This document discusses reward systems and compensation. It defines reward systems as mechanisms for distributing tangible returns like cash compensation and intangible or relational returns. Reward management is concerned with formulating fair and equitable reward strategies, designing and maintaining the overall reward system, and deciding on financial and non-financial rewards. Compensation typically includes base pay, contingent pay based on performance, incentives, and employee benefits. The effectiveness of compensation plans depends on appropriately linking rewards to performance and organizational goals.

1. Herman Aguinis, University of Colorado at Denver
Reward Systems: Definition
Set of mechanisms for distributing
 Tangible returns
and
 Intangible or relational returns
As part of an employment relationship
.

2. Herman Aguinis, University of Colorado at Denver
Definition of Reward
Management
• This management discipline is concerned
with the formulation and implementation of
strategies and policies, the purposes of which
are to reward employees fairly, equitably and
consistently in accordance with their value to
the organisation.
• It deals with design, implementation and
maintenance of reward systems (processes,
practices, procedures) that aim to meet the
needs of both the organisation and its
stakeholders.

3. Herman Aguinis, University of Colorado at Denver
Reward management is concerned
with:
• the formulation and implementation of reward strategies;
• the overall design and maintenance of the reward system;
• deciding how people should be rewarded financially with
the help of job evaluation and market pricing;
• deciding what non-financial rewards such as recognition
should be provided;
• base pay management – designing and managing grade and
pay structures;
• contingent pay – devising and managing schemes that
reward people according to their merit or contribution;
• the provision of pensions and employee benefits;
• managing and controlling the reward system.
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4. Herman Aguinis, University of Colorado at Denver
Tangible returns
Cash compensation
Base pay
Hourly wages, Salary
Cost-of-Living Adjustment (COLA)
To combat the effect of inflation in an attempt to preserve the
employee buying power
Contingent Pay/ Merit Pay
Additional pay based on employee level of performance
Incentives (short- and long-term )
bonuses (short term) or stock options/ownership (long term)
.

5. Herman Aguinis, University of Colorado at Denver
Tangible returns
Benefits, such as
Income Protection Program
Serve as a Backup to employee salaries in the event when employee is sick,
disabled, or no longer able to work .
E.g. Disability pay, medical insurance, pension plans, savings plans.
Allowances
E.g., housing, transportation, mobile , gym facility, phone bills.
Work/life focus
E.g., vacation time, counseling, financial planning, flexible work schedules (e.g.,
telecommuting, non-paid time off).
.
In fact, a recent survey including both employees in general and HR professionals in particular showed that
health care/medical insurance is the most important benefit, followed by paid time off and retirement benefits

6. Herman Aguinis, University of Colorado at Denver
Intangible returns
 Relational returns, such as
Recognition and status
Employment security
Challenging work
Learning opportunities
.

7. Herman Aguinis, University of Colorado at Denver
The 4Ps of Reward
• Pay
– Salary, bonus, shares, etc.
• Praise
– Positive feedback, commendation, staff-of-the-
year award, etc.
• Promotion
– Status, career elevation, secondment, etc.
• Punishment
– Disciplinary action, withholding pay, or criticism,
etc

8. Herman Aguinis, University of Colorado at Denver
Returns and Their Degree of Dependency on the
Performance Management System
Return
 Cost of Living Adjustment
 Income Protection
 Work/life Focus
 Allowances
 Relational Returns
 Base Pay
 Contingent Pay
 Short-term Incentives
 Long-term Incentives
Degree of Dependency
• Low
• Low
• Moderate
• Moderate
• Moderate
• Moderate
• High
• High
• High
.
Degree of DependencyDegree of DependencyReturnsReturns

9. Herman Aguinis, University of Colorado at Denver
Business &
HR strategy
Reward
strategy
Total Reward
Total
Remuneration
Job evaluation
Grade &
pay structure
Market rate
analysis
Contingent pay
Employee
benefits
Non-financial
rewards
Allowances
Performance
management
DerivationDerivation
of Totalof Total
RewardReward

10. Herman Aguinis, University of Colorado at Denver
Transactional
(tangible)
rewards
Relational
(intangible)
rewards
Base pay
Contingent pay
Employee benefits
Learning and development
The work experience
Total
remuneration
Non-financial
rewards
Recognition, achievement, growth
Total reward
Components of Total Reward (Armstrong 2009)

11. Herman Aguinis, University of Colorado at Denver
Components of Total Remuneration
• Base pay: Base pay is the fixed compensation paid to an
employee for performing specific job responsibilities. It is
typically paid as a salary, hourly (or in some situations piece rate).
There is a tendency towards market orientation and the
increasing role of qualifications.
• Contingent pay: Individual contingent pay relates financial
rewards to the
– individual performance, organisation or team performance,
– competence,
– service,
– contribution or
– skill of individual employees.
Consolidated pay: built into the base pay
Variable pay: provided in the form of cash bonuses (increasing role
nowadays).
• Employee benefits: Elements of remuneration given in addition
to the various forms of cash pay.

12. Herman Aguinis, University of Colorado at Denver
Contingent pay
• Individual contingent pay is a good motivator
(but to what extent?) for those who receive it.
• It attracts and retains better workers.
• It makes labour related expenditures more
flexible.
• It can demotivate those who don’t receive it
(depends on performance measurement)
• Can act against quality and teamwork.

13. Herman Aguinis, University of Colorado at Denver
Types of individual contingency pays
• Performance-related: increases basic pay or
bonuses related to assessment of
performance
• Competence-related: Pay increases related to
the level of competence
• Contribution-related: pay is related both to
inputs and outputs
• Skill-based: pay is related to acquisition of
skills
• Service-related: pay is related to service-time

14. Herman Aguinis, University of Colorado at Denver
Team based pay
• Pay is related to team performance
• It can encourages teamwork, loyalty and co-
operation
• It can be demotivating on individual level
(encourages social loafing)

15. Herman Aguinis, University of Colorado at Denver
Organisaton-wide schemes
• Profit-Sharing Plans – organization-wide
programs that distribute compensation based
on an established formula designed around
profitability
• Gain Sharing – compensation based on
sharing of gains from improved productivity
• Employee Stock Ownership Plans (ESOPs) –
plans in which employees acquire stock, often
at below-market prices

16. Herman Aguinis, University of Colorado at Denver
Employee benefits
• Attractive and competitive total remuneration
• Provide for the personal needs
• Increase commitment toward the organisation
• Tax-efficient

17. Herman Aguinis, University of Colorado at Denver
Main types of Employee benefits
• Pension schemes
• Personal (and family) security: different types of insurances
• Financial assistance: loans, house purchase schemes, discount
on company services…
• Personal needs: holidays, child care, recreation facilities,
career breaks…
• Company cars and petrol
• Intangible benfits: quality of working life…
• Other benefits: mobile phones, notebooks…
• Cafeteria systems

18. Herman Aguinis, University of Colorado at Denver
Definition of the psychological
contract
“The perceptions of both parties to the employment
relationship, organization and individual, of the
reciprocal promises and obligations implied in that
relationship”
The state of the psychological contract is concerned
with whether the promises and obligations have
been met, whether they are fair and their
implications for trust.

19. Herman Aguinis, University of Colorado at Denver
Variable Pay: Incentives for
Performance
19
Variable
Pay Assumptions
Some people perform better
and are more productive than
others
Better performing employees
should receive more
compensation
Some jobs contribute more
to organizational success
than others
Part of compensation should
be tied directly to
performance and results

20. Herman Aguinis, University of Colorado at Denver
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21. Herman Aguinis, University of Colorado at Denver
Developing Successful
Pay-for-Performance Plans
21
Pay-for-
Performance
Plans
Link strategic goals
and employee
performance
Enhance results
and reward
employees
financially
Reward and
recognize
employee
performance
Promote
achievement of
HR objectives

22. Herman Aguinis, University of Colorado at Denver
Successful Variable Pay Plans
22
Effective Incentive Plans
Plan Fits
the
Organizatio
n
Plan Rewards
the
Appropriate
Actions
Plan
effectively
Administere
d

23. Herman Aguinis, University of Colorado at Denver
Why Variable Pay Plans Fail
23
Plan incentives are
not seen as desirable
Plan doesn’t reward
doing a good job
Plan doesn’t motivate
Plan rewards
teams/groups rather
than individuals
Plan doesn’t increase
base pay
Employees’
View of Variable Pay
Plan

24. Herman Aguinis, University of Colorado at Denver
Developing Successful Incentive Plans
24
Develop clear, understandable plans that are
continually communicated.
Use realistic performance measures.
Keep plans current and linked to organizational
objectives.
Link results to payouts that recognize
differences.
Identify variable pay incentives separately from
base pay.
Successful
Incentive Plans

25. Herman Aguinis, University of Colorado at Denver
Individual Incentives
25
Necessary Conditions For
Individual Incentive Plans
Individual
performance must
be identified
Individual
competitiveness
must be desired
Individualism must
be stressed in the
organizational
culture

26. Herman Aguinis, University of Colorado at Denver
Categories of Variable Pay Plans
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27. Herman Aguinis, University of Colorado at Denver
Individual Incentives
• Piece-Rate Systems
–Straight piece-rate system
–Differential piece-rate system
• Bonus
• “Spot” Bonuses
• Special Incentive Programs
–Performance awards
–Recognition awards
–Service awards
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28. Herman Aguinis, University of Colorado at Denver
Purposes of Special Incentives
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29. Herman Aguinis, University of Colorado at Denver
Why Organizations Establish Variable Pay
Plans for Groups/Teams
29
Group/Team-
Based Variable
Pay Plans
Improve
productivity
Tie pay to team
performance
Improve
customer service
or production
quality
Increase
employee
retention

30. Herman Aguinis, University of Colorado at Denver
Design of Group/Team Incentive Plans
30
Group/Team Incentive Plan
Issues
Distribution
of
Group/Team
Incentives
Timing of
Group/Team
Incentives
Decisions
About
Group/Team
Incentive
Amounts

31. Herman Aguinis, University of Colorado at Denver
Group/Team Incentives
• Distributing Rewards
– Same-size reward for each member
– Different-size reward for each member
• Problems with Group/Team Incentives
– Rewards in equal amounts may be perceived as “unfair” by
employees who work harder, have more capabilities, or
perform more difficult jobs.
– Group/team members may be unwilling to handle incentive
decisions for co-workers.
– Many employees still expect to be paid according to individual
performance.
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32. Herman Aguinis, University of Colorado at Denver
Conditions for Successful
Group/Team Incentives
32

33. Herman Aguinis, University of Colorado at Denver
Types of Group/Team Incentives
• Group/Team Results
– “Self-funding” pay plans for groups/teams that reward
through improved organizational results on the basis of
group output, cost savings, or quality improvement.
• Gainsharing (Teamsharing or Goal Sharing)
– The sharing with employees of greater-than-expected
gains in productivity through increased discretionary
efforts.
• Improshare
• Scanlon Plan
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34. Herman Aguinis, University of Colorado at Denver
Organizational Incentives
34
Primary Objectives
• Increase productivity and
organizational performance
• Attract or retain employees
• Improve product/service
quality
• Enhance employee morale
Drawbacks
• Disclosure of financial
information
• Variability of profits from year
to year
• Profit results not strongly tied
to employee efforts
Profit Sharing

35. Herman Aguinis, University of Colorado at Denver
Framework Choices for a Profit-Sharing Plan
35

36. Herman Aguinis, University of Colorado at Denver
Employee Stock Plans
• Stock Option Plan
– A plan that gives employees the right to purchase
a fixed number of shares of company stock at a
specified price for a limited period of time.
• If market price of the stock is above the specified
option price, employees can purchase the stock and
sell it for a profit.
• If the market price of the stock is below the specified
option price, the stock option is “underwater” and is
worthless to employees.
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37. Herman Aguinis, University of Colorado at Denver
Employee Stock Plans
• Employee Stock Ownership Plan (ESOP)
– A plan whereby employees gain significant stock
ownership in the organization for which they work.
– Advantages
• Favorable tax treatment for ESOP earnings
• Employees motivated by their ownership stake in the firm
– Disadvantages
• Retirement benefit is tied to the firm’s future
performance
• Management tool to fend off hostile takeover
attempts.
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38. Herman Aguinis, University of Colorado at Denver
Types of Sales Compensation Plans
• Salary-Only
– All compensation is paid as a base wage with no
incentives.
• Commission
– Straight Commission
• Compensation is computed as a percentage of sales in units or
dollars.
• The draw system make advance payments against future
commissions to salesperson.
– Salary-Plus-Commission or Bonuses
• Compensation is part salary for income stability and part
commission for incentive.
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39. Herman Aguinis, University of Colorado at Denver
Effectiveness of Sales Incentive Plans
39
Frequent changes in sales plans
An “entitlement” culture
Pay without performance
Poor quota setting
Small differences in pay for top and bottom
performers
Causes of
Ineffectiveness in
Incentive
Plans

40. Herman Aguinis, University of Colorado at Denver
Executive Compensation
40
Executive Salaries
Executive Benefits
Executive Perquisites
(Perks)
Annual Executive Incentives
and Bonuses
Performance Incentives:
Long Term vs. Short Term
Elements of
Executive
Compensation

41. Herman Aguinis, University of Colorado at Denver
“Reasonableness” of Executive
Compensation
41
Executive
Compensation
Considerations
and
Concerns
Would another company hire this
person as an executive?
How does the executive’s
compensation compare with that
for executives in similar
companies?
What would an investor pay for
the level of performance of the
executive?
Is the executive’s pay consistent
with pay for other employees
within the company?

42. Herman Aguinis, University of Colorado at Denver
Common Executive Compensation Criticisms
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43. Herman Aguinis, University of Colorado at Denver
Thank you for your attention!