Reward

Strategy
and
Performance

Organisational Reward
System

Organizational reward system

Concerned with selection of types of rewards to

be used by organization
Organizational rewards
Rewards that result from employment the
organization; includes all types of rewards, both
intrinsic and extrinsic
Intrinsic rewards Internal to individual and are
normally derived from involvement in certain
activities or tasks
Examples Job satisfaction and feelings of
accomplishment

Organisational Reward
System

Extrinsic rewards Directly controlled and

distributed by organization and more tangible

than intrinsic rewards
Examples Pay and hospitalization benefits
Although differing, intrinsic and extrinsic rewards
are closely related
Often an extrinsic reward provides recipient
with intrinsic rewards

Intrinsic versus Extrinsic

Rewards

Selection of Rewards

Management must recognize what employees

perceive as meaningful rewards
Pay is usually the first, and sometimes the
only, reward most people think about
However, rewards should be viewed in the
larger perspective as anything employees
value
May include things such as
Office location
Allocation of certain pieces of equipment
Assignment of preferred work tasks
Informal recognition

Selection of Rewards

Returns benefiting organization through

distribution of awards can be realized only if

desires of employees are known
Organizations should learn what employees
perceive as meaningful rewards, which is not
necessarily what management perceives
Traditionally, managers have assumed they are
fully capable of deciding just what rewards
employees need and want
Unfortunately, this is often not true
Studies have shown that employees tend to
rank lack of recognition as the most probable
reason good employees quit their jobs

Selection of Rewards
Another false assumption is exemplified by fact that

most organizations offer same mix of rewards to all

employees
Studies show that many variables can influence
employee preferences for certain rewards. They
include
Age
Sex
Marital status
Number of dependents
Years of service
For example, older employees are usually much more
concerned with pension and retirement benefits than
are younger employees

Selection of Rewards

When selecting types of rewards to offer,

intrinsic benefits that might accrue as a result of

the rewards need to be considered
Managers and employees alike consider only
tangible benefits associated with a reward
External factors that place limitations on an
organizations reward system also exist
These factors (usually beyond the control of the
organization) include such things as
Organizations size
Environmental conditions
Stage in product life cycle
Labor market

Relating Rewards to
Performance

Free enterprise system is based on the premise

that rewards should depend on performance

Performancereward relationship is desirable at
Organizational or corporate level
Individual level
Employees will be motivated when they believe
such motivation will lead to desired rewards
Many formal rewards provided by organizations
are not related to performance

Relating Rewards to
Performance

These rewards are almost always determined

by organizational membership and seniority;

they include
Paid vacations
Insurance plans
Paid holidays
Other rewards, such as promotion, can and
should be related to performance
Opportunities for promotion may occur only
rarely
When available, higher positions may be filled
On basis of seniority
By someone outside the organization

Relating Rewards to
Performance

Primary organizational variable used to reward

employees and reinforce performance is pay

Even though many U.S. companies have some
type of pay-for- performance program, most do
a poor job of relating the two
Surveys repeatedly show that employees do
not have much confidence about a positive
relationship exists between the two
Evidence shows that paying for performance is
working at the highest levels in many
companies

Relating Rewards to
Performance
Why is the practice not more widespread?
Not easy to do; much easier to give everybody the

same thing, as evidenced by the ever-popular acrossthe-board pay increase

Relating rewards to performance requires that
performance be accurately measured, and this is
often not easily accomplished
Requires discipline to actually relate rewards to
performance
Many union contracts require that certain rewards be
based on totally objective variables, such as seniority
No one successful formula for implementing a pay-forperformance program has yet been developed

Preconditions for
Implementing Pay-forPerformance Program

Trust in management
If employees are skeptical of management, it is
difficult to make a pay-for-performance
program work
Absence of performance constraints
Jobs must be structured so that an employees
performance is not hampered by factors
beyond his or her control
Trained supervisors and managers
Supervisors and managers must be trained in
setting and measuring performance standards

Preconditions for
Implementing Pay-forPerformance Program

Good measurement systems

Performance should be based on criteria that

are job specific and focus on results achieved

Ability to pay
Merit portion of the salary increase budget
must be large enough to get the attention of
employees
Clear distinction among cost of living, seniority,
and merit
In absence of strong evidence to the contrary,
employees will naturally assume a pay
increase is a cost-of- living or seniority
increase

Preconditions for
Implementing Pay-forPerformance Program

Well-communicated total pay policy

Employees must have a clear understanding

of how merit pay fits into the total pay picture

Flexible reward schedule
It is easier to establish a credible pay-forperformance plan if all employees do not
receive pay adjustments on the same date

Job Satisfaction and Rewards

An employees general attitude toward the job

Organizational reward system often has a
significant impact on level of employee job
satisfaction
Manner in which extrinsic rewards are
dispersed can affect intrinsic rewards (and
satisfaction) of recipients
There are five major components of job
satisfaction:
Attitude toward the work group
General working conditions
Attitude toward the company
Monetary benefits

Job Satisfaction and Rewards

Other components include

Employees state of mind about the work itself
Life in general
Health, age
Level of aspiration, social status, and political
and social activities
Organizational morale Employees feeling of
being accepted by and belonging to a group of
employees
Through common goals
Confidence in desirability of those goals
Desire to progress toward the goals

Job Satisfaction and Rewards

Morale is the by-product of a group

Job satisfaction is more an individual state of
mind
Two concepts are interrelated in that job
satisfaction can contribute to morale and
morale can contribute to job satisfaction

The Satisfaction
Performance Controversy

The path of least resistance Attempts to

explain belief that a satisfied employee is

necessarily a good employee
If a performance problem exists, increasing an
employees happiness is far more pleasant than
discussing with the employee his or her failure to
meet standards
Although happiness eventually results from
satisfaction, the latter goes much deeper and is
far less tenuous than happiness
Two propositions concerning the satisfactionperformance theory exist
Traditional view is that satisfaction causes
performance

The Satisfaction
Performance Controversy

Performance leads to rewards that result in a certain

level of satisfaction
Rewards constitute a necessary intervening
variable in the relationship
Another position considers both satisfaction and
performance to be functions of rewards
Satisfaction results from rewards, but current
performance also affects subsequent performance
if rewards are based on current performance
Research evidence generally rejects the more
popular view that satisfaction leads to performance
It does provide moderate support for the view that
performance leads to satisfaction

The Satisfaction
Performance Controversy

Evidence also strongly indicates that

Rewards constitute a more direct cause of

satisfaction than does performance

Rewards based on current performance enhance
subsequent performance
Reviews of studies in the area stating that job
satisfaction and job performance are related do not
support a strong relationship
Found that the best estimate of the true
population correlation between satisfaction and
performance is relatively low
Lay people often tend to believe strongly that
satisfied employees are more productive at work

The Satisfaction
Performance Controversy

It has been clearly established that job

satisfaction does have a positive impact on

Turnover
Absenteeism
Tardiness
Accidents
Grievances
Strikes

The Satisfaction
Performance Controversy

Experience, gender, and performance can have

a moderating effect on these relationships

Organizations prefer satisfied employees
simply because they make the work
environment more pleasant
Although a satisfied employee is not necessarily
a high performer, there are numerous reasons
for cultivating employee satisfaction

Other Factors Affecting Job

Satisfaction

Wide range of both internal and external factors

affect an employees level of satisfaction
Surveys have found that the top drivers of
employee job satisfaction were
Pay, and benefits
Job security, and feeling safe in the work
environment
Flexibility to balance work and life
Job satisfaction and motivation are not
synonymous

Other Factors Affecting Job

Satisfaction

Motivation is a drive to perform

Organizational reward systems can influence

both job satisfaction and employee motivation

It affects job satisfaction by making the
employee more or less comfortable as a result
of the rewards received
It influences motivation primarily through the
perceived value of the rewards and their
contingency on performance

Determinants of Employee
Satisfaction and
Dissatisfaction
Pay,
Pay, benefits
benefits
and
and fairness
fairness of
of
compensation
compensation
Job
Job security
security
Balance
Balance of
of
worklife
worklife

Job
Job
Satisfaction
Satisfaction

Commitment
Commitment
to
to the
the
organisation
organisation

Job
Job
Dissatisfacti
Dissatisfacti
on
on

Turnover,
Turnover,
absenteeism,
absenteeism,
tardiness,
tardiness,
accidents,
accidents,
strikes,
strikes,
grievances,
grievances,
sabotage
sabotage

Safety
Safety in
in work
work
environment
environment
Quality
Quality
Style
Style and
and quality
quality
of
of management
management
Working
Working
conditions
conditions
Perceived
Perceived
opportunities
opportunities
elsewhere
elsewhere

Employee Compensation

Compensation
All extrinsic rewards that employees receive in

exchange for their work

Composed of base wage or salary, any
incentives or bonuses, and any benefits
Base wage or salary Hourly, weekly, or
monthly pay employees receive for their work
Incentives Rewards offered in addition to
the base wage or salary and are usually
directly related to performance

Employee Compensation

Benefits Rewards employees receive as a

result of their employment and position with

the organization (Examples: Paid vacations,
health insurance, and retirement plans)
Pay
Refers only to actual dollars employees receive
in exchange for work

Components of Employee
Compensation

Compensation Policies

Policies must deal with following issues:

Minimum and maximum levels of pay Taking

into consideration
Worth of job to organization
Organizations ability to pay
Government regulations
Union influences
Market pressures
General relationships among levels of pay (e.g.,
between senior management and operating
management, operative employees, and
supervisors)
Division of total compensation dollar (i.e., what

Compensation Policies

Organizations must also make decisions

concerning
How much money will go into pay increases for
the next year
Who will recommend them
How raises will generally be determined
Another important decision concerns whether
pay information will be kept secret or made
public

Pay Secrecy

Many organizations have a policy of not

disclosing pay-related information

Information about pay system as well as
individual pay received
Justification for pay secrecy
To avoid any discontent that might result from
employees knowing what everybody else is
being paid
Many employees, especially high achievers,
feel very strongly that their pay is nobody
elses business

Pay Secrecy

Drawbacks of pay secrecy

Difficult for employees to determine whether

pay is related to performance and does not

eliminate pay comparisons
May cause employees to overestimate pay of
their peers and underestimate pay of their
supervisors
Can create feelings of dissatisfaction
Employees may become suspicious

Pay Secrecy

Some companies actually forbade employees to

discuss and/or disclose their pay
In 1992, the National Labor Relations Board
(NLRB) ruled that forbidding employees to
discuss their pay constitutes a violation of the
National Labor Relations Act
Womens groups in U.S. and UK have begun to
challenge pay-secrecy rules stating that they
perpetuate income gap between men and
women
A compromise on issue of pay secrecy is to
disclose pay ranges for various job levels within
the organization
Clearly communicates general ranges of pay

The Importance of Fair Pay

Little doubt exists that inadequate pay can have

a very negative impact on an organization

Pay dissatisfaction can influence employees
feelings about their jobs in two ways:
Can increase desire for more money
Can lower attractiveness of the job
An employee who desires more money is likely to
engage in actions that can increase pay

The Importance of Fair Pay

These actions might include

Joining a union
Looking for another job
Performing better
Filing a grievance
Going on strike

The Importance of Fair Pay

All of the consequences (except performing

better) are generally undesirable by management

Better performance results only in those cases
where pay is perceived as being directly related
to performance
When job decreases in attractiveness, the
employee is more likely
To be absent or tardy
To quit
To become dissatisfied with the job itself

Model of the Consequences

of Pay Dissatisfaction

Pay Equity

Equity theory of motivation holds that

Employees have a strong need to maintain a

balance between what they perceive as their

inputs to their jobs and what they receive from
their jobs in the form of rewards
Employees who perceive inequities will take
action to eliminate or reduce them

Pay Equity

Pay equity concerns whether employees

believe they are being fairly paid

For example, if an employee believes he or
she is underpaid, that employee will likely
reduce expended effort by working more
slowly, taking off early, or being absent
Similarly, if an employee believes she or he is
being overpaid, that employee is likely to
work harder or for longer hours

Pay Equity
Several dimensions of equity to be considered when

looking at pay equity

Internal equity Addresses what an employee is being
paid for doing a job compared to what other
employees in the same organization are being paid to
do their jobs
External equity Addresses what employees in other
organizations are being paid for performing similar
jobs
Individual equity Addresses issue of rewarding
individual contributions; is very closely related to the
pay-for-performance question
Organizational equity Addresses how profits are
divided up within the organizations

Pay Equity

Employee interpretations of pay equity are

based on their perceptions

Organizations should make these perceptions
as accurate as possible
An employee can also feel good about one or
more equity dimensions and feel bad about
others
For example, an employee may feel good
about his or her pay in comparison to what
friends working in other organizations are
making
She or he may also believe the company
profits are fairly distributed within the
company

Pay Satisfaction Model

Based on the idea that employees will be

satisfied with their pay when their perception of

what their pay is and of what they think it should
be agree
Happens when employees feel good about
internal and external equity of their pay
Present pay is a primary factor influencing an
employees perception of equity
Persons wage history and perception of what
others are getting also have an influence
For example, employees who have historically
received high pay tend to lower their
perception of present pay
Similarly, the higher the pay of friends and

Pay Satisfaction Model

These factors account for the fact that two

people may view the same level of pay in a very

different manner
An employees perception of what pay should be
depends on several other factors, including
Job inputs
Includes all the experience, skills, and abilities
an employee brings to the job in addition to
the effort the employee puts into it
The perceived inputs and outcomes of friends
and peers
Refer to the individuals perception of what
friends and peers put into their jobs and what
kind of pay they get in return

Pay Satisfaction Model

Nonmonetary outcomes
Refer to the fact that certain nonmonetary

rewards can sometimes substitute for pay, at

least up to a point
It makes allowances for employees who believe
their pay exceeds what they think it should be
Research has shown that in such cases, people
often experience feelings of guilt, inequity, and
discomfort

Model of the Determinants

of Pay Satisfaction

The Role of the Human

Resource Manager in the
Reward System

Role of human resource manager in overall

organizational reward system is to assist in its

design and to administer the system
Administering the system Carries
responsibility of ensuring that system is fair to
all employees and that it is clearly
communicated to all employees
Ensuring that the system is fair places burden of
minimizing reward inequities and employees
perceptions of reward inequities squarely on the
human resources manager

The Role of the Human

Resource Manager in the
Reward System

Little doubt exists that organizations need to do a

better job of explaining and communicating their
compensation system to employees
Many tools and techniques are available to
assist human resource managers in designing
and administering compensation systems

Relevant Legislation &

Government Policy

Prevent exploitation
Ensure minimum wages above poverty line
Political stability
Country remain competitive
Excessive wage increase resulting higher cost
of exported goods

Legislation Relating to
Payment of Wages

The Employment Act

Minimum Wages Order
The Sabah Labour Ordinance
The Sarawak Labour Ordinance
The Wages Councils Act