Reward System

What is Reward System ?

Reward system refers to the procedures, rules, and standards associated with allocation of benefits and compensation to employees. Reward system in the context of performance management is defined as an. integrated system that ensures equitable avenues to employees for fulfillment of their financial and non financial needs and recognition urge for their contribution to attainment of organizational goals.

An employee reward system consists of an organization's integrated policies, processes and practices for rewarding its employees in accordance with their contribution, skill and competence and their market worth. It is developed within the framework of the organization's reward philosophy, strategies and policies and contains arrangements in the form of processes, practices, structures and procedures which will provide and maintain appropriate types and levels of pay, benefits, and other forms of reward.

Objectives of Reward System

Reward system has three main objectives :

1) Attraction : 
A reward system is intended to attract and retain suitable employees. An employer who develops a reputation as "cheap" is unlikely to be desirable in the job market, because potential employees will think it does not reward effort. Such an organization is likely to end up with the people that nobody else wants.

2) Great Performance : 
Compensation is also intended to maintain and improve performance. As we know that nobody can truly motivate, employee motivation can only come from within. But the promise of a bonus or a pay rise is intended to encourage employees to motivate themselves to reap the compensation.

Performance-related pay is very popular in today's organizations. In Canada, over 70 per cent of companies offer it in some form. Some companies have three different kinds of performance-related pay: individual, team, and organization. The main problem with Individual Performance-Related Pay (IPRP) is that it assumes that pay alone motivates workers, but this is not correct. Consider the intrinsic compensation or psychological compensation mentioned earlier. A worker with high pay but who receives no intrinsic compensation will probably go elsewhere.

3) Commitment : 
The reward system also serves to maintain and strengthen the psychological contract It indicates what behavior the organization values. i.e. what is paid for.
For example, if a company values teamwork, then there will probably be a team bonus of some kind. The psychological contract will partly determine what employees perceive to be "fair" in terms of reward for work they do.
Disruptive behavior such as theft in the workplace is often an attempt to restore "fairness" to remuneration. Violation of the psychological contract is far more likely to cause problems with employees more than any other single factor.

Components / Types of Reward System 

An organization's reward system comprises these components. In designing an effective reward and compensation system, all these elements must be carefully considered, as detailed below :

1) Financial Reward : 
Financial compensation is direct monetary compensation encompassing the payment of cash compensation to employees for work accomplished or efforts expanded. 
For example, salary, wage, incentives, commission, etc.

2) Non-Financial Reward : 
Non-financial compensation are indirect monetary compensation and include those items of financial value the organization provides to employees that do not result directly in employee's receiving spend able cash. 
For example, medical insurance, life insurance, subsidize canteen, subsidized transport, free uniforms, interest-free loans, etc.

3) Reward Policies : 
Reward policy will cover such matters : 

i) Level of Compensation : 
The policy on the level of compensation indicates whether the company is a high payer, is content to pay median or average rates of pay or even, exceptionally accepts hat it has to pay below the average. 

ii) External Competitiveness versus Internal Equity : 
External competitiveness refers to the pay rates of an organization's jobs in relation to its competitors' pay rates. Internal equity exists when an employer pays wages commensurate (equal) with the relative internal value of each job. This is established according to the employer's perception of the importance of the work performed.

iii) Assimilation Policies : 
The introduction of a new or considerably revised pay structure means that policies have to be developed on how existing employees should be assimilated i.e. adjusted into it. These policies cover where people should be placed in their new grades and what happens to them if their new grade and pay range means that their existing rate is above or below the new scale for their job.

iv) Protection Policies : 
Protection (sometimes called safeguarding) is the process of dealing with the situation when, following the introduction of a new pay structure, the existing pay of some employees may be above the maximum for their new grade and they are therefore 'red-circled. In these circumstances the general rule is that no one should suffer a reduction in their present rate of pay.

v) Transparency : 
There is no chance of building a satisfactory psychological contract unless the organization spells out its reward policies and practices. Transparency is achieved through involvement and communication.

4) Psychological Satisfaction : 
This form of reward includes opportunities to perform meaningful work, social interactions with others in the workplace, job training career advancement opportunities, recognition, employer brand, and a host of similar factors. 

5) Pay Structures : 
Companies often establish more than one pay structure, depending on market rates and the company's job structure. Common pay structures include exempt and non-exempt structures, pay structures based on job families, and pay structures based on geography :

i) Exempt and Non-Exempt Pay Structures : 
Exempt jobs are not subject to the overtime pay previsions of the act. Core compensation terms for these jobs are usually expressed as an annual salary. Non exempt jobs are subject to the overtime pay provision of the act. Accordingly, the core compensation for these jobs is expressed as an hourly pay rate. Companies establish these pay structures for administrative case. Some broadly consistent features distinguish exempt from non-exempt jobs, Exempt jobs, by the definition of the Fair Labor Standards Act, are generally supervisory, professional, managerial, or executive jobs that contain a wide variety of duties. Non-exempt jobs are generally non supervisory in nature, and the duties tend to be narrowly defined.

ii) Pay Structures Based on Job Family : 
Executive, managerial, professional, technical, clerical, and craft represent distinct job families. Pay structures are also defined on the basis of job family, each of which shows a distinct salary pattern in the market.

iii) Pay Structures Based on Geography : 
Companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices may establish pay structures based on going rates in different geographic regions because local conditions may influence pay levels. The cost of living is substantially higher in the northeast region than in the south and southeast regions of the United States.

6) Base Pay : 
Base (or basic) pay is the level of pay (the fixed salary or wage) that constitutes the rate for the job. It may provide the platform for determining additional payments related to performance, competence or skill. It may also govern pension entitlement and life insurance. The basic levels of pay for jobs reflect both internal and external relativities. The internal relativities may be measured by some form of job evaluation which places jobs in a hierarchy (although the trend now is to play down the notion of hierarchy in the new process-based organizations). External relativities are assessed by tracking market rates. 

7) Job Evaluation : 
Job evaluation is a systematic process for defining the relative worth or size of the joi 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. It is based on the analysis of jobs or roles, which leads to the production of job descriptions or role profiles.

8) Contingent Pay : 
Additional financial compensation may be provided that are related to performance, competence, contribution, skill and/or experience. These are referred to as 'contingent pay. If such payments are not consolidated into base pay, they can be described as variable pay'. Variable pay is sometimes defined as 'pay at risk'. For example, the pay of sales representatives on a 'commission-only' basis is entirely at risk. The main types of contingent pay are : 

i) Individual Performance-Related Pay : 
In which increases in base pay or cash bonuses are determined by performance assessment and ratings (also known as merit pay).

ii) Bonuses : 
Compensation for successful performance which is paid as cash (lump) sums related to the results obtained by individuals, teams, or the organization.

iii) Incentives : 
Payments linked with the achievement of previously set targets which are designed to motivate people to achieve higher levels of performance; the targets are usually quantified in such terms as output or sales. 

iv) Commission : 
A special form of incentive in which sales representatives are paid on the basis of a percentage of the sales value they generate.

v) Service-Related Pay : 
It increases by fixed increments on a scale or pay spine depending on service in the there may times be scope for varying the rate of progress up the scale according to performance.

vi) Competence-Related Pay : 
Competence-related pay varies according to the level of competence achieved by the individual.

vii) Contribution-Related Pay : 
Which relates pay to both outputs (performance) and inputs (competence).

viii) Skill-Based Pay (Sometimes called Knowledge-Based Pay) : 
Which varies according to the level of skill the individual achieves.

ix) Career Development Pay : 
Which compensation people for taking on additional responsibilities as their career develops laterally within a broad grade (a broad-banded pay structure).

9) Allowances :
Allowances are elements of pay in the form of a separate sum of money for such aspects of employment as overtime, shift working, call-outs and living in London or other large cities. London or large-city allowances we sometimes consolidated; organizations which are simplifying their pay structure may "buy out the allowance and increase base pay accordingly.

10) Total Earnings : 
Total earnings are usually calculated as the sum of base pay and any additional payments.

11) Total Remuneration : 
Total remuneration is the value of all cash payments (total earnings) and benefits received by employees.

Designing Reward System

The organization should be clear about what it would like to reinforce through rewards - performance, effort, process, credibility, team building, loyalty (retention), sincerity etc. This needs to be clearly communicated advance to the employees concerned. Regardless of what the management says it rewards people will respond to what behaviors they perceive are rewarded. Employees should preferably be involved in such a decision.

Rewards can be broadly classified into extrinsic and intrinsic rewards. Extrinsic rewards are bonuses, paid holidays, etc. These can be classified as monetary and non-monetary rewards. Examples of monetary towards are performance bonus, profit sharing, stocks, etc. Whereas non-monetary rewards include gifts, holidays. facilities, etc. Intrinsic rewards include providing more responsibility, greater job freedom and discretion, more interesting and challenging work, opportunities for personal growth toot vertical tine-band promotion), diversity of activities, etc. Since rewards are symbols of recognition, non-monetary rewards are preferable. Organizational culture is created and maintained and organizational goals are fulfilled not only by individuals but also by teams. In fact, was organizational tasks are carried-out in teams. So it is necessary to think of rewarding both the individuals and the teams.

As the first step in designing a reward system, an organization should develop consensus on the values, norms, and behavior it wants to reinforce in its members. In short, is should be clear on the kind of organizational culture it wants to create. The following points may be kept in mind while designing reward system :
  1. Rewards should be given to both individuals and teams.
  2. A multi-dimensional and wider reward system is likely to reduce undue pressure on promotions from which many organizations in India suffer. 
  3. Variable component of compensation may be included in the reward system.
  4. Extra increments, as reward are dysfunctional lump-sum rewards may instead be considered. 
  5. Rewards must develop pride in belonging to the organization and a felting that people are valued. It should promote teamwork and inter-team collaboration, and should reinforce organizational values and what is desirable in the organization and the unit/department concerned. HRD should conduct annual surveys in the various units/departments to get feedback on these and other dimensions of the reward system. The results should be discussed at the top level.
  6. A manual for reward system may be developed, so that all employees may know about the system Corporate and Department Rewards Committees may be constituted. The Corporate Rewards Committee may collect data, rate various units/departments on different dimensions, receive recommendations, approve (after discussions with respective unit/departments heads), etc. It may also develop policy, formats schemes, procedures, etc.
  7. A reward corpus may be formed, e.g.. by contributing some 15% of managers wage bill. All rewards may come out of this fund. Cash rewards, non-cash intrinsic rewards and non-cash extrinsic rewards may be of the same quantum.
  8. It is very important that there is transparency and fairness in the reward system and is perceived so by the employees.

Issues in Designing Reward System

Designing a reward system involves the following challenges / issues :
  1. Whom to reward ?
  2. What to reward ?
  3. What kind of reward ?

Whom to Reward ?

In any company different types of employees exist - Managers, blue collar workers, white collar workers, line employees, project team members, permanent teams, individual workers, and so on and so forth. Organization need know whom to reward. In general, it relates to the question if organization should reward all employees of company or only a certain kind. In teamwork, the reward target relates to the question if reward should be given to the team, the team's individuals or both.
This implies that all employees are suitable for rewards. Some authors such as Armstrong emphasize that certain types of employees need special consideration. For example, sales staff and top managers are particularly predestined for rewards due to the nature of their job. In addition, this kind of staff tends to have a high entrepreneurial personality: Armstrong also mentions that project teams need special consideration for getting reward.

What to Reward ?

Another important aspect is to know what to reward the employee's results or performance or behavior or the skills.
Four main objectives exist that can be rewarded. These are employee's results, performance, competence, and skills. The discussion about the reward target focuses on the influence of the task characteristics : 

1) Results-Based Rewards : 
It means payment by piecework. It is widely accepted by the modest reward proponents the payment by results can work for very simple and quantity focused jobs such as answering phones calls in call centers (e.g. Miller 1991, Ellemers et al., 2004, and Rosenbloom 2001). Performance Saved rewards are the most common type of rewards (IRS Employment Review 2001 in Armstrong 2002). Usually, certain objectives are agreed between employees and their superior and later the employees are assessed. Depending on the assessment, the employees get a reward, often in the form of a cash bonus.

2) Performance-Based Rewards : 
It needs good benchmarks that the actual performance can be measured against. Otherwise, employees will feel assessed unfairly.

3) Competence-Based Rewards : 
It focuses on "the ability to perform". Competence is only measurable in qualitative terms and usually "hangs on the back of an existing (performance-based reward) system". The advantage is that long-term employee development is supported. On the other hand it is cost intensive and a danger exists that value for money is low. It is more suitable for quality-focused work where the way something is done should be rewarded rather the results or actual performance. That means even if employees do not reach a goal or perform not as well as originally assumed they might still be rewarded if the assessment reveals that they brought out the best of the job.

4) Skill-Based Rewards : 
It supports the development of skills. It makes sense when companies want flexible employees. The use of skill-based rewards supports the long-term development of the employees and can be cost intensive. Skill-based rewards are suitable for qualitative jobs and are the contrast to result-based rewards.

What Kind of Reward ? 

Next important aspect is to decide what kind reward should be given. Cost intensive incentives such as cash bonuses or rather recognition such as a certificate or an "employee of the month" award or may be both. Incentive's tend to be financial rewards given for reaching an agreed objective. Their purpose is to motivate employees.
Recognition tends to be a non-financial reward or financial reward with a rather symbolic character. It is given to employees spontaneously and the purpose is to appreciate the work that employees did in the past. The exact distinction is often difficult. Incentives become recognition in the moment they are given. Recognition may become motivational if employees expect to get the recognition. It is possible and often recommendable to give both, recognition and incentives to employees. For example, one major incentive could be promised for meeting an overall objective. Additional recognition could be given for meeting sub-goals and as impulses to keep the employees going.