CHAPTER 2
Reward Strategy
TOPICS OF THE CHAPTER
1) How reward system operates
2) The components of a reward system
INTRODUCTION
A reward system consists of the interrelated processes
and practices that combine to ensure that reward
management is carried out effectively to the benefit of the
organization and the people who work there.
The reward system is basically concerned with problems
of relationship, of structure and of interdependence
- Katz and Kahn
It has the characteristics of an open system (that they are
continually dependent upon and influenced by their
environments)
- Miller and Rice
HOW REWARD SYSTEM OPERATES
Reward systems are based on the reward strategy, which
flows from the business strategy.
For example to gain competitive advantage.
The HR strategy
For example, focus on resourcing but it should also be
concerned with satisfying people as well as business
needs. All these aspects of strategy are affected by the
environment.
Reward strategies direct the development and operation
of reward practices, processes and procedures.
1)Reward strategies:
Theses set out what the organization intends to do in the
longer term to develop and implement reward policies,
practices, processes and procedures that will further the
achievement of its business and HRM goals.
2) Reward policies:
These set guidelines for decision making and action.
3) Reward practices:
These comprise the schemes, structures and techniques
used to implement reward strategy and policy
4) Reward processes:
These consist of the ways in which policies are implemented
and practices carried out.
For example, how the outcomes of surveys are applied and
how manage the pay adjustment and review process.
5) Reward procedures:
These are operated in order to maintain the system and to
ensure that it functions efficiently and flexibly and provides
value for money.
For example, procedure for conducting and annual pay review.
COMPONENTS OF REWARD SYSTEM
1) Business Strategy
2) Reward Strategy
3) Reward Policy
4) Base Pay
5) Job Evaluation
6) Market Rate Analysis
7) Grade and Pay Structure
8) Pay Progression
9) Contingent pay for performance, contribution, competence
or skill
10) Service Related Pay
11) Pension and employee benefits
12) Allowances
13) Performance management
14) Non financial Rewards
15) Total Remuneration
16) Total Rewards
COMPONENTS OF A REWARD SYSTEM
1) Business strategy:
The drivers are unique to any organization.
Examples: such as high performance,
profitability, productivity, innovation, customer
service, quality, price/cost leadership and the
need to satisfy stakeholders investors,
shareholders, employees, and elected
representatives.
2) Reward strategy:
Flows from an analysis of the business drivers. The
question is: How can these are supported by reward in
order to achieve the goals of the business? The strategy
will define longer-term intentions in such areas as pay
structures, contingent pay, employee benefits, steps to
increase engagement and commitment and adopting a
total reward approach.
3) Reward policy:
The level of rewards.
External competitiveness versus internal equity
Transparency
Assimilation
Protection
3) Base or basic pay
The base rate is the amount of pay (the fixed salary
or wage) that constitutes the rate for the job. It may be
varied according to the grade of the job or for shop
floor workers, the level of skill required.
Base pay may be expressed as an annual, weekly
or hourly rate. The latter is sometimes called a time rate
system of payment.
5) Job evaluation:
Job evaluation is a systematic process for defining the
relative worth or size of jobs within an organization in
order to establish internal relativities and provide the
basis for designing an equitable grade structure, grading
jobs in the structure and managing relativities.
It does not determine the level of pay directly. Job
evaluation can be analytical. It is based on the analysis of
jobs or roles, which leads to the production of job
descriptions or role profiles.
6) Market rate analysis:
Market rate analysis is the process of identifying the
rates of pay in the labor market for comparable jobs to
inform decisions on levels of pay within the organization
and on pay structures. A policy decision may be made on
how internal rates of pay should compare with external
rates an organization's market stance.
7) Grade and pay structure:
Multi-graded structure: one consisting of 10 or more job
grades into which jobs of broadly equivalent value are
placed. The pay span in each grade may be fairly small.
Also known as a narrow-graded structure.
Broad-banded structure: a pay structure with a small
number (typically four or five) wide bands.
Broad-graded structures: grade and pay structures with
six to nine grades.
Job-family structure: a grade and pay structure consisting
of a number of separate families. Each family may
constitute a market group in which rates of pay are
related to market rates and may differ from that of
equivalent jobs in other families.
Career family structure: a grade and pay structure
consisting of a number of separate job families. It is
distinguished from a job-family structure by having the
same levels of pay for equivalent jobs in different
families. As the name implies, the emphasis is on
defining career paths or ladders as well as providing a
grade and pay structure.
Pay spine: a structure consisting of a series of fixed
increments (incremental points) extending from the
lowest to the highest-paid jobs covered by the structure.
Progression is usually based on service but scope is
sometimes given for it to be related to performance or
contribution. The pay spine may be divided into grades.
Spot rate: The rate for a job or an individual that is not
fitted into a grader or band in a conventional grade
structure and does not allow any scope for pay
progression.
TYPE WHEN APPROPRIATE
Narrow Graded In a large and bureaucratic organization with well defined
and extended hierarchies.
Pay progression expected to occur in small but relative
steps.
The culture attaches significance to status as indicated
by grading.
Where some but not too much scope for pay progression
is required.
Broad Graded It is believed that will be easier to define and differentiate
grades.
An existing narrow graded structure is the main cause of
grade drift.
More scope is wanted for pay progression is to be
related to contribution.
Broad Banded Greater flexibility required.
It is believed that job evaluation should not drive grading
decision.
The focus is on rewarding people for lateral development
of the organization had been delayered.
Career Family There are distinct families and different career
paths within and between career families that can
be identified.
There is strong emphasis on career development.
It is believed that career paths need to be defined
in terms of competence requirements.
Job Family Distinct market groups exists which needs to be
rewarded differently
It ranges of responsibility vary between families.
It is believed that career paths need to be defined
in terms of competence requirements.
Pay Spine This is traditional approach unable to measure
contribution fairly and consistency.
Ease of administration a major consideration.
8) Pay progression:
Pay progression takes place when base pay advances
through pay brackets in a grade and pay structure or
through promotions or upgrading. Formally through a
contingent pay scheme or by means of fixed increments.
Example: ceiling should be not less than 30%
Length of service, age related pay, linked to team
performance, based on organizational performance,
individual competency or skills or increase due to change
in market rate.
Informal progression takes place when there is no
contingent or incremental pay scheme and increases are
arbitrary.
9) CONTINGENT PAY FOR PERFORMANCE,
CONTRIBUTION, COMPETENCE OR SKILL:
Performance-related pay, which provides individuals
with financial rewards in the form of increases to basic
pay or cash bonuses that are linked to an assessment of
performance, usually in relation to agreed objectives.
Contribution-related to pay, which provides financial
rewards related to both outputs and inputs
(competence)
Competence-related pay, which reward people by
reference to the level of competence they demonstrate
in carrying out their roles
Skill-based pay-which provides employees with a direct
link between their pay progression and the skills they
have acquired and use effectively.
10) Service-related pay:
Service related pay provides fixed increaments, which are
usually paid annually to people on the basis of continue
and service either in a job or a grade in a pay spine
structure.
Example: Terms and Conditions applied together to
achieve merit in private sector like health, education, banks
etc.
11) Pensions and employee benefits
Pensions and employee benefits such as sick pay,
insurance cover, company cars and a number of other
perks comprise elements of remuneration additional to
the various forms of cash pay, and also include
provisions for employees that are not strictly
remuneration, such as annual holidays.
Flexible benefits schemes allow employees to
decide on the make-up of their benefits package within
certain limits.
12) Allowances:
The main types of allowances are location allowances,
overtime payment shift payments, working conditions
allowances, and stand-by or call-out allowances (made to
those who have to be available to come in to work when
required).
13) Performance management:
Performance management process define
individual performance and contribution
expectations, assess performance against
those expectations, provide for regular constructive
feedback, and result in agreed plans for
performance improvement, learning and personal
development.
They are a means of providing non-financial
motivation and may also inform contingent
pay decisions.
14) Non financial rewards:
Non financial rewards do not involve any
direct payments and often arise from the work itself,
for example recognition, achievement, autonomy, scope
to use and develop skills, training, career
development opportunities and high-quality
leadership.
15) Total remuneration:
Total remuneration is the value of all
cash payments (base pay, contingent pay and
allowances, ie total earnings) plus the pensions
and benefits received by employees.
16) Total rewards:
Total rewards are the combination of financial
and non financial rewards available to employees.