Wednesday, 8 December 2010

Reward Management and Philosophy – What you need to define before formulating your policy

Employees have traditionally invariably been paid with cash, only relatively recently organisations have focused their attention on developing bespoke reward strategies, whose main aim is to help businesses to attain their specific organisational objectives.


Until the 1980s in the private sector, and even until more recently in the public sector, employee pay and employment terms and conditions were determined by means of the collective bargains made by management and trade unions more often than not at national or industry level.


This “multi-employer” bargaining system declined sharply during the 1980s and 1990s and continued indeed to decline further in the following years; insofar as in 2004 only 36 percent of the public sector employers and 1 percent of the private sector companies still had pay arrangements whose mechanism was controlled by a collective agreement.


The end of this long-established system has enabled employers to introduce and develop pay systems aiming at rewarding individual skills, efforts and performance and to gain a higher level of flexibility in the design, development and expansion of their value proposition.

In the last two decades, reward has attracted the growing interest of consultants and academic researchers so that a considerable literature on the subject has been indeed made available. All of that has enabled employers and managers to develop and implement bespoke reward practices helping these to meet their specific organizational needs and objectives. Nonetheless, as pointed out by Armstrong et al (2005), a worrying “knowing-doing gap” still remains.


Since in many organizations the activities aiming at identifying the most suitable pay arrangements are presently underway, it can be argued that to some extent some reward approaches are still somewhat of on probation. The debate on the effectiveness, efficiency and fairness of the different reward models developed by employers and their reward managers is hence still rife and passionate.


Reward Management
First and foremost, it could be interesting to find out why the term reward itself has been used to refer to the whole range of benefits, in addition to pay, an employee receives from his employer in exchange for his work.


As aptly stressed by Torrington et al. (2008), the term “payment” would have been too limited in scope in that many of the rewards an employee receives for his/her work are actually no longer paid in cash.


The term “compensation”, widely used in the American literature, mostly gives the idea of making amends for something that has caused loss or injury to someone else, which would not definitely be the most appropriate idea to provide individuals about the outcome produced by their work.


The word “remuneration” has the same meaning as “payment”; additionally, it allegedly is the most misspelled (renumeration) word in the HR lexicon.

“Reward” would not indeed be the best term to use either in that it suggests the idea of a special payment for a special act; nonetheless, amongst the available options, it emerged as the most appropriate and suitable term.

Considering the issue from the transactional viewpoint, and to some extent from the psychological contract point of view, it would not be completely incorrect to refer to the term “return”, but it would risk revealing inappropriate and misleading by reason of it not taking into consideration the remarkable efforts employers are actually making to offer their employees a diversified value proposition, that is, a reward package formed by several components combined together to make the work rewarding and worthwhile; what is today known as “total reward.”


All of the activities performed within an organisation are basically aimed at supporting the attainment of the business strategy developed by its business leaders. These strategies should consequently inspire the policies, procedures, practices and actions developed within each function existing within an organisation. The organizational functions can in turn differently influence the overall business strategy according to the knowledge each of these can contribute to the development of informed and realistic, but also profitable, suitable and viable strategies.


Reward management makes no exception. As claimed by Armstrong (2006), reward management basically is about the formulation and execution of strategies, policies, practices and procedures developed with the aim of rewarding employees fairly, equitably and consistently in accordance with the business culture and beliefs. These are thus intended at enabling the organisation to achieve its overall strategic aim and objectives.


Reward policies not only need to be consistent and coherent with the business strategy, but must also reflect the organisation’s culture and its shared values and beliefs in order to ultimately inspire and foster integrity within the organisation.


Employees are becoming the more and more sensitive to and wary and intolerant of the discrepancies existing between what an employer states and say and what this actually does and executes in practice. Employers definitely need hence to pay attention to this aspect and invariably avert to talking the talk but not walking the walk.


While formulating reward practices employers should constantly give serious and careful consideration to the main aims the organisation intends to pursue by means of the policies themselves.


As suggested by Armstrong (2006), to this extent there are some mandatory tenets which need to be taken into consideration, such as:

- Consider and reward employees according to what the company values the most,

- Reward employees for the value these create in order to develop a clear performance culture within the organisation,

- Use reward to make it clear what behaviour and outcomes are considered important by the employer,

- Employ reward to attract and retain the right individuals necessary to the firm,

- Develop a total reward system encompassing both financial and non financial reward,

- Consider what employees value, in addition to what it is important for the employer, hence focus on finding a good balance and trade-off between the two interests,
- Operate transparently, consistently, fairly and equitably.

Organisation and reward values and beliefs
Reward management should aim at supporting the business by means of enabling it to achieve its intended strategy. To successfully attain this objective, it is necessary to develop in turn the reward management values and guiding principles, which will clearly be inspired by the organisational values and beliefs. Armstrong (2006) defines reward management’s sets of values and guiding principles as the “philosophy of reward management.”

The foundations of reward management at large lie in consistency, transparency, equity and fairness.


This does not clearly mean that all of the employees have to receive exactly the same amount of “reward.” A reward philosophy underpinned by the idea of valuing human capital, for instance, will aim at rewarding individuals according to the different degree of contribution these make to the organisation’s success, profitability and growth, and on the return on the investment these are able to generate.


This is a point employees may be prone to miss so that a clear, open and extensive communication process on what the reward practices are intended to pursue within the organisation should be definitely implemented and periodically refreshing sessions organised.


Line managers, after having received a thorough and specific training programme, definitely represent a central and fundamental part of this process. Yet, in order to avert later undesirable misunderstandings, which may also be perceived by employees as a breach of their psychological contract, employers should better devote part of the induction process to explain to their new recruits the guiding principles, values and beliefs, that is to say the philosophy, behind their reward practices. It would also help to make it clear to newcomers what the organisation is expected from them in terms of behaviour and desired standard of performance, and what and how the firm assesses and rewards work and performance.


Reward management values and guiding principles, consistently with the overall business values and strategy, need to enable the organisation to address rewarding problems in the long-run and to identify suitable and fair solutions to reward people according to their real level of performance and actual achievements.


In order to motivate, engage and ultimately retain staff reward management also has to be based on the total reward idea and need thus to considers both the intrinsic and the extrinsic aspects of reward, which linked as a whole to the other HR initiatives will produce a multiplicative bundle-like effect boosting motivation and engagement within the business.

In order to achieve this result reward management practices need to be not only vertically aligned with the overall business strategy, but also horizontally aligned with the HRM strategies of which reward is indeed part, too.


Business and HR strategies are not the only factors having a remarkable impact on reward management, which is also considerably affected by the pressure coming from the endogenous and exogenous environment. An example of the pressure exercised by the internal environment is, for instance, represented by the importance the firm’s top management attaches to reward, whereas an example of the pressure coming from the external environment is represented by the market rates characterizing the relevant labour market.


Having a clear idea of the different economic theories underpinning the pay level decision-making process and gaining a thorough understanding of the practical significance of each of them, would definitely reveal particularly interesting and useful for employers to make informed decisions about their positioning in the “reward market.”


The law of supply and demand
It works exactly as the law of supply and demand regulating any other market and product. When labour supply exceeds the relative demand, pay levels decrease; vice versa, when there is a lack of labour and demand hence outweigh supply, pay levels increase.


In this case the market rates are basically linked to, and influenced by, the market trends and factors.


Efficiency wage theory
Also known as “economy of high wages theory”, this theory is based on the principle that paying higher than market rate salaries will enable organisations to attract, retain and motivate individuals. This theory is also aimed at curbing labour turnover and persuading employees that they are treated fairly.


Organisations resort to this theory when aiming at being considered as market leaders or above-the-average employers.


Human capital theory
This theory aims at building on the individual education and skills in order to generate productive capital. This approach is intended to lead to a win-win situation for both the employer and the employee: good pay for the employee, good return on investment expected by the employer.


Agency theory
The owners or principals of an organisation are separated by their agents or employees; this is likely to generate “agency costs” in that agents are unlikely to be as productive as principals would. These need therefore to find effectual ways to motivate and engage them.


This theory requires the development and introduction of an incentive scheme aiming at paying employees according to the measureable results these yield.


This theory is also applied to the business managers. In this case, the agency costs is intended to avert that managers may use their role to their personal benefit, rather than to that of the business owner or principal.


The effort bargain
According to this approach, employers have to determine the right level of reward for each employee in order to this performing at his/her best. Bargaining is hence seen as a means to an end both for employees and employers. The former want to be fairly awarded for their efforts, whereas the latter aim at offering what it takes, and no more, to receive the required and expected contribution to the attainment of the organizational objectives. Rates of pay are thus bargained by individuals and organizations according to the skills the individuals actually possess and the significance and worthiness employers attach to those capabilities.

Longo, R., (2010), Reward Management and Philosophy – What you need to define before formulating your policy; HR Professionals, [online].

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