The design and management of reward systems present the
general manager with
one of the most difficult HRM tasks. This HRM policy area contains the
greatest
contradictions between the promise of theory and the reality of
implementation.
Consequently, organisations sometimes go through cycles of innovation
and hope
as reward systems are developed, followed by disillusionment as these
reward
systems fail to deliver.
Rewards and employee satisfaction
Gaining an employee’s satisfaction with the rewards
given is not a simple
matter. Rather, it is a function of several factors that organisations
must
learn to manage: 1. The individual’s satisfaction with
rewards is, in part,
related to what is expected and how much is received. Feelings of
satisfaction
or dissatisfaction arise when individuals compare their input - job
skills,
education, effort, and performance - to output - the mix of extrinsic
and
intrinsic rewards they receive.
2. Employee satisfaction is also affected by comparisons with
other people
in similar jobs and organisations. In effect, employees compare their
own
input/output ratio with that of others. People vary considerably in how
they
weigh various inputs in that comparison. They tend to weigh their
strong points
more heavily, such as certain skills or a recent incident of effective
performance. Individuals also tend to overrate their own performance
compared
with the rating they receive from their supervisors. The problem of
unrealistic
self-rating exists partly because supervisors in most organisations do
not
communicate a candid evaluation of their subordinates’
performance to them.
Such candid communication to subordinates, unless done skilfully,
seriously
risks damaging their self-esteem. The bigger dilemma, however, is that
failure
by managers to communicate a candid appraisal of performance makes it
difficult
for employees to develop a realistic view of their own performance,
thus
increasing the possibility of dissatisfaction with the pay they are
receiving.
3. Employees often misperceive the rewards of others; their
misperception
can cause the employees to become dissatisfied. Evidence shows that
individuals
tend to overestimate the pay of fellow workers doing similar jobs and
to underestimate
their performance (a defence of self-esteem-building mechanism) .
Misperceptions of the performance and rewards of others also occur
because
organisations do not generally make available accurate information
about the
salary or performance of others.
4. Finally, overall satisfaction results from a mix of rewards
rather than
from any single reward. The evidence suggests that intrinsic rewards
and
extrinsic rewards are both important and that they cannot be directly
substituted for each other. Employees who are paid well for
repetitious, boring
work will be dissatisfied with the lack of intrinsic rewards, just as
employees
paid poorly for interesting, challenging work may be dissatisfied with
extrinsic rewards.
Rewards and motivation
From the organisation's point of view, rewards are intended to
motivate
certain behaviours. But under what conditions will rewards actually
motivate
employees? To be useful, rewards must be seen as timely and tied to
effective
performance.
One theory suggests that the following conditions are
necessary for employee
motivation.
1. Employees must believe effective performance (or certain
specified
behaviour) will lead to certain rewards. For example, attaining certain
results
will lead to a bonus or approval from others.
2. Employees must feel that the rewards offered are
attractive. Some
employees may desire promotions because they seek power, but others may
want a
fringe benefit, such as a pension, because they are older and want
retirement
security.
3. Employees must believe a certain level of individual effort
will lead to
achieving the corporation’s standards of performance.
As indicated, motivation to exert effort is triggered by the
prospect of
desired rewards: money, recognition, promotion, and so forth. If effort
leads
to performance and performance leads to desired rewards, the employee
is
satisfied and motivated to perform again.
As mentioned above, rewards fall into two categories:
extrinsic and
intrinsic. Extrinsic rewards come from the
organisation as money,
perquisites, or promotions or from supervisors and co-workers as
recognition.
Intrinsic rewards accrue from performing the task itself, and may
include the
satisfaction of accomplishment or a sense of influence. The process of
work and
the individual’s response to it provide the intrinsic
rewards. But the
organisation seeking to increase intrinsic rewards must provide a work
environment that allows these satisfactions to occur; therefore, more
organisations are redesigning work and delegating responsibility to
enhance
employee involvement.
Equity and participation
The ability of a reward system both to motivate and to satisfy
depends on
who influences and/or controls the system’s design and
implementation. Even
though considerable evidence suggests that participation in decision
making can
lead to greater acceptance of decisions, participation in the design
and
administration of reward systems is rare. Such participation is
time-consuming.
Perhaps, a greater roadblock is that pay has been of the last
strongholds of
managerial prerogatives. Concerned about employee self-interest and
compensation costs, corporations do not typically allow employees to
participate in pay-system design or decisions. Thus, it is not possible
to test
thoroughly the effects of widespread participation on acceptance of and
trust
in reward system.
Compensation systems: the dilemmas of practice
A body of experience, research and theory has been developed
about how money
satisfies and motivates employees. Virtually every study on the
importance of
pay compared with other potential rewards has shown that pay is
important. It
consistently ranks among the top five rewards. The importance of pay
and other
rewards, however, is affected by many factors. Money, for example, is
likely to
be viewed differently at various points in one’s career,
because the need for
money versus other rewards (status, growth, security, and so forth)
changes at
each stage. National culture is another important factor. American
managers and
employees apparently emphasize pay for individual performance more than
do
their European or Japanese counterparts. European and Japanese
companies,
however, rely more on slow promotions and seniority as well as some
degree of
employment security. Even within a single culture, shifting national
forces may
alter people’s needs for money versus other rewards.
Companies have developed various compensation systems and
practices to
achieve pay satisfaction and motivation. In manufacturing firms,
payroll costs
can run as high as 40% of sales revenues, whereas in service
organisations
payroll costs can top 70%. General managers, therefore, take an
understandable
interest in payroll costs and how this money is spent.
The traditional view of managers and compensation specialists
is that if the
right system can be developed, it will solve most problems. This is not
a
plausible assumption, because, there is no one right answer or
objective
solution to what or how someone should be paid. What people will
accept, be
motivated by, or perceive as fair is highly subjective. Pay is a matter
of
perceptions and values that often generate conflict.
Management’s influence on attitudes toward
money
Many organisations are caught up in a vicious cycle that they
partly create.
Firms often emphasize compensation levels and a belief in individual
pay for
performance in their recruitment and internal communications. This is
likely to
attract people with high needs for money as well as to heighten that
need in
those already employed. Thus, the meaning employees attach to money is
partly
shaped by management’s views. If merit increases, bonuses,
stock options, and
perquisites are held out as valued symbols of recognition and success,
employees will come to see them in this light even more than they might
have
perceived them at first. Having heightened money’s importance
as a reward,
management must then respond to employees who may demand more money or
better
pay-for-performance systems.
Firms must establish a philosophy about rewards and the role
of pay in the
mix of rewards. Without such a philosophy, the compensation practices
that
happen to be in place, for the reasons already stated, will continue to
shape
employees’ satisfactions, and those expectations will sustain
the existing
practices. If money has been emphasized as an important symbol of
success, that
emphasis will continue even though a compensation system with a
slightly
different emphasis might have equal motivational value with fewer
administrative problems and perhaps even lower cost. Money is
important, but
its degree of importance is influenced by the type of compensation
system and
philosophy that management adopts.
Pay for performance
Some reasons why organisations pay their employees for
performance are as
follows: under the right conditions, a pay-for-performance system can
motivate
desired behaviour.
a pay-for-performance system can help attract and keep
achievement-oriented
individuals.
a pay-for-performance system can help to retain good
performers while
discouraging the poor performers.
In the US, at least, many employees, both managers and
workers, prefer a
pay-for-performance system, although white-collar workers are
significantly
more supportive of the notion than blue-collar workers.
But there is a gap, and the evidence indicates a wide gap,
between the
desire to devise a pay-for-performance system and the ability to make
such a
system work.
The most important distinction among various
pay-for-performance systems is
the level of aggregation at which performance is defined - individual,
group,
and organizationwide. Several pay-for-performance systems are
summarised in the
exhibit that follows.
Individual performance |
Group performance |
Organizationwide performance |
Merit system Piece rate Executive bonus |
Productivity incentive Cost effectiveness |
Profit sharing Productivity-sharing |
Historically, pay for performance has meant pay for
individual
performance. Piece-rate incentive systems for production employees and
merit
salary increases or bonus plans for salaried employees have been the
dominant
means of paying for performance. In the last decade, piece-rate
incentive
systems have dramatically declined because managers have discovered
that such
systems result in dysfunctional behaviour, such as low co-operation,
artificial
limits on production and resistance to changing standards. Similarly,
more
questions are being asked about individual bonus plans for executives
as top
managers discovered their negative effects.
Meanwhile, organizationwide incentive systems are becoming
more popular,
particularly because managers are finding that they foster
co-operation, which
leads to productivity and innovation. To succeed, however, these plans
require
certain conditions. A review of the key considerations for designing a
pay-for-performance
plan and a discussion of the problems that arise when these
considerations are
not observed follow.
Individual pay for performance. The design of an individual
pay-for
performance system requires an analysis of the task. Does the
individual have
control over the performance (result) that is to be measured? Is there
a
significant effort-to-performance relationship? For motivational
reasons
already discussed such a relationship must exist. Unfortunately, many
individual bonus, commission, or piece-rate incentive plans fall short
in
meeting this requirement. An individual may not have control over a
performance
result, such as sales or profit, because that result is affected by
economic
cycles or competitive forces beyond his or her control. Indeed, there
are few
outcomes in complex organisations that are not dependent on other
functions or
individuals, fewer still that are not subject to external factors.
Choosing an appropriate measure of performance on which to
base pay is a
related problem incurred by individual bonus plans. For reasons
discussed
earlier, effectiveness on a job can include many facets not captured by
cost,
units produced, or sales revenues. Failure to include all activities
that are
important for effectiveness can lead to negative consequences. For
example,
sales personnel who receive a bonus for sales volume may push unneeded
products, thus damaging long-term customer relations, or they may push
an
unprofitable mix of products just to increase volume. These same
salespeople
may also take orders and make commitments that cannot be met by
manufacturing.
Instead, why not hold salespeople responsible for profits, a more
inclusive
measure of performance? The obvious problem with this measure is that
sales
personnel do not have control over profits.
These dilemmas constantly encountered and have led to the use
of more
subjective but inclusive behavioural measures of performance. Why not
observe
if the salesperson or executive is performing all aspects of the job
well? More
merit salary increases are based on subjective judgements and so are
some
individual bonus plans. Subjective evaluation systems though they can
be
all-inclusive if based on a thorough analysis of the job, require deep
trust in
management, good manager-subordinate relations, and effective
interpersonal
skills. Unfortunately, these conditions are not fully met in many
situations,
though they can be developed if judged to be sufficiently important.
Group and organizationwide pay plans. Organisational
effectiveness depends on
employee co-operation in most instances. An organisation may elect to
tie pay,
or at least some portion of pay, indirectly to individual performance.
Seeking
to foster team-work, a company may tie an incentive to some measure of
group
performance, or it may offer some type of profits or
productivity-sharing plan
for the whole plant or company.
Gains-sharing plans have been used for years in many
varieties. The real
power of a gains-sharing plan comes when it is supported by a climate
of
participation. Various structures, systems, and processes involve
employees in
decisions that improve the organisation's performance and result in a
bonus
throughout the organisation.
Russian management’s approach to
motivation.
Nowadays, top managers at Russian companies don’t
pay much attention to the
employee motivation. Not only is it the result of the long communist
background
of the country, but it also is somewhat affected by the national
traditions,
customs and mentality.
Many of the recently “commercialised”
enterprises believe that employees are
to be satisfied with their salary only, and a pay-for-performance
system is,
therefore, of no need. However, the failure to observe the different
motivation
factors, such as money, respect, promotion and others, can lead to a
worsening
performance and, as a result, to a lower efficiency organizationwide.
On the other hand, money is not considered to be the most
influencing
motivation factor by the employees themselves. Though it may be a more
vital
need of most Russian workers in comparison with their Western
colleagues, at
the same time they put more value on the co-operative atmosphere in the
organisation, rather than on the money side. And, thus, it is
reasonable for
the management to base the performance incentive system on some other
factors,
such as work security, pension etc. It’s hard to predict the
situation in the
long-run, however one can expect that the value put on money as a
performance
motivation factor will rise.
Bibliography
Searle, John G., Manage People, Not Personnel, A Harvard
Business review
book, 1990