1 Managing People in OrganisationsLecture 8 - Managing Employee Reward

2 Learning Objectives for this LectureExamine the fundamental purposes of reward management Critically review influential theories of work motivation and assess their implications for the design of reward systems Evaluate individual performance related pay (PRP) systems Assess contemporary approaches in reward management

3 The Contribution of Reward in HRMEnsuring the right mix and levels of reward are provided in line with the needs of the business the needs of employees the economic, competitive and market environment in which the business operates. Developing a strong orientation towards the achievement of sustained high levels of performance. Indicating to employees what types of behaviour will be rewarded and how this will take place, thus clarifying perceptions about performance and supporting a performance culture, increasing motivation and commitment.

4 Objectives in Reward Employee Objectives Employer objectivesPurchasing Power Fairly treated Rights Relatives Composition Employer objectives Prestige Competition Control Motivation Productivity Profitability Underpin performance

5 Concept of a Reward SystemAn employee reward system consists of an organisation’s integrated policies, processes and practices for rewarding its employees in accordance with their contribution, skill and competence and their market worth. (Armstrong 1997:4) Reward values Structural issues Process features (Lawler 1995) Values: paying for performance, equity, employees sharing in success, combining financial and non-financial rewards. Structures: clear division between base and variable pay, PRP, team based pay, broad pay bands, job design, appraisals, gain-sharing Process: communication, implementation, consistency, evaluation.

6 Reported Important Reward Strategy Goals% of respondents by sector All Public Private Voluntary Support business goals 83 71 85 80 Reward high performance 76 66 79 60 Recruit and retain high performers 49 75 55 Achieve/maintain market competitiveness 34 64 Manage pay costs 63 54 65 Link pay to the market Ensure internal equality 35 30 Source: CIPD(2003) Responses are a percentage of the total sample listing as an important goal

7 Development of Vroom’s model: Porter and Lawler: Expectancy Model of MotivationPerception that attractive rewards are available Valence Ability Intrinsic rewards Perception that effort will lead to effective performance Expectancy EFFORT PERFORMANCE SATISFACTION Extrinsic rewards Role perceptions Perceptions of demands of job and most expedient way of doing the job Perception that effective performance will lead to rewards Instrumentality Perceived equity of rewards

8 Process Theories of Motivation - Operant Conditioning TheoryThe theory suggests that people learn to behave in a particular fashion as a result of the consequences that have followed their past behaviours. Operant conditioning — a learning process based on the results produced by a person “operating on” the environment. The reaction of the environment is to reward, punish, or ignore the person. Reinforcement — occurs when a consequence makes behaviour more likely to be repeated. Extinction — occurs when a consequence or no consequence makes behaviour less likely to be repeated.

9 Operant Conditioning Theory (continued)Schedules of reinforcement Fixed ratio — a specific number of responses must be made before reinforcement (consequence) occurs. Variable ratio — the number of responses before reinforcement varies around an average number of responses. Fixed interval — a certain amount of time must past before reinforcement occurs. Variable interval — the amount of time before reinforcement varies around an average time interval.

10 Equity Theory Theory states that motivation is affected by an individual’s perception of the equity (fairness) of the outcomes (rewards) they receive in return for their inputs (efforts), compared to the outcomes and inputs of other people (referent others). Referent other ratio comparisons: State of equity — ratio comparison is satisfactory. Over-reward — ratio comparison favours the individual. Under-reward — ratio comparison favours the referent other.

11 The Equity Theory ComparisonOUTCOMES PERSON INPUTS REFERENT OTHER ??

12 Process Theories of MotivationGoal Theory The theory states that people will perform better if they have difficult, specific accepted performance goals or objectives. People will attempt to achieve those goals that they intend to achieve. Difficult goals result in better performance than easy goals. Specific goals are better than vague goals. People must accept goals as their own if they are to work toward achieving them. People must commit to goals to achieve them.

13 Components of Pay Direct pay: Indirect pay: Base pay Merit pay (PRP)Incentives / Bonus Service related pay Skill based pay Profit related pay: Profit-sharing Share options Saving related share options Indirect pay: Pension Sick pay Insurance Non-financial reward: intrinsic rewards Recognition Achievement Responsibility/Influence Personal growth

14 Basic Approaches to RewardTwo basic approaches Service philosophy: emphasises the acquisition of experience - length of service is rewarded Fairness philosophy: emphasises the right reward for the demands of the job and the performance of the individual

15 Types of Payment Scheme 1: Time RateType A: Time rates (service philosophy) In the UK: 75% of all employees are on time rates Hourly rate, weekly or monthly wage, annual salary Either: Flat rate Incremental increases (based on length of service) Advantages and Disadvantages?

16 Pay Bands Salary bands: Movement towards broad bands/single spinesRange – allows for progression as experience / competence builds Overlap between bands: highly competent job holder in band A may be “worth” more to the firm than a newly appointed person on band B Importance of differentials … difference between the mean pay in one band with the mean pay in another – sense of status/fairness Movement towards broad bands/single spines Flattening organisations Flexibility

17 Types of Payment Scheme 2: PBRType B: Payment by results (fairness philosophy) e.g. “piece work” pay/commission pay Can apply to whole or, more usually, part, of employees’ pay (top-up to basic pay) Can involve: payment varying according to output … or payment of a fixed sum upon the achievement of a particular level of output

18 Types of Payment Scheme 2: PBRParticular jobs for which PBR is most suitable? Advantages and Disadvantages?

19 Individual Bonus PaymentsThe reward is immediately payable for work well done The bonus can be linked to past and future targets, and is therefore both a reward and an incentive Lump sum payments appeal to some people Additional rewards can be given to people at the top of their salary scale without damaging the integrity of the salary structure May concentrate on that aspect of the job which leads to a bonus

20 Types of Payment Scheme 3: PRPFrom PBR (quantity) to PRP (quality) … Widespread moves in the last decade towards individual Performance Related Pay Three Levels: 1) Individual 2) Group 3) Business unit … Long-term PRP: Employee share ownership

21 Types of Payment Scheme 3: PRPTop-up to standard annual, inflationary, pay increase at differential rates (e.g. +2%, +4%, +8%) to reflect the individual’s personal performance Inflationary pay increase might itself be performance related … i.e. possibility of pay cuts Quotas established for each increase band: e.g. only 5% of employees will qualify for the 8% rise PRP – using qualitative judgements … Clear, measurable, criteria needed Consistent / fair judgements …. with appeals procedure

22 Types of Payment Scheme 3: PRPPurcell (2000): “Most people in receipt of individual performance related pay are in the middle range of performance. We can expect 10% of staff to be in the top performing bracket and 5% to be in the poor performer category. The rest, all 85% of them, will get average awards that are similar to the going rate. Most of them have no prospect of getting into the top bracket next year, so the incentive is minimal. We could live with this if the outcome of this pay system was neutral, but often it is negative, costing more than any benefit achieved” So …. Is it worth it … advantages and disadvantages?

23 Does PRP Deliver Enhanced Performance?A number of major research studies failed to demonstrate any causal link between PRP and performance or productivity. Armstrong 1996:239

24 Characteristics of a Successful PRP SchemeIndividuals need to be clear about the targets and standards of performance required. Performance must be measurable, if you cannot measure performance you cannot pay for performance Should be clear about the rewards received for achieving the end result - there should be a clear link between effort and reward The results required to generate the reward should be attainable, although not too easily Schemes must deliver significant rewards if they are to produce the desired motivational impact and be taken seriously They must be in a position to influence the performance by changing their behaviour or decisions Schemes must offer sufficient differentials between levels of performance rating The reward should follow as closely as possible to the accomplishment that generated it

25 Disadvantages of PRP It is not a guaranteed motivator; the performance pay criteria are often difficult if not impossible to meet. It has to be based on some form of assessment , usually a rating, but it may be difficult to produce realistic performance measures. As a result ratings may be unfair, subjective and inconsistent PRP can lead to pay rising faster than performance (pay drift) questionable that it is cost effective. As a result PRP tends to be more about managing the pay bill rather than managing reward

26 The Two Extremes of PRP Cautious PRP believer Confirmed PRP scepticrewards performance at work allows individuals to be paid according to contribution complements performance management is intrinsically fair - in theory motivates employees management view - performance improved focuses effort on organisational goals amounts are meaningful is based on fair and objective performance measurement should be integrated with appraisal systems is central to the management of performance enables managers to reward employees Confirmed PRP sceptic pays for conformity to organisational norms divides teams and encourages individuals to pursue selfish goals is just a fad in practice creates feelings of unfairness and inequity demotivates more employees than it motivates recipient’s view- performance not improved has confused objectives which are difficult to evaluate amounts are not worth the effort performance is assessed subjectively and only on what is easy to measure transforms the appraiser from a development coach to a judge and jury is marginal in the management of performance significantly strengthens the right to manage

27 Payment systems: benefitsReward = Pay + Benefits extrinsic benefits: flexible hours, holidays, expenses, travel, catering, car-parking, pension [defined benefit v. defined contribution] … etc. What benefits might knowledge workers particularly value? What strategic advantages do firms gain by offering extrinsic benefits to their employees?

28 Contemporary Pay Approaches Harmonisation and the Flexible Pay PackageTraditionally benefits differed significantly between salary bands and were fixed by the organisation Current trends … Harmonisation or “single status”: the only differentiator being actual pay levels Flexible pay package Employees choose from a menu of rewards … individuals allowed to compile their own package of costed benefits up to a total value Recognition of the differing value of rewards to different individuals

29 What is the Flexible Reward Package?A formalised system which permits individual employees to influence the make-up of their pay and benefits package, so that they may select certain items and reject others to match their personal requirements. Stredwick & Ellis 1998:218

30 Flexible Core ComponentsBase salary Life assurance Personal accident insurance Health insurance 20 days holiday

31 Flexible Variable ComponentsPension top up Extra insurances Child care vouchers Lease car Additional holidays Sabbatical leave Stock options Discounts on company products Club memberships Dental care Crêche Elder-care Savings plan Sports facilities etc

32 Contemporary Pay Approaches - Team PayADVANTAGES OF TEAM PAY Encourage effective team working and co-operative behaviour Enhance flexible working and multi-skilling within teams Provide an incentive for team collectively to improve performance Through peer pressure can encourage less effective team members to improve to meet team standards DISADVANTAGES OF TEAM PAY Peer pressure may compel individuals to conform to group norms , which itself may be undesirable Can diffuse individual motivation because the relationship between individual effort and reward may be remote People in teams that receive high pay may be unwilling to move and difficult to break up Lower performing teams who receive less PRP may find it difficult to attract the better staff

33 Contemporary Pay Approaches - Competency Based PayPayment based how people do it using an agreed framework of behavioural competencies Competency based pay may focus either on the acquisition of competencies based on a strategy to increase flexibility and multiskilling the demonstration of competencies, the extent to which competencies are used in the performance of the job based on a strategy to stimulate better performance Problem areas complex and hard to measure generic competencies may not be related to successful task performance danger of assessment being referred to personality traits and rewarding people for behaving nicely, irrespective of their impact on results

34 Contemporary Pay Approaches - Contribution PayPayment based on what people do to bring about a result as a combination of inputs and outputs PAYING FOR CONTRIBUTION + = RESULTS COMPETENCE PAYING FOR PAST PERFORMANCE PAYING FOR FUTURE SUCCESS

35 Intrinsic Rewards Recent emphasis on enhancing the intrinsic rewards of work. Hackman and Oldham 1970s studies of job characteristics are still influential: Skill variety Task identity Task significance Autonomy Intrinsic feedback Jobs which score highly on these five result in: Experiences of meaningfulness Experiences of responsibility … High motivation and quality of work outputs

36 Managing intrinsic rewardsEnhancing intrinsic rewards through: Job rotation Defined jobs – movement of individuals Job enlargement Horizontal task extension Job enrichment Vertical task extensions Team working Degree of autonomy over processes and responsibility for outcomes Evaluate each of these from management and employee perspectives

37 Effectiveness of intrinsic rewardsPfeffer noted: ‘Creating a … challenging and empowered work environment in which individuals are able to use their abilities to do meaningful jobs for which they are shown appreciation is likely to be a more certain way to enhance motivation and performance – even though creating such an environment may be more difficult and take more time than merely turning the reward lever’

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