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Employee Rewards and Performance Systems

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8 views3 pages

Employee Rewards and Performance Systems

Uploaded by

omar sallam
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Rewards and Reward Systems

 Rewards strongly influence employee effort and performance (see equity theory).
 There are two ways to classify rewards:
1. Intrinsic
 Rewards associated with the work itself.
 Employee being responsible for a portion of work, doing work which leads to personal
development/confidence.
 Jobs with high levels of intrinsic rewards include doctors, lawyers, and research scientists.

2. Extrinsic
 Rewards given to an employee by the firm.
 Extrinsic rewards can be broken down further into;
a) Direct Compensation – Base salary, performance bonuses, share options, pensions.
b) Indirect Compensation – Rewards given due to organisational level vs. performance – loans at
low interest rates, personal services, protection.
c) Non-Financial Compensation – Preferred office furniture, assigned parking spaces, impressive
titles, and insignias.

Distributing Rewards in Organisations


 Common methods used to distribute rewards based on:
1. Performance – performance becomes a motivator when rewards are distributed on that basis.
2. Effort –to minimise turnover/hiring costs, many firms decide to reward effort but, This does not improve
performance.
3. Seniority – When seniority becomes a substitute for performance in the allocation of rewards, managers
find that seniority is encouraging tenacity vs. performance and achievement.
4. Equality – Everyone at a given organisational level receives the same base pay and pay raises, this
causes employees to support teamwork.
5. Power/Influence – Groups/individuals are able to increase their share of rewards at the expense of
another.

 The most organised way of developing an effective reward system is to develop a job classification scheme
to rank jobs against each other

Comparison of Pay-practises
 Cafeteria-style Fringe Benefits – Allows employees to select a package of fringe benefits.
 Lump sum Pay Systems – Allows employees to decide how they receive their paycheque.
 Skill-based Compensation – Reward the employees for learning new skills.
 Accumulative time-off
 All-salaried team – By paying all employees a salary, to improve loyalty, commitment, and self-esteem
in the workforce.

Open Salary Information


 Means that making salary information available to all employees, This usually involves publishing ranges
for pay raises and number of pay grades
 When methods used to determine pay raises are performance based and well understood by employees,
their perceptions of procedural justice rise.
 The periodic use of job analysis and salary surveys demonstrates to employees that the company is serious
about maintaining objective methods to ensure fairness.

Guidelines for Improvement


1. Incentives should be tied as closely as possible to actual performance on the job.
2. Incentives should be adjusted according to individual differences.
3. Incentive should be matched with the type of work performed by employees and the structure of their
firm.
4. Incentive should be monitored over time to ensure employees are being paired at the prevailing salary
levels for their work

Group Based Reward Systems


 Works best when company goals depend on teamwork/collaboration and employee effort.
 Group based reward systems encourage both cost savings (Scanlon plan & Rucker plan) or a profit-sharing
program (profit sharing plane).
The Scanlon Plan (Gainsharing plan)
 The first systematic cost-savings, group based reward system developed in 1937
 This plan tries to reduce labour costs below a historic base level.
 The plan promotes a work climate with better labour-management co-operation.
 These programs are extremely powerful tools for:
 building innovation into a company.
 Increases employee satisfaction
 Reduces turnover.
N.B:
1. Work best when there are histories of labour costs exist in the firm.
2. Company should have a history of labour-management co-operation.
3. Easier to establish in smaller production units (50-300 employees)
4. Top management must be committed to the concept of productivity enhancement.

The Rucker Plan


 Value added is the measurement of productivity, which is the difference between the sales
income from goods produced and the cost of materials, labour, and outside services
consumed.
 The following steps are taken to establish a Rucker Plan:
1. Identify a base period that provides data that will be valid and useful for establishing
standards.
2. Generate the following data using the base period standards:
a) Sales value of production (SVP)
b) Cost of Materials, supplies, service, etc. (COM)
c) Cost of Labour (COL)
 In a Rucker plan 75% of the bonus is paid monthly to employees and the remaining 25% is
held until year-end.
 Benefits to the Rucker Plan
1. It adapts to current economic thinking that stresses measurement of profit in terms of
value added by factors of production.
2. Once employees understand the Rucker plan, they will have ideas about raising the
labour value added.
3. It is less rigid that the Scanlon plan in its requirements for employee participation.
4. Lower level of hierarchical control results in shortened cycle time.
 A Rucker plan should only be established after the period of declining workforce
productivity that follows delayering/downsizing has taken place.

 Why Do Self-Directed Teams Participate in a Rucker Plan?


1. Rucker Plan teams have a strong incentive to increase their productivity because they
have line of sight. (i.e. effort/performance  incentives).
2. They can push the firm ahead of rivals.
3. The sales value of output raises faster in a firm that has adopted this system by
improving product designs and production effectiveness.

*How the Rucker plan fits in a plan to strengthen competitive advantage in the firm?
 It is done through three phases:
1. Fix high cost structure up to two years to complete
2. New strategic direction for another year
3. Cementing a new basis for competitive advantage.
Profit-Sharing Plans
1. Means that employees contribute to the success of the firm should share in the profit.
2. Usually popular in times of economic health.
3. Create Labour-Management cooperation and strong organisational culture when the
organisations are successful with these plans.
4. Work climates evolve leads to loyalty and achievement which results in low absenteeism
and turnover.
5. On the other hand, these plans require constant maintenance and high commitment from
both managers and employees.

A well-designed Group-based reward system can strengthen competitive advantage in


several ways.
1. Attraction and retention.
2. Motivation and performance.
3. Skill development
4. Organisational culture

 Cost of Incentives can account for up to 50 percent of the cost of goods sold
 In service-driven firms, this percentage can go much higher.
 Incentive system costs should reflect the company’s strategic and competitive successes.

Common questions

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Management commitment is crucial for the success of group-based reward systems as it ensures the alignment of strategies with operational goals and fosters an environment of trust and cooperation. Without strong support from top management, these systems may fail to achieve desired outcomes, such as improved productivity and innovation, because they rely heavily on consistent and active engagement from all organizational levels .

Group-based reward systems strengthen a company's competitive advantage by enhancing team collaboration and motivation. These systems incentivize continuous skill development and innovation, aligning employee goals with organizational objectives. By fostering a cooperative culture, they improve employee satisfaction and reduce turnover, contributing to a more stable and skilled workforce, which can adapt quickly to market changes and sustain competitive positioning .

Group-based reward systems like the Scanlon and Rucker Plans promote success by fostering teamwork and reducing labor costs. The Scanlon Plan improves labor-management cooperation and innovation, while the Rucker Plan ties incentives to value-added measures, encouraging productivity. However, these plans require a history of cooperation and commitment from management, making them unsuitable for organizations lacking such backgrounds. Furthermore, they can be challenging to implement in larger units due to the complexity of coordination .

Skill-based compensation encourages employees to acquire new skills, fostering personal and professional growth. This approach can lead to increased employee satisfaction and retention, as well as improved performance due to the enhanced capabilities. For organizations, this results in a more versatile and adaptable workforce, enabling better response to changing market conditions and potentially leading to competitive advantages .

Cafeteria-style fringe benefits allow employees to tailor their benefits package to their individual needs, aligning with modern expectations for personalization and flexibility. This approach can enhance employee satisfaction and loyalty, serving as an effective retention strategy by demonstrating that the organization values and supports diverse employee needs .

Performance-based reward systems enhance perceptions of fairness as they are aligned with equity theory, meaning rewards are proportional to an individual's contributions. This perception of procedural justice is further improved when salary information is transparent and methods for determining raises are clear, leading to a belief that the organization values performance and effort appropriately .

The Rucker Plan's focus on value-added measures encourages employees to innovate and enhance productivity as bonuses are tied to improvements in the sales value of production relative to input costs. This tangible connection between performance and compensation incentivizes employees to identify and implement efficiencies and innovations, directly benefiting the organization's profitability and competitiveness .

Organizations implementing open salary information may face challenges such as employee concerns about pay equity and privacy. To address these, clear communication about how salaries are determined, including the use of job analyses and salary surveys, is essential. Additionally, reinforcing that pay raises are performance-based can assure employees of fairness and help mitigate issues related to perceptions of inequality .

During times of economic health, profit-sharing plans enhance organizational culture by fostering labor-management cooperation and a strong sense of shared success. They lead to increased loyalty and motivation, enhancing employee performance while reducing absenteeism and turnover. Such plans reinforce a culture of achievement and mutual benefit, aligning employee interests with organizational goals .

Intrinsic rewards are associated with the work itself and include factors like personal development and confidence, making them more impactful for jobs such as doctors and research scientists. Extrinsic rewards are external and provided by the organization, such as direct (e.g., salary, bonuses), indirect (e.g., low-interest loans), and non-financial (e.g., office perks) compensations. Intrinsic rewards generally enhance job satisfaction and long-term motivation, while extrinsic rewards can directly boost short-term performance but may not sustain long-term engagement without intrinsic satisfaction .

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