Strategic Reward Management: Design, Implementation, and Evaluation - Example

Introduction Reward management is a key element in human resource management. It contributes greatly in the realization of positive outcomes in an organization. There are different types of rewards, the most common being basic pay (salaries and wages) benefits, incentive system, prerequisite and awards. When combined, they form an individual compensation package. The most important reward for employees is the pay they receive since it symbolizes the employees’ worth (Bratton, and Gold 2001). Basic pay is necessary in an organization due to the following reasons. First, an effectively planned and managed pay system improves the employees’ performance. Second, poor pay is usually considered a source of dissatisfaction of employees in an organization and therefore a poor design may lead to problem in areas such as law morale and turn over. In fact, it serves as the central aspect of reward management since it influences the organization’s financial control and management. According to Heneman (2002), reward systems are responsible in eliciting, reinforcing and maintaining desired organizational performance. He further explain that the system may be oriented to specify jobs, workgroups and may affect the performance of the organization as well as the well being of the employees. He says that pay serves as the central aspect of reward management and the organizational management should make strategic decisions in designing and administering pay share which will enhance the improvement of the organizational performance. However, there have been various debates on how the reward management is related to organizational performance. Some authors like Bratton and Gold (2001), view the relationship being direct and thus enabling strategic plan and outcomes of the organization, while others view it as being complex. Authors who view the relationship as being complex argue that there are intervening variables between the reward management and the overall improved organizational performance. These authors have different views since they measure the effectiveness of reward management in different manners. White and Druker (2000) argue that it is the responsibility of the human resources management to discuss and negotiate on the decisions and the pay distribution among employees in the organization. Thus reward management forms the key lever which should be deployed in an organization for the pursuit of effective human resource management. The human resource management needs to structure a pay strategy which meets the HR objectives. Authors like Edward Hawler III and Zingherm and Schusker as highlighted in White and Druker (2000), have developed arguments along this line creating a link between business strategies and the reward management. They argue that this central relationship and the need to pay are explicitly linked to the performance of the organization. According to Griffin and Moorhead (2009), the performance management forms a basis in which employees are rewarded. The rewards have a greater impact as the motivation of the employees and the overall performance of the organization. There are various rewards management systems used in organizations in allocating both the compensation and the benefits for their employees in exchange for their contributions to the organization. Organizations use reward systems especially the basic pay to attract, retain and maintain the employees. HR Management have the responsibility of organizing the compensation strategy so as it is equitable and consistent in ensuring that complies with the law and equality of treatment. The employees’ base pay should be fair for each individual’s contribution to the achievement of the organizational objectives, although it seems difficult to measure these contributions objectively. Thus, managers should be both fair and equitable in determining the compensation fruits worker. Besides the reward system should be competitive in the global market so as to be able to attract and retain competent employees. In managing the reward systems, the organization must focus on other issues such as the ability to pay its employees at a given level, the impact of the pay system to the organizational financial performance as well as the economic and labor market conditions. Besides, it is necessary for the organization to consider the relationship between the rewarding system and the organizational performances. Employees have a perception that the rewards they receive are linked to their performance. Managers should therefore take the advantage of the symbolic value of pay in improving the overall performance of the organization. Organizations should relate the compensation of employees to the actual performance. According to Heneman (2002), new employee should start as a wage predetermined by the experience skills, educational qualifications or other job related factor he or she holds. After he or she has joined the organization, his or her rewards should be based on the actual performance. Organizations should ensure that pay differences among employees are based on performance including rewards and not factors that are not related to performance such as effectively, gender as well as other discriminatory factors. In the development of a reward strategy, organizations should use basic compensation levels for every employee since it is difficult to differentiate them in terms of their performance. What is necessary for them to remember is that the rewards that the employees are given narrates their performance and therefore they must see a clear and direct links between their job related behaviors and the attainment of the rewards. Paauwe presents various arguments by different authors on the relationship between the HR practices and the HRM outcomes like employee motivation and turnover among others. According to Paawe (2009), Guest present the relationship in a more desired manner unlike authors such as Gardner, Becker, Wright and Gerhardt who believes that there are intervening variables between reward management and the organizational performance that helps in explaining the link between the two with the bottom line of the firm performance. The variables that they include in their framework are employee skills, creativity, motivation, and discretionary efforts as a mediating variable. Authors like Bowen and Usloof (2000), and Klein and Koclowski (2000) cited in Paauwe (2009) extend this multilevel analysis so that these variables can be properly accounted at both individual and organizational levels. Paawe illustrate how authors such as Becker and Gerhardt (1996) conceptualize the significance of human resources in contributing to the competitive advantage and organizational performance. Paawe and Richardson (1997) indicate that human resource management activities such as reward management result in HRM outcomes that influence the performance of an organization. Change in HR system results into a 10-20 % increase in the organizational performance. This is also supported by Heneman (2002). Later evidence given by Wright and Gardner (2003) as cited in Paauwe (2009) show that, the HR practices are weakly related to the organizational performance. Wall and Woods’ conclusion also indicate that there is a positive correlation between reward management and the organizational performance. Paawe points out that the effect as of reward management is small in various studies and that they also fail to indicate if it is brought directly by the HR practices or if there are other variables involved. Therefore, it is necessary to be very cautious when dealing with the relationship between the individual and organizational performance. In determining the relationship between HRM policies (such as compensation and incentives, resourcing and development, involvement and job design) and organizational performance, Katou (2008) says that the two are partially mediated through the HRM outcomes that include attitudes, behavior and skills. Besides, it is also influenced by the business strategies such as quality, cost and innovation. There are various HRM-performance linkage models which have been designed to analyze the impact that the HR practices have on organizational performance. The models complement one another by adding variables, constructs and relationship in trying to fill the gap that exists in the HRM- performance relationship. Gerhart (2005) stresses that “the view that the two variables are directly linked,” lack clarity. It fails to explain the factors that lead to the other. In his analysis, he takes into consideration the influence of business strategies on the relationship between the two variables. In drawing the linking between HRM and organizational performance, Katou (2008), illustrates this using an operational model in which Paauwe and Richardson (1997) argues that the HRM outcomes intermediates the HRM activities and the organizational performance. Katou then argues that the HRM outcomes connect the HRM policies as being independent. In this model the insights form the theories of resource based view, contingency and AMO are blended into the overall theory of HRM. From Katou’s research, the HR outcomes intervenes the relationships between organizational performance and the HRM policies. This shows that either a direct or indirect link exist between HR practices and the organizational performance. He also argues that there are variables which moderate the endpoint variables in the relationship between the HR practices and the organizational performance. Thus, we support the contingency perspective which illustrates how business strategies influence the HRM policies. The crucial factor in the reward management –organizational performance relationship is how it shapes the discretionary behavior. The AMO theory forms the heart of strategic human resources management in the domain of compensation and incentives and this in turn is designated to positively shape the organizational behavior. The HRM outcomes include employee attitudes (commitment, satisfaction and motivation), employee skills (co-operation and competencies) and employee behavior (such as presence and retention) mediates the HR practices and organizational performance. Research indicates that business strategies precede the HR policies in determining organizational performance. The various business strategies are indicators of the organizational effectiveness. Organizations that use the quality strategy offers high rewards to the employees due to their capability of attracting qualified and skilled workers who will facilitate the business performance. Besides, it facilitates cooperation and other behaviors that help in ensuring that the individuals are able to identify with the goals of the organization and thus leading to the overall performance. Katou (2008) discusses how authors like Parcell and Hutchinson (2007), Gardner, Moynihan, Park an Wright (2001)argue that HR outcomes do not affect the organizational performance but rather what causes it include a serial causation from skills of employees, to attitudes and then behaviors. These HR outcomes then affect the organizational performance and thus, the levels of commitments, satisfaction and motivation are improved. The human resources create a workforce that is skilled, with right attitudes and behavior which supports satisfaction, commitment and motivation that finally influences the organizational performance. Based on the various studies by human resource management practitioners and authors on the relationship between reward management and the organizational performance, Paawe insists that the two are weakly related. However, some of them believed on a strong linking between them. Katou (2008) points out how various practitioners and researchers have shown how contingency theory, (ability, motivation and opportunity) AMO framework and resource based view have been focused in the organizational performance and individual performance. In analyzing their literature over the past years, there are disparities in the direct relationship between human resource practices and the performance. The contingency theory indicates that the HRM influences organizational performance due to the contingent factors of the organization that include business strategies. On the other side, in the resource based view, HRM influences organizational performance in accordance to the social and human capital that the organization holds, while in the AMO theory influences the organizational performance by relating to the ability of the employees, their motivation and opportunity to participate. However, they have only focused on a specific effect of a reward system of employees. This calls for the application of a multilevel approach through the combination of different levels of analysis. The reward systems of the employees’ give a positive psychological contract in the organization hence resulting into greater job satisfaction, job security as well as employee motivation. A strong argument then is derived form this reasoning making a distinction between the strategy human resource practices and the actual human resource management practices as well as the perceived human resource management practices. The above mentioned theories however link the HRM with organizational performance in simple terms i.e. it correlates them directly without the mediating variables. Actually, according to Katou and Budhwar (2009) there is need to theorize and model the relationship in a more advanced way by holding that, the HR practices at the management level affect the behavior and attitudes of the employees, and these in turn affects the HR outcomes that include turnover and labor productivity. This subsequently impacts on the overall performance of the organization. It is clearly noted that this approach indicates a multi-level theorization which explicitly seek to link the reward management at organizational level and employee satisfaction and performance at the individual level. This therefore shows a multi-level theorization which is accompanied by various complex multi-level analysis that controls the various contingencies. Nevertheless, more research needs to be carried out in measuring and establishing the actual relationship between reward management and the organizational performance by analyzing and testing the existing complex theoretical arguments with appropriate methodologies. In assessing the different view points, we capture the HR outcomes in terms of organizational outcomes, such as quality, productivity and efficiency, financial outcomes such as sales, profits and gain of market share or HR related outcomes such as commitment, job satisfaction. In most cases, it is the profits and sales (financial measures) which represent the organizational performance. Some researchers such as Kanfer (1994) and Guest (1997) cited in Paauwe (2009) indicate that there is big distance between the individual HR practice and performance outcomes such market share and profits and that the relationship that may exist between the two could be due to other business intervention such as market research, marketing strategies and development activities. Paauwe gives an example to illustrate this. He says that smart policies set out by organizations for the management of the working capital can substantially increase the working capital and thus this may have nothing related to the proclaimed HR practice in general and specifically the reward management. The HR policies have consequent impact on the business performance through the shaping of employee behavior. Also, the employee skill is improved by the business policies, which in turn influences the organizational performance. This group of authors proclaims that in measuring the relationship between reward management and organizational performance. HR practitioners should use performance indicators which are close to the HR practices in terms of their actual effects and changes. These indicators include the attitude of the employee behavior such as turnover and absence. Consequently, they create subsequent changes in the organizational outcomes that include the quality of products and services and the level of productivity. A closer analysis of using too distant financial indicators shows no much correlation between the reward management and organizational performance. According to Armstrong and Murlis (2007) the HR practices such as reward management is measured after a performance period with the results reflecting on the predicted past performance of the organization. This kind of measurement ignores the investigation of the causal factors. This critically indicates that there should be a better research design aimed at linking reward management to the past performance as well as the subsequent performance. This check of the past performance impacts on HR outcomes and that the HR practices has a causal influence on the subsequent organizational performance. With such a close check, there is a clear indication that the HR practice relates to future performance of the organization. This indicates that the two are not directly linked. Paauwe (2009) highlights that contingent pay reflects the objective of strategic Human Resource Management programs such as indication and recruitment of strong performers, provision of skills and confidence for employees to work effectively, reward them well and monitor their progress towards the achievement of organizational performance. It has however been difficult to measure the HR practices themselves. Some researchers use the presence or absence of the practice, others use the extent at which the practice has been covered while others use the perception of how effectiveness of the practice has been achieved. In the HRM- performance debate, Paauwe regards HRM as a facilitator of strategic options to be used by the organization with the main goal of developing a workforce with sufficient adaptability and flexibility in implementing a range of strategic options. Thus, there are high demands placed upon employees such as being ready to learn and display willingness to change and to be flexible as well as well as adaptable. This can only be achieved if there is a proper care of the needs of the employees in ensuring fair treatment and consideration of their well being. HRM combine relational and economic rationality in establishing trustworthy and sustainable relationships with the organizational stakeholders based on the legitimacy and criteria of fairness. This brings great benefits for employees and the organization itself. In meeting the relational rationality, the management has to treat the employees well so as to result into higher job satisfaction, reduced employee absence and greater willingness of staying within the organization. Therefore, the reward management outcomes enhance productivity and the well being of employees. Conclusion Past research by HR researchers and practitioners show that there exists a relationship between the HR practices and organizational performance. This link can either be direct or indirect. From the relationship model discussed, the Human Reward- performance relationship has been investigated by blending different aspects of Resource Based View, contingency theory and the AMO theory. From this new model, results show that the HR practices, inclusive of reward management, influence HRM outcomes (such as attitudes and skills) directly and thus indirectly improving the organizational performance. Furthermore, the HR practice of Human Reward is moderated by the organizational strategies that include quality, cost and innovation. The employees’ motivation is also moderated by the organizational culture and the managerial style. Therefore, we can conclude that the HR outcomes such as employees’ attitude, skills and behavior link the human reward and the organizational performance. The employees are motivated from the pay incentives they receive. This has a positive impact on their attitude towards work and thus leading to the organizational performance. The organizational management should develop a reward management system by following its set business strategies. Besides, they should emphasize the development of business strategies and reward management should be directed to the improvement of the HR outcomes. References Armstrong M and Murlis H 2007, Reward management: a handbook of remuneration strategy and practice, Kogan Page Publishers, Great Britain Bratton, J and Gold J. 2001, Human Resource Management: Theory and Practice, Routledge, New York. Gerhart B 1996, “The impact of human resource management on organizational performance: progress and prospects,” Academy of Management Journal, 39(4): 779-801 Gerhart B 2005, “Human resources and Business performance: findings, unanswered questions, and an alternative approach,” Management review, 16: 174-185 Griffin R and Moorhead G 2009, Organizational Behavior: Managing People and Organizations, (9th ed) Cengage learning, California Heneman R 2002, Strategic reward management: design, implementation, and evaluation IAP, London. Katou A and Budhwar P 2009, “Causal relationship between HRM policies and organizational performance: Evidence from the Greek manufacturing sector” European Management Journal Katou A, 2008, “Measuring the impact of HRM on organizational performance,” Journal of Industrial Engineering and Management. 1(2): 119-142 Paauwe J 2009 “HRM and performance achievements, methodological issues and prospects,” Journal of Management Studies, 46 (1):128-139 Paauwe J and Richardson R 1997, “Introduction: special issue on HRM and performance,” International Journal of Human Resources Management, 8: 257-262 White G and Druker J 2000, Reward management: a critical text, Routledge, New York. Read More