Critical Elements and Objectives of a Reward System - Literature review Example

Reward Strategy Name Affiliation Outline Introduction 3 Critical elements of a reward system 4 Objectives of reward system 4 Design Options 6 Rewards Strategies being embraced 7 Compensation 7 Benefits 10 Personal and Professional Development 10 Work Environment 11 Conclusion 12 References 15 Introduction In recent years, the aspect of human resource management has become so familiar and widely used given the invaluable roleexecuted by this department in every organizational setting. This is driven inter alia by the fact that organizations have realized that human beings who offer workforce are their key assets or resources (Boxall &Purcell, 2010).As a result; this has precipitated the need for adopting a strategic approach to obtaining, developing, administering, motivating and acquiring commitment of these key resources. Among the many functions of human resource managers is concerned about the rewards to the employees of the company (Boselie et al, 2005). Initially, the reward was seen to incorporate benefits and compensation but there has been radical change as a way of repositioning whereby, a term total rewards strategies is being used as it encompasses compensation, personal and professional growth opportunities, a motivating work environment , benefits and other forms of superannuation’s (Armstrong, et al, 2011 ). Reward Systems have hence becomea critical part of organization's design. According to Brown (2008), these systems should be congruent with other organization’s systems for effectiveness of the organization and high quality life experienced by people in the organization. The overriding and principal guiding factor in designing a reward system is the management style andorganizational being guided by the organization's strategyensuring that thisstrategy is realized in terms of organizational and individual behavior. Critical elements of a reward system As noted by Cox et al (2010) to achieve this, the reward systems must address these three critical elements: First, the core principles of an organization which states how the organization operates such as belief in pay for work done, secrecy concerning pay and long-term commitments in areas of reward systems contracted by the organization. Secondly, structural feature and process features such as decision making practices and communication policies are paramount as they reflect the overall organization’s management style and influence the manner in which reward system practices are accepted, understood and how much of commitment to them. Finally, these reward systems incorporate actual reward practices and structures such as pay delivery systems (profit-sharing plans, gain sharing plans, administrative polices and other organizational programs. As pin-pointed out by Brown (2008), reward systems are assumed to be effective to the degree that the core principles, processes and practices are in alignment. Objectives of reward system From the existing research, a reward system adopted by an organization influences the following factors which consequently are assumed to have impacts on organization’s effectiveness. These include: Attraction of employees and their retention – the existing studies show that the type and reward levels chosen by an organization highly determines who are attracted and who will be willing to continue working for it (Becker & Gerhart, 1996).They further noted that generally, organizations offering most rewards are best placed to attraction and retention of employees which is attributable to the assumption that these colossal rewards levels lead to very low turnover (Boselie et al, 2005). This is attributed toa feelingby valuable employees that they are presently satisfied and feel secured in their present jobs and are above those of similar job and job groups from other organization (Armstrong & Duncan, 2010). The high rates of turnover are curbed by rewarding your employees somewhat above what other organizations are giving. According to Cox, (2010), this can be a high additional cost to the organization especially where it offers cash rewards and intraorganizational imbalance can be felt by the higherperformers as they are remunerated almost similar to poor performers as this stresses on external comparisons. Hence a performance based pay system is adopted by the organizations where higher performers receive extra rewards though it must be designed in a manner that they feel they deserved more (Brown, 2008). Motivation– reward systems with desirable conditions motivate employees’ performance (Becker &Huselid, 2006). Rewards should be connected to the desired performance. Enterprises take behaviors which they use to set rewards that employees value hence goal congruence. As a result, as the employees strive to meet their needs they also achieve the organization’s goals (Corby, 2005). Becker, (2001) noted that employee’s motivation is seen to be composed of; efforttowards expected performance, performance to achieve and the perceived attractiveness from outcomes. Knowledge and skills–a favourable reward system motivates development and learning of the employees particularly on areas that are rewarded based on the skill design (Gerhart & Rynes, 2003). Culture – this refers to way of doing thing s by an organization such that it becomes its norm given the invaluable benefits it derives from it. Therefore, a reward system can be part of the culture and have an impact on organization’s overall performance (Lawler, 1990; Armstrong, Reilly &Brown, 2011). For example, an enterprise can design a participative reward system where it engages its workers in establishing their pay and other business decisions resulting in a sense of ownership and commitment to the organization thereby ensuring its success. Also, as stated by Becker & Huselid (2006) an organization can be a higher remunerator and therefore making its employees feel superior and continue working for it.An organization’s culture can be that of performance based remuneration that impacts on its operations and productions. Definition and reinforcement of structure - according to (Lawler, 1990) a reward system embraced by an enterprise have effects on its structure. It is said that the possible impacts of reward system if not thoroughly considered while designing it, its eventual effects on organization’s structure are unintentional (Boselie, 2005). Despite this, the impacts can be relegated and define how well an organization is in terms of integration and differentiation. Also, this defines the hierarchy and the decision structures that decide on the best opportunities to be utilized for company’s success. Cost –this is a critical area as rewardsparticularly cash forms part of company’s operating costs which have a direct impact on its net earnings Design Options Many ways have been used in designing and management of reward systems. This is due to the fact that rewards exist in many different distributable forms (Cox et al, 2010; Brown, 2008). As noted by (Lawler, 1990), the process and content are the useful twofold that are considered in designing the reward systems. The content fold involves formal mechanisms, practices and procedures such as salary structure and performance appraisals. On the other hand, the process describes the decision and communication processes taking place in the system. Rewards Strategies being embraced Total Rewards Strategy Definition Compensation Compensation is a term that is used to refer tothese three major components: pay increases, pay level - salary or base wage and incentives such as cash bonuses (Gerhart & Rynes, 2003). The pay level involves an elaborate process that organizations follow to establish it (Armstrong et al, 2011). This process begins with job analysis which involves gathering information concerning the features of specific duties and the people in charge. He further stated that this gives rise to job description which in a nut shell summarizes the duties, roles and responsibilities andjob specification that gives details illuminating theskills, abilities, knowledge and other qualifications of any person needed to execute these duties and responsibilities. Thereafter, the organization assesses the value of the job spelled out which is determined by its role in employer’s competitive strategy compared to the competitors (Armstrong &Brown, 2010) stated that the enterprise goes ahead to perform job evaluations to assess internal jobs’ value relative to company’s strategy. He further notedthat a salary survey is then carried out by gathering information on pay rates of similar organizations on similar jobs that is used to set the pay using either broad banding or skill-based approach. Pay increases are offered through promotion and merit pay. Brown (2008) states that for merit pay, an employer correlates performance ratings with the pay increase such that higherperformance rating calls for higherpay increase but they are getting cautious as merit pay increases on company’s costs. Research has consistently proved that a positive correlation exists between employeeattitudes and such plans to pay satisfaction leading to improved attendance, union and retention (Armstrong et al, 2011). Perhaps the critical and key strategic issueto be addressed in designing a reward system is a decision as to whether it will be performance based or not (Cox et al, 2010). Pay can also be based on seniority as it is the case by most government agencies that set their employees pay rates based on longevity one has been in service which may influence promotion and hence merit system as it is the case with business enterprises in United States (Becker et al, 2001). Surprisingly on the other hand it is argued that some organizations would be well off without relating promotion and pay to performance but insteaddepended on othercriteria for motivating performance (Corby et al, 2005). This statement stems due to the difficulty in specifying the kind of performance that is desired and going further ahead in determining whether indeed has been demonstrated (Becker & Huselid, 1998; 2006). An empirical ample evidence subsists showing that a merit system that has been poorly designed and managed does more harm than good (Corby et al, 2005) On the other side, there exists evidence that whenever pay is meritoriouslycorrelated to the preferred performance, it then serves to help to attract ,motivate and retain outstanding workforce (Lawler, 1990). Incentives may include stock orcash bonus where organizations useobjective performance measuressuch as employee’s productivity instead of using performance ratings (Cox et al 2010). Individual incentives are offered at individual employee’s level such as it is the case for sales commissions. This plan is considered the most effective of other reward strategies as empirically it has proved toincrease productivity to about 30% (Brown, 2008). This however does not guarantee a proportionate improvement in product quality and promote teamwork. This is however addressed by the group incentivesthat rewards for performance achieved by a group thereby encouraging and promoting organizational goal sharing and reducing costs. According to (Duncan Brown, 2008), these incentiveshave more moderate effectson productivity of an enterprise than individualincentives leading to increase in yield ofabout 13% . Organizational incentives have also been developed where they are underpinned on the overall organization’sperformance and include stock options, profit sharing and employee stockownership plans. According to Gerhart & Rynes (2003), profit sharing plans generate a relatively small rise in productivity toabout6% which is probably attributable to views and feeling s by the employees that organization’s performance isoutside their control. Hence, they areless or not motivated to work extra harder. Contrary to profit sharing, research showsthat stock sharing plans leads in positive shareholder returns. In addition, one studyfound organizations that had stockownership plans being 5%more profitable above those without these plans (Boselie et al, 2005). On the other hand, errors have been committed while designing the group incentives as they only focus on short term operating outcomes that are quantifiable, measurable and regularly obtained. For example, most organizations reward their top managers based on annual profitability. This can have dysfunctional and detrimental consequences as managers may become short-sighted and end up ignoring strategic objectives that are critical to the organization’s long-term profitability. A similarly dangerous error is the complete dependency on performance appraisals that are subjective for rewards allocation. Substantive evidence subsists to proof how invalid and biased those performance appraisals are and they cause demotivation and unfavorable working climate. Benefits These include insurance and health care entered into by the organization with investments funds on behalf of its employees with a view to gaining good profits from theirinvestment through employee highperformance. In designing this benefit package, organizationsconsider how to convey the information about the plans and the employees’ options in choosing benefits that fit them. According to( Armstrong et al, 2011), past studies have indicated that employees from most organizations are not aware of such benefits and end up being dissatisfied and consequently are prone to absenteeism and to some extreme instances they leave the company for greener pastures. Researches have further shown that where there is a wide range of schemes for employees to choose from in course of their different life stages; they tend to be more satisfied and dedicated to the organization’s activities and hence increase in production. These host benefits are flexible style benefit program that permits individuals to establish their reward package that best fits their desiresand needs. These benefits have become increasingly prominent since organizations are in a position to get the best value and returns from their money by offering employees only those items they desire (Purcell, 2010). This also has an advantage of handlingemployees as mature adults compared to treating them like dependent people whose welfare must be looked after through structured means. Personal and Professional Development professional and personal development opportunities involves training as a process of improving skills, knowledge and attitudes needed by individuals or group of employees in order to enhance their performance at their present job. This can range from job training, orientation, safety training, promotion and refresher courses. According to ( Purcell, 2010) the value being added to the organization by these rewards is less clear unless where the skills and knowledge gained will enable the employees to add value to its operations and give it unique capabilities that are difficult for rivals to copy.Therefore, if professional development opportunities equip workers with general skills that are easily transferable from one organization to another do not offer strategic value and sharp competitive edge to the enterprise (Becker & Gerhart, 1996). It is thus highly advised that any company must take a fine line when incorporating professional and personal growthopportunities into its total rewardssystems and ensure that thedevelopment experiences provided are valuedby employees as well as serving the organization’s strategic goals (Becker et al 2001). Work Environment In this context a cogent attention is given to positive work environment which serves as an imperativeelement in organizations’ total rewards strategy and includes recognition, job design, and work/life balance (Boselie et al, 2005). Job design couples both thephysical attributes of work setting, for example office size and the psychologicalcharacteristics based on how theemployees perceive theirwork. These characteristics compriseperceptions about the work whether itischallenging or meaningful,offers autonomy and whether the persons recognizeswith their roles. According to (Lawler, 1990) job characteristics model and positive perceptionsof job increases employeemotivation and consequently improvedjob performance. A review ofstudies carried to tryout thistheory indicated a modest correlation existing between employees’ motivation and perceptions of psychological qualities of a job and a weak one between these perceptions and workers performance (Brown, 2008). When the workplace is pleasant and satisfying, individuals come to work regularly; when it isn't, they don't. The job contents and job contexts are considered to be very effective even in terms of costs in addressing absenteeism. According to (Becker & Huselid, 2006) a pleasant workplace tend to satisfy the employees and as a result they regularly attend their duties leading to increased organization’s productivity and vice versa. According to Kessler (2005) recognition has been adopted and practiced by many employers particularly those who are costs averse as these are relatively inexpensive in relation to the aforesaid reward strategies. Given heightened worldcompetition and the need tominimize labor costs, employerstoday are placing as much emphasison recognition as financialincentives—sometimes even more. As a support from the other side, employees have also embraced this as theyprefernonfinancial rewards evenover financialones (Cox et al, 2010. In addition, studies show thatrecognitionexertspowerfulimpacts on employees’ performance (Duncan Brown, 2008) and influence the organizations’ effectiveness just as financial incentives do. It is however advisable that both nonfinancial andfinancial rewards be used together as they apparently show synergism (Boseli et al 2005). Conclusion In the modern dynamic and competitive business world, all organizations are working very hard to ensure that they are properly positioned and placed at a competitive edge over and above their competitors. This has seen them dedicate much in matters to do with human resource management aimed at attracting and retaining the most outstanding performers (Becker & Huselid, 2006). As a result a discipline called reward management Systems have evolved. However, a caution should be taken to ensure congruousness between the reward systems and other systems in the organization (Brown, 2008). This is because of the impact sit have on effectiveness of the organization and employees value. Therefore, over the last decade some reward systems have emerged aimed at aligning how enterprises are managed and designed (Lawler, 1990). The main objectives of these rewards strategies were to ensure attraction and retention of right and highlyproductive employees, motivate employees in their duties, cut on the operating costs, enhance career growth, skills and development of workers, define the structures as well as the culture of the organization. These reward strategies involve both financial and non-financial rewards. Where only financial rewards are given, it is becoming difficult for the businesses given the stiffer competition from competitors. Hence, non-financial rewards were sought by the employers as they were deemed to be less costly while they offered the desired motivation to employees (Gerhart& Rynes,2003). A lot of care should be taken in designing and implementing reward systems that best places an enterprise in a health competitive edge. The rewards must be in line with the organization’s strategies. Another critical thing is to ensure that the reward system is so satisfying to the employees to curtail possibilities of turnovers. Therefore, proper design and implementation of reward systems may have a positive contribution to the organizations’ overall performance and growth. On the other hand, failure to establish a sound rewarding system may leave an organization wallowing in miasma of failure and unable to coup with the ever changing tastes and preferences of the employees and other stakeholders. References Armstrong, M., Brown, D. and Reilly, P (2011) Increasing the Effectiveness of Reward Management:An Evidence-based Approach", Employee Relations, Vol. 33 Iss: 2 pp. 106 – 120 Armstrong, M. & Brown, D. (2011). Strategic Reward – Implementing More Effective Reward Management. 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