

To be satisfied with the work, employees need the job to be even more meaningful to their lives. To be a work works to have fun. Thus, the company/manager who share the belief usually ends up as bribing their employees which later in the long run manifest itself as employees’ lack of loyalty and commitment to the organization.

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Employee incentive pay improves his performance

It was discovered in practice and in reality, it rather undermines performance of the individual and the organization.

Studies have strongly suggested that individual employee’s incentives pay undermine team work and encourages a short-term focus.

It leads people to believe that pay is not related to performance at all, instead, it is about having right relationships and ingratiating personality.

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Labor Rate and Labor Cost are the same

Labor rates are straight total wages divided by the time/output.

Labor cost, however, is a calculation of how much a company pays its people in one hand and how much they produce, on the other hand.

Labor rate is relative to time/output while labor cost is relative to employees’ productivity.

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Labor costs are lowered by cutting labor rate

This belief is bought by managers who agree that labor costs are the same with labor rates.

Thus, since labor costs are the function of labor rates and labor productivity simultaneously, lowering them requires the need to address both productivity and rate. But, denominator Mangers find it difficult to do that.

That is why, sometime, lowering labor rate, instead, increases labor costs. Because, productivity may suffer due to low morale of employees.

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Labor costs constitute a significant proportion of total

organizational cost The assertion is true only if the labor costs is

proportional to a total costs. It is noted that labor costs, sometime, do not

proportionally vary with the total organizational cost. Because, labor costs usually vary widely according to the type of industry and companies.

This has encouraged denominator managers to improves their performance by cutting labor cost which is the only most immediate malleable expenses.

Managers should be developed and trained to act as numerator managers.

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Low labor costs are a potent and sustainable competitive

weapon Although, professor porter suggested in his generic

strategy (costs, differentiation, focus), he does not say labor cost along is the total cost of an organization.

Low labor costs is good, but, is a most slippery and least sustainable way to compete. It can easily be copied.

There are many competitive strategic advantage through quality, product/service, customer care services, product/process/service innovation or technology leadership which a company can adopt and are even very difficult to be imitated than the labor costs cut.

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conclusion Critically examining these myths, one can

observe how the belief system usually undermine the effort of company to justify the qualities/characteristics of sound philosophy of reward management.

In addition, it is observed that many motivational theories’ assertions have confirmed many of these submission.

The relevant theories include: Two factors theory of motivation (Herzberg,1966); Equity theory of motivation (Adams, 1963); Expectancy theory of motivation (Vroom,1964) to name but few.

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Thanks for Listening and Attendance