This is a general introduction to the concept of compensation and benefits, but using the more broad term ‘ reward ’ as mentioned in the guidance.
Reward is one of many aspects of management that you have probably covered in your Masters degree. So why do we study these varied aspects of management? By studying these varied aspects of management, we hear about various theories of how various stakeholders act. By studying these organizational and management theories we obtain a greater sense of what works and what doesn ’ t, without having to go through the research ourselves. So theories of management provide ‘ short cuts ’ on how to understand the workplace.
Reward management is an umbrella term covering the many steps in the process of implementing compensation and benefits strategy. As a rule there are two main questions that need to be addressed.
Reward is 3 dimensional in that it is affected by external aspects, individuals, and internal aspects. A company ’ s reward strategy will take these into consideration, and will make an assessment of how important each is to the success of the organisation. For example, if the organization requires highly skilled workers and there is a skills shortage of available workers, reward strategy may be affected in regards to higher wages to attract scarce talent. Strategy is a mix of the behaviors of these dimensions and how important they are to the organization.
There are 3 key areas of reward: direct financial, indirect financial and non-financial. Each organization needs to holistically assess the mix of these three areas to ensure success of corporate goals.
Rewards are varied – they fit on two continuums: non-money to money related and group related to individually related.
The objectives of the strategy have to fit the organizational ‘ style ’ and objectives, reward the right behaviors, ensure attraction and retention of needed talent in reference to the market (industry norms and availability of talent in labor market).
Said in another way – Reward Strategy is determined by the culture of the organization, what behaviors it wants to reward, the economic environment externally and within the company, the legal constraints, the political context (are unions involved), and does the strategy fit in with social norms or even support external social issues?
Traditionally, pay and benefits were more collective, in that unions negotiated terms of employment. With the emergence of HRM, reward is now more strategic and managed internally through HR or a Reward Manager. The modern issue with this, is that unions were more employee focussed advocates, whereas it is argued that HR is too much of a corporate function to be a true employee advocate.
Reward is transitional in that the workplace is changing. Global competition has made the labor market and global one – especially for high skilled and professional workers. Reward is increasingly negotiated by individuals not collectively; unions less involved. The psychological contract has become more insecure and uncertain – workers are motivated by varied individual choices – so how do employers address these varied desires? Even the definition of what is a reward is changing – workers may make decisions based on non-traditional rewards such as career development or training opportunities.
Some key trends – pay is becoming less equal in regards to pay at the top is inflated while pay at the lower levels is too low. Growth in bonus, profit sharing and stock incentive schemes. Growing government interventions through regulations which influence pay.
There is an emerging theme of ‘ New Pay ’ from the US which is influenced by the need to create a strategy of how people are paid. However, how does this fit with the need to address individuals? So there is this growing tug of war between having a set strategy for all employees, with the need to address individuals who may dictate their own terms due to high skills or shortage of skills in the market. Who wins? And how do you create strategy based on this?
Aspects covered under this new philosophy include pay systems which only pay out if certain goals are met, become focussed on person-related pay and the skills that person has, there is less focus on seniority and more pay is available through increased performance and bonus achievement, a move away from a set offering to a set of choices.
A comparison of traditional pay systems versus the new pay philosophy.
The major components address: what are the objectives of reward (performance?/compliance?); what drives the system (a desire to be employer of choice?/quality?/efficiency?); how is it implemented (higher pay vs. lower pay/higher bonus potential); how does it fit internally, in comparison to the external market, how does it reward employee contribution, and how is it administered through HR or management?
The big debate in HR/Reward is: Do you create a strategy which works uniquely for the organization OR Do you follow what other organizations are doing? Sometimes ‘ Best Fit ’ strategies are hard to sell to potential employees if they are very different to competitors. Sometimes ‘ Best Practice ’ at one organization does not work within the business or culture of another. Which is the best way?
Looking at it a new way…there is a growing message that Best Fit is the new Best Practice! Employers need to know their business and their employees – and HR/Reward managers bridge this for the organization by understanding the business and employees.
As a last example of how diverse reward is becoming…it is not just pay, benefits and a 401k!
Compensation and Benefits/Reward Introduction
Learning outcomes 2To understand and be able to explain the following:The definition, nature and context of rewardThe content and objectives of the reward relationshipThe theoretical context to reward
Why study aspects of management? 3“Theories are important. They contain our basic assumptions about key relationships in business life. Theories tell us what to look out for, what our first steps should be and what to expect as a result of our actions. Saving us from going back to first principles at each stage, they are actually short- cuts to action.”Whittington, D. (2001) What is Strategy – and does it matter? Thomson Learning
What is Reward Management? 4Reward management is an umbrella term covering:- design, implementation, maintenance, communication and evolution of reward processes which help organizations to improve performance and achieve their objectives. (Armstrong and Murlis, 1994)Two questions:- How much should be paid (rewarded) to each employee? What form should the payment (reward) take ?
Dimensions of reward 5Reward 3-dimensional External:- Market (labor pools/skills shortages) legal requirements - min wage, equal pay Company’s reward strategy governed by dimensions: strategy positioned according to actual behavior and corporate values on relative importance of dimensions Individual:- Internal:- performance job evaluation competencies negotiation teams corporate performance
The content of reward management 6Direct financial reward in the form of base pay and incentives/allowances.Indirect financial reward in the form of employee benefits and conditions.Non-financial reward in the form of job satisfaction, career development and good working environment.Reward strategy takes a holistic approach to these three areas.
Types of reward 7 Group related Security driven Tradition driven Lifetime jobsNon-money related Cost of living increases Money related Corporate prestige Perks Employability driven Contribution driven Training & development Performance pay Personal career plans Merit bonuses Individual related
Objectives of reward strategy 8Congruence with corporate values and beliefsLinked to business strategyDrive and support behavior at all levelsFit desired management styleProvide a competitive edge in HR termsReflect market realities (Armstrong 2002)
From backroom to boardroom? 10In the past, pay and benefit administration largely governed by the outcomes of collective bargaining. A backroom function.Today, the management of reward is increasingly seen as a key HR function linked to the strategic objectives of the employer.
The context of reward in the 21st century 11Increasing global competitionTrend to lower levels of trade union membership and less collective bargaining and pay regulationIncreasingly individual employment relationshipChanges in the psychological contract at work - more insecurity and uncertaintyDiffering views of what‘Reward’is
Key trends since the 1990s 12Growing inequality in pay - incomes of higher paid have increased much faster than the lower paid.Growth in financial participation schemesGrowth in regulation of reward - particularly in Equal Pay and Hours and Holidays, minimum wage, increasing casual and part-time workers protection.
The New Pay Philosophy 13New Pay ideas originate in USA (Lawler; Schuster and Zingheim; Gomez-Mejia; Mahoney)Influenced by HRM literature - new pay based on concept that management of people must be strategically focused.Prescriptive or descriptive?
The New Pay Philosophy 14Change to pay systems which are contingent on business strategy and circumstancesTrend away from ‘job related’ pay to ‘person related’ pay.Shift away from stable, seniority based systems to more variable and ‘at risk’ pay.Move away from fixed benefits to flexible (cafeteria) benefits
Traditional vs New pay 15 Traditonal pay New payFocus External constraints Business needs FairnessObjectives Recompense for time Enhancement of given up loyalty and commitmentDetermination Collective bargaining ManagementApproach Evolutionary, ad hoc Rational, strategicBasis Job based Person based Time based Performance basedDemarcations? Diff conds for diff groups Harmonisation Wage and salary based All salary based Many grades Few gradesFlexibility? Fixed benefits Flexible benefits
Reward systems - the major components 161. What are the objectives of the reward system?2. What is the corporate strategy that provides the foundation of the system?3. What techniques are used to link strategy and objectives.4. The four main strategy areas are: 1) internal 2) external 3) rewarding employee contribution and 4) administration.(Milkovitch and Newman 2002)
Key debate - Best practice, best fit? 17 Best fit (contingent)? ‘New pay’ concentrates on alignment of reward strategy with business objectives for each individual company i.e. it is particular, contingent to an organization; it is best fit Makes sense? Best practice? Best practice looks to find approaches which are ‘universal’ in value in terms of recruiting, retaining and motivating i.e. to produce competitive advantage. Counterintuitive?
Looking at Old Issues in a New Way Best Practise vs. Best Fit (Schuster and Zingheim, 2002; Brown and Christie, 2005) All encompassing offerings are seen as Best Practise Focus should be on best fit for the organisation AND its employees Employer - Understand Yourself Organisations need to understand what they need to succeed Employer - Understand Your Employees True performance success is gained through employee involvement and seeking the employee’s direct voice (Walton ,1985; Lawler, 1986) HR can assist by bridging the gap, by understanding the business AND becoming an employee advocate so as to understand the employees (Legge, 1999) Rewards can then become that which meets the needs of both Rewards becomes more than Total Rewards, it becomes a Total Relationship approach (Schuster and Zigheim, 2000)
Reward Elements ExamplesReward Elements: Work Experience Elements:Basic SalaryCompany Bonus Opportunities for career advancementPersonal Bonus Job-orientated trainingProfit SharingStock or Share Options Other training availableSales Incentives/Commission Performance appraisalLong Term IncentivesPrivate Medical Cover Merit pay increasesPrivate Dental Cover Opportunities for job enhancementPrivate Vision CoverHealth Screens/Physicals Employer is ‘people’-focussedDefined Benefit Pension Positive leadershipDefined Contribution Pension Supportive managementCritical Illness CoverLife Insurance Positive colleague interactionsRecognition Scheme Great workLong Service AwardsCompany Car or Allowance Work/life balancePetrol Allowance Flexible working practicesMobile PhoneOn-site Crèche You feel ‘involved’Childcare Vouchers You trust your employerOn-site CafeteriaOn-Site Coffee Bar Your employer trusts youLuncheon Vouchers Open and honest communicationsOn-Site Life style/ConciergeTube or rail pass benefits StakeholdershipOn-site or discounted parking Company is growingWellness ProgrammesOn-site or discounted Gym membership Company is successfulShopping Discounts Company has a positive imageEmployee Assistance ProgrammeSalary sacrifice Bicycle purchase Company has a positive reputation Company has a clear vision Company has a clear set of values (Source: Schuster and Zigheim 2000)
References 20Perkins, S. & White, G. (2010) Employee Reward:Alternatives, Consequences and Contexts. CIPD: LondonThorpe, R. & Homan, G. (2009) Strategic RewardSystems. Prentice Hall: LondonWhite, G. & Druker, J. (2009) Reward Management: aCritical Text. Routledge: London