Money and Value
Reward management involves designing and implementing strategies, policies and practices to pay people and otherwise reward them. Ideally, rewards should be fair, egalitarian and consistent with your organization’s ideals and purpose. Thus, reward management pays people for their work, but it also sends a message about what the organization values. At the same time, properly managed rewards can encourage a culture of performance, motivate staff, recruit and keep the right people, and form a psychological contract to ensure a positive relationship between your employees and your organization. People feel they are being treated justly when they believe their rewards are commensurate with the value they contribute.
Contemporary reward theory rests upon two concepts:
• Strategic pay – Policies and practices governing pay should flow naturally from the organization’s strategy, and must be a product of its culture, values and objectives.
• New pay – Since reward policies can motivate organizational change, this philosophy holds that compensation should focus on results and should reward behavior that advances the organization’s goals. It says employees should have a voice in determining whether the organization’s reward systems are appropriate.
Reward Management
Reward management is the collection of your organization’s strategies, policies and practices designed to pay people fairly, in accordance with the worth of their contributions and the organization’s values and objectives. Rewards are not exclusively monetary. Any well-considered reward system should include nonfinancial rewards. For example, you can boost your organization’s ability to recruit and keep good people by providing the right work environment and by giving employees opportunities to grow along clear career paths.
Use strategic reward management to determine what your reward system should be and how to establish it. Base your decisions on your organization’s philosophies, beliefs and value judgments about reward. Create explicit reward strategies so you can use them to:
• Show employees the paths they should travel and give them touchstones so they can tell when they have achieved the organization’s goals.
• Ascertain whether money is well spent. Wages constitute the single largest expense in many organizations.
• Ensure that rewards have the desired impact on performance.
• Define links between rewards and other human resource management functions and objectives.
Reward strategy is not static. It always grows and changes as organizations themselves grow and change. Support your evolving reward strategy with a foundation of information gathered by analyzing the current reward system and its results. Use gap analysis to compare goals with attainments and to highlight areas that need special attention. Link your reward strategy to your organization’s documented objectives. Give line managers responsibility for reward management, but have human resources staff develop training and other support to help line managers make the right reward decisions.
Reward Policies
Reward policies address the balance between external competitiveness and internal fairness. Companies may opt as a matter of policy to pay more than the market, the market median or, in some cases, below the market level. Equal pay for equal work should be important in driving your reward policies, if only because legislators in the U.S. and the European community have made such equality a matter of public policy interest. When developing a reward policy consider:
• Which policy issues are most germane to your organization’s culture and values?
• Which policies are most germane to your business objectives and employee needs?
• What policies are possible to implement?
• How much training or preparation do line managers need to implement the policies?
• How will the organization communicate necessary information about the policies?
Your company’s reward policies cannot be static. As the market moves and the organization moves, reward policies should also move. Periodically ask whether policies that were relevant in the past are still relevant and whether any changes are necessary.
Reward Management in Concept and Context
Competitive pressures are the most important external factors that influence your reward policy. Global competition certainly affects reward policy because it drives businesses to be more productive. A corporation that wants world-class status must have world-class people. National and regional competition affects the demand for labor, the fragmentation of the labor market, the structure of local industries, the availability of skills, and other matters that inevitably influence reward management. For example, in an environment of low inflation, pay grows more slowly. Similarly, the increase in temporary employment and the end of society’s job-for-life assumption has driven a more intense emphasis on short-term rewards, while lessening employee emphasis on long-term rewards, such as pension schemes.
Seven economic concepts guide professional thinking about pay:
1. Labor theory of value – Karl Marx wrote that the value of goods and services is proportional to the amount of labor required to make them. Although mainstream economists rejected this labor theory, it still survives as an unspoken assumption in many conventional approaches to job valuation. Such approaches are indifferent to market rates; they address only the content of jobs.
2. Labor market – A labor market may be regional, continental or international. When many buyers chase a limited supply of labor, the price of labor rises; when few buyers are looking and labor is abundant, the price of labor lags. Labor markets may be external or internal.
3. Classical economics – This approach looks at the labor market as a dynamic play of supply and demand in search of equilibrium. Classical economic theory assumes that all other things are equal and that there is a perfect market for labor. While theoretically useful, such assumptions ignore many real-world facts, such as constraints on labor movement.
4. Efficiency wage – This idea suggests that companies will pay above market rates to attract the best people, who presumably will perform at a higher level and make the company more competitive.
5. Human capital – Workers are skill sets rented by employers. The worker’s capital consists of skills and knowledge gained from education, experience and training.
6. Agency theory – Corporations separate ownership and management. Agency theory, therefore, seeks to align incentives with desired behaviors. Critics of agency theory say that its carrot-and-stick approach implies mistrust.
7. Effort bargain – This concept suggests that managers must offer certain incentives and rewards to get a certain level of effort from the workforce. Thus, it says, managers must determine what a particular set of rewards will buy in terms of effort, as well as in terms of hours worked.
Organizations – at least, major organizations – have formal structures that govern pay and jobs. These formal structures may begin at the highest level with directors and officers, and stretch all the way down to the shop floor. Job evaluations often determine what an individual job is worth to the organization, based on the job’s contribution to overall objectives. But market forces almost always play an important part in decisions about individual rewards. Your company’s objective must be to pay people according to their contributions, but the company’s financial position determines what rewards it can and cannot afford to offer.
Reward and Motivation
One of the goals of reward management is motivation. Your company’s reward system should include extrinsic and intrinsic rewards. Extrinsic rewards help you recruit and keep employees and may also help encourage additional effort. But in the long term, nonfinancial rewards such as autonomy, the inherent satisfaction of the work and individual achievement, may be more important than pay. Though it is not a financial reward, recognition can be an important psychological award. Goals also motivate people. In fact, people clearly perform at a higher level when they are attempting to reach stretch goals and when their managers provide feedback.
Make your job evaluation schemes analytical, appropriate, comprehensive, transparent and nondiscriminatory (that is, they should meet the standard of equal pay for equal work). Job evaluation is distinct from role evaluation. A job is a discrete group of tasks, but a role includes both the behaviors and the results expected from the behaviors. Role analysis is complex and difficult, and may rely heavily on opinion and interpretation. Organizations establish pay structures and grade structures to communicate information about opportunities and compensation based on their analysis of jobs and roles.
In addition to formal pay structures, many organizations also offer contingent pay, which makes it clear to employees what the organization really values and will pay to attain. Many organizations consider contingent pay a powerful motivator, but strong arguments exist against it. Critics target the questionable motivational effect of contingent pay, the slippery definition of success and the fact that individuals respond differently to contingent pay. Given the evidence on both sides of the debate, no blanket answer covers the advisability of contingent pay. Given that its benefits are uncertain, most companies should consider relying more on nonfinancial motivators. However, if your company decides to provide contingent pay, ensure that the standards are fair and equitable, and that the system allows people to influence their rewards by behaving differently or by developing new skills. The reward always should have a close relationship to achievement. Many of the criticisms of individual contingent pay also apply to team pay. In fact, many organizations have decided that the disadvantages of team pay outweigh its merits.
Nonfinancial Rewards
One of the most important nonfinancial rewards is the opportunity to learn. While a job itself may be an important learning experience, organizations also offer separate specialized training programs that focus on skill development. Often, the availability of training is a major factor in an employee’s decision to stay with a job or to leave.
Performance management can enhance your relationships with your employees, especially if managers use feedback and performance reviews to clarify what they want. The most important issue in performance management is getting the backing of upper level executives and ensuring that managers conduct the right kind of reviews at the right time. Ensuring that managers have the performance management skills they need to make a review program succeed requires a fairly substantial investment in training.
A reward system involves much more than simply paying what the market will bear. Rewards have important psychological and motivational dimensions that are not always intuitively obvious. Moreover, certain groups (such as directors and officers, or even expatriates) need specialized reward treatment. Reward system administration will often be the purview of the human resources staff, but actual decisions about who gets what rewards belong increasingly, and rightly, to line managers. These complexities suggest that reward management needs to be an organization-wide initiative, and that human resources staff members need to work closely with line managers to be sure that rewards align with the organization’s strategy and values.
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