The Importance of Reward Management

Reward management in a business organisation is basically the way in which that particular business forms and implements strategies and policies to reward the employees to a fair standard and in accordance with how the organisation values them. Reward management in a business organisation usually consists of the business analysing and controlling the employee’s remuneration and all of the other benefits for the employees.

The main aim of reward management in a business organisation is to reward the employees fairly for the work that they have completed. The main reason reward management exists in business organisations is to motivate the employees in that particular organisation to work hard and try their best to achieve the goals which are set out by the business. Reward management in business organisations not only consist of financial rewards such as pay but they also consist of non-financial rewards such as employee recognition, employee training/development and increased job responsibility.

Reward management in a business organisation deals with the design, implementation and maintenance of reward practices that are geared towards the improvement of the business organisations performance.

The Importance of Reward Management

The elements of reward management within a business organisation are all the things that they use to attract potential employees into their business which includes salary, bonuses, incentive pay, benefits and employee growth opportunities such as professional development and training opportunities. Having a reward management system in place provides the business with many advantages, especially in small to medium size organisations where the managers must have a good relationship with the employees. Reward programmes have proved to be very successful in motivating employees and in turn increase the performance of the organisation as a whole.

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Below are some of the reasons why a reward system is important:

Mutually beneficial - A reward system is beneficial not only to the employee but also to the organisation. The employee will feel more motivated to work harder.by having a reward system in place the employee will feel more committed to their work and their productivity will increase. An increase in productivity will then benefit the organisation. Therefore a reward system is mutually beneficial to the employee and the organisation.

Motivation - A reward system will motivate employees by reaching targets and organisational goals in exchange for rewards. A reward system is great at motivating employees but they will also be motivated to prove themselves to the organisation.

Absenteeism - A reward system will reduce absenteeism in the organisation. Employees like being rewarded for a job well done and if there is a reward system in place, employees will be less likely to be ringing in sick and not showing up for work. Also by having a reward system in place the employees will be clearer about the targets and goals of the organisation as they will be rewarded when reach certain targets. So by having a reward system as an incentive they will be less likely to be absent from work.

Loyalty - A reward system will increase the employee’s loyalty to the organisation. By a reward system being in place the employee feels valued by the organisation and knows that their opinion matters. If an employee is happy with the reward system, they are more likely to appreciate work place and remain loyal to the organisation

Morale - Having a reward system in place providing employees with incentives and recognition will boost their morale. By encouraging employees to meet goals and targets it gives them clear focus and purpose which will their morale. By the employees morale being boosted this will increase the morale of the entire organisation. This is all down to a reward system in the organisation.

Teamwork - The reward system will increase the teamwork spirit in the organisation. The reward system will promote teamwork to the employees. The employees will work together as part of a team to achieve their targets in return for rewards. Teamwork within the organisation will help increase efficiency and create a happier workplace. This is another reason why reward systems are important in business organisations.

Types of Reward Systems

There are several ways to classify rewards; the three most common types are as follows:

Intrinsic Rewards Vs Extrinsic Rewards-

Intrinsic rewards are the personal satisfaction you get from the job itself eg having pride in your work, having a feeling of accomplishment or being part of a team. If an employee experiences feelings of achievement or personal growth from the job, this would be labelled as an intrinsic reward.

Extrinsic rewards would include money, promotions and other benefits. Extrinsic rewards are external to the job and come from an outside source, usually management. If an employee receives a salary increase or a promotion, this would be labelled as an extrinsic reward.

Financial Rewards Vs Non-Financial Rewards-

Financial rewards are those that will enhance the employees financial well-being directly eg bonus, increase in wages and profit sharing schemes.

Non-financial rewards do not enhance the employee’s financial position directly but make the job more attractive. Some of the Non-financial rewards that a business organisation offer might include-an attractive pension scheme, access to private medical care, help with long-term sickness, crèche facilities, counselling services, staff restaurant etc.

Performance-Based Rewards Vs Membership-Based Rewards-

The rewards that a business organisation gives to their employees can be based on either their performance or membership criteria. Performance-based rewards are exemplified by the use of commissions, piecework pay plans, incentive schemes, group bonuses, merit pay or other forms of pay for performance plans.

Membership-based rewards would include cost of living increases, benefits and salary increase, seniority or time in rank, credentials or future potential.

Case Study

Tom Warner owned a plumbing, heating and air-conditioning business in Montgomery County,Maryland. In the early 1990s, he faced a major problem. His main customers were commercial property management businesses and they wanted to cut costs. In order to do this; these commercial property management businesses decided to end their contract with Tom Warner and hire their own “handymen”.

Tom Warner didn’t want to lay off any of his 250-person workforce. He decided to reconstruct his workforce into territories. He assigned each worker their own territory and told them to operate their territory as if they were running their own business. He put each “area director” through training in sales techniques, budgeting, negotiating, cost estimating and how to handle customer complaints.

Warner believed that if he had technically superb, friendly, and ambitious employees, they could successfully operate like small-town “handymen”, even though they would be part of a large organisation.

Tom Warner’s programme proved to be very successful. The area directors developed a strong sense of pride and ownership in their territories. Each employee was able to schedule their own work, handle their own equipment, develop their own estimates and advertising campaigns. These were the rewards that each employee desired.

Tom Warner’s programed increased the employees’ wages. A typical employee working for Warner before he introduced the programme was earning $60,000.In the first year of the programme that employee was earning $100,000.In the second year he was earning $125,000.

From a reward point of view, Warner’s employees are extremely happy and Tom Warner’s business grew by more than 200 per cent in 24 months.

Literary Review

According to the book “Human Resource Management in Ireland” 3rd edition by Patrick Gunnigle, Noreen Heraty and Michael j. Morley:

Schuler (1995) outlines a number of core objectives that a business organisation should have in relation to the reward package that they offer.

Schuler states that in order for a business organisations reward package to be successful it must meet the following objectives:

It should attract potential employees- along with the organisations human resource plan and recruitment and selection techniques the reward package should make potential employees want to work there. The reward package including its mix of pay, incentives and benefits should serve to attract suitable potential employees.

It should assist in retaining good employees- the reward package must be perceived internally by the employees as fair and equitable and it should be perceived externally as competitive. Internally the employees should feel happy with the reward package and they should know that in comparison to other businesses it is a very competitive reward package so they won’t want to leave and seek employment elsewhere.

It should motivate employees- the reward package should help and assist motivating employees to work harder. By linking rewards to performance it should motivate employees to work harder as there is an incentive element.

It should contribute to human resource and strategic business plans- the reward package should create a rewarding and supportive climate to work in and therefore it should be perceived as an attractive place to work. This will benefit the business as it will be attracting the best applicants.

Reward management in business organisations is extremely important as the reward package helps to attract employees, retain employees and influence performance and behaviour at work.

According to the book “People Management and Development; Human Resource Management at Work” by Mick Marchington and Adrian Wilkinson:

Lawler (1984) feels that a reward system within the business organisation can influence a number of HR processes and practices, which then have a direct impact on the organisations performance as a whole.

Influence recruitment and retention: Lawler states that any business organisations that have a reward system in place will attract and retain the most people. If better performers are rewarded more highly than poor performers. This also will have an effect on recruitment and retention, so performance-based systems are more likely to attract high-performers.

For Example: If a business organisation rewards their employees with high wages, they will attract more applicants which will allow the business more of a choice over selection and hiring decisions. This hopefully will reduce labour turnover in the organisation.

Influence Motivation: Employees see that by having a reward system in place, it puts an importance on various activities and tasks. Reward systems therefore have a motivational impact on the employees. However the management must integrate the reward system with the behaviour they expect from the employees.

Influence Corporate Culture: The way in which the employees are rewarded will have a huge influence on the corporate culture of the organisation.

For example: If a business organisation has a reward system in place that provides benefits for long-serving staff, this will likely shape the existing culture into one where loyalty is seen as central to the business organisations ideology. In contrast, if a business organisation has a reward system in place that rewards the employees for innovative behaviour and ideas, this is more likely to shape the businesses corporate culture into one where creativity and innovation is important.

Cost as an influence: Cost is a huge factor and influence in the reward system. Some business organisations may not be able to afford to set up and maintain the reward system; it may be too costly for them. On the other hand, some business organisations may not want to waste the money on a reward system. This may demotivate the employees as they will think that not worth it and this will have a direct impact on their performance in the organisation which in turn will in turn have a direct impact on the organisations performance as a whole.

According to the book “Human resource management in Ireland” 4th edition by Patrick Gunnigle, Noreen Heraty and Michael j. Morley:

Lawler (1977) highlights that in order for reward management to be successful the reward system needs to have the essential characteristics:

Reward level- In order for reward management to be successful, the reward package must satisfy the employees basic needs for survival, security and self-development.

Individuality- Along with satisfying the employee’s basic needs, the reward system should be flexible enough to meet the employees varying individual needs.

Internal equity- The rewards must be seen as fair when compared to others in the business. The criteria and reasons for the allocation of rewards to employees should be equitable and clear to everyone in the organisation .The reason behind the allocation of rewards to employees should be communicated and accepted by all parties. The rewards should be applied consistently throughout the organisation.

External equity- The rewards must be seen as fair when compared to those offered for comparable work outside the organisation.

Trust- In order for reward management to be successful in the organisation, the management and the employees must believe in the reward system 100 per cent. The employees must believe and accept that will receive rewards when they meet the relevant criteria. The management should trust that the employees will perform at a high standard and the best to their ability in return for rewards.

According to Lawler (1977) in order for a business organisation to be successful in reward management, he believes that a reward system must have the characteristics listed above.

According to the book “Human resource management” 6th edition by De Cenzo and Robbins:

Armstrong and Murlis (1998) offer some broad distinctions between the main types of reward system:

Gain Sharing Schemes-the pay of a group of workers is linked to improvements in internal company productivity.

Employee Stock Ownership Schemes (ESOPs)-The business organisation offers company stock (at a lower rate than normal) to certain employees.

Profit-Sharing Schemes-The business organisation gives a certain percentage of the end of year profits to the employees.

Skill-Based Pay Schemes-The business organisation rewards the employees with pay on the basis of job-related skills or competencies.

Individual Incentive Schemes-The business organisation rewards the employees for reaching or exceeding specific established performance criteria. Piece- rate schemes are the most obvious form of individual performance related rewards.

Group Incentive Schemes-The business organisation rewards groups of employees with the same principles they use on individual schemes. Used most commonly when group work or team work is present in the business organisation.

Conclusion

To conclude I am going to give a brief run through the topics I have covered throughout this report.

I defined and explained the meaning of what reward management is and how organisations manage rewards in organisations. I then went on to discuss the importance of reward management within organisations, by doing this I pointed out the advantages of having reward systems in an organisation. These benefits included mutually beneficial, increases motivation, improves morale, increases the employees loyalty to the organisation, improves teamwork and reduces absenteeism. I looked at commonly used reward schemes. I looked at a case study about Tom Warner was forced to reward his employees with a huge amount of responsibility; however it had an extremely successful outcome for him. I then looked at the main aims that every reward system should have; attract potential employees, assist in retaining good employees, motivate employees, contribute to human resource and strategic business plans. I explained the direct impact a reward system can have on the organisation as a whole ie influence on performance, influence on motivation, influence on the corporate culture.

I looked at and explained the essential characteristics a reward system must have in order to be effective. This is important for management when designing their reward system. They should look at and evaluate their current reward system and make sure it possesses the right characteristics. I then differentiated between the most common types of reward schemes according to research I found on Armstrong and Murlis’ point of view on reward systems.