Tuesday, 10 January 2012

The past, present and possible future of reward

The past and present of reward
The concept of reward has changed and evolved considerably with the passing of the years. For centuries, organizations have exclusively paid their employees in cash and only relatively recently has emerged a growing need for well-identified and specific reward strategies, aiming at helping organizations to attain their intended objectives by developing and offering their employees a diversified value proposition (Torrington et al, 2008).
From the terminological point of view it can be observed that the current term “reward” has largely replaced the older terms “payment” and “remuneration.” It is not clearly only the wording which has evolved over time, but rather and most importantly the meaning, concept and idea associated with each term. Whether in fact the term “payment” appropriately reflects the role once played by money, which represented the only form of remuneration offered by employers to individuals in return for their contribution, the term “reward” rather expresses the more comprehensive idea of a “package”, which is thus not only composed of cash but of several elements, that is to say financial and non-financial rewards.

The evolution of the concept of payment has been indeed made possible by the diminished role once played by trade unions in salary negotiations. As long as staff salaries were bargained by employers with labor unions, more often than not at industry and national level, employers’ latitude to design and develop their reward systems and decide the composition of the reward packages to offer to their employees was sensibly reduced (Torrington et al, 2008). There are indeed still several countries in the EU where the bargaining power and influence exerted by trade unions considerably restrict the employers’ ability and autonomy to design, develop and offer reward packages effectively enabling them to achieve their intended business strategies.


Firms can clearly autonomously agree with employees the worth of their individual reward package, but cash supplements have to be essentially provided in addition to what employers have already agreed at industry, national and every so often also at local level with unions. In these instances, incentives, bonuses and contingent pay at large are thus granted to individuals at an additional cost compared to the overall personnel budget already determined by employers on the basis of the levels of pay bargained with trade unions. Whether employers would be put in a position to freely use their overall personnel budget, these would clearly use it differently. Rather than operating pay systems essentially based on length of service, employers might have preferred, for instance, to establish contingent pay systems or in any case, introduce the pay arrangements they would have considered as most appropriate to enable them to more properly and effectively influence their staff actions and foster the desired behaviour. Under such circumstances, the payment of additional cash would no longer be taken for granted by individuals in that bargained by unions, but would rather be perceived, as it is, as a payment at risk, which needs thus to be re-earned year after year to be repeated.

The fact that in the past and for centuries, differently from what happens today, the only form of compensation provided by employers to their staff in return for their work was exclusively represented by money can be nonetheless definitely taken for granted.


The psychological contract
Taking heed of the employee point of view and expectations it should be added that initially and also in this case for centuries, the terms and conditions of the psychological contract at the basis of any work relationship were essentially represented by respect, fair treatment and employment stability. Individuals were basically expected to receive a salary in exchange for their work activity on the basis of a written contract of employment and to be treated fairly and enjoy job stability, which typically gave rise to the idea of a job for life (Porter et al, 2006), on the basis of the expectations generated by an unwritten contract, that is, the psychological contract. Employers were expected that in exchange for that employees would have done their best to support their organization, would have been committed to its values, and would have been loyal to the employer and compliant with the organizational rules (Armstrong, 2009).

In order to enhance individual loyalty, ensure that employees would have continued to do their utmost, reward good performers, retain quality staff and attract new skilled individuals employers subsequently started offering employees benefits, bonuses and other forms of financial recognition in addition to base pay.

Conceivably by reason of their nature, the more human beings become used to have, the more they aim at having and long to receive, Maslow’s hierarchy of needs (1954) and Alderfer’s Existence - Relatedness - Growth (ERG) theory (1972), just to name a couple of theories, are self-explanatory in this sense. So whilst HR professionals and academics were investigating the impact and effects produced by financial reward on staff’s performance (investigation actually still underway), individuals were starting to develop and attach a different meaning and content to the psychological contract. Taking for granted job stability and pay, employees began attaching a growing significance to other factors, that is to say training, career prospects and personal and professional growth; which is clearly good for employers too. The psychological contract was hence and is still changing and employers had and have to adapt their value proposition accordingly.


The role played by money
The question is whether financial reward still plays a role or whether it can be considered as completely and totally irrelevant. Findings of hundreds of investigations and studies carried out over the years on this subject have indeed led to different and contrasting conclusions.

Prior to the global financial and economic downturn, the role played by money as an effective motivator had been sensibly weakened and considered questionable at best. The findings of a study carried out by Jurgensen (1978) amongst 50,000 job applicants over a considerable period of 30 years, nonetheless, revealed that although men considered pay as the fifth most important characteristic of a job and women considered pay as the seventh most important factor, when the same individuals, irrespective of their gender, were asked to rate the importance, in their opinion, other individuals with their same characteristics (education, age, gender, etc.) attached to pay, cash gained the top of the table. The vast majority of the individuals surveyed basically assumed that pay was important for everyone but themselves.

The meaningfulness and reliability of the findings produced by these types of investigations are also affected by the methodology these use. As suggested by Slovic and Lichtenstein (1971), when answering surveys questions individuals habitually tend to underrate factors such as pay, which is considered socially less important, to attach a greater significance to those factors which are mostly appreciated as socially relevant. Yet, Lawler (1971) suggested that investigations can lead to different conclusions according to the different methodologies which have been used.
As in many other situations concerned with human beings behaviour and reactions, the true is possibly in the middle: people need and work for money but in the long run the influence of money may tend to fade, which is what Herzberg’s (1957, 1968) two-factor theory basically maintains. This idea is effectively summarised by Pfeffer (1998), who claimed that individuals work for money but also “work to have fun” insofar as organizations overlooking this aspect will see their staff’s lack of loyalty and commitment to jump. Furnham (2006) claimed that money is not the most important thing and that individuals could be happier “with more time off, or more job security”, he also suggested that “people are prepared to trade-off things for money once they have enough or grow weary of the game.”
Furnham to some extent seems to refer to the same idea expressed by Herzberg. He indeed contends that people are willing to turn money into time-off, but he also points out “once they have enough” (of money). Herzberg considered cash as a weak motivator in the mid- to long-term accepting thus that in the short run money might have its importance too. This can be associated with the mechanism that after a period of time, when individuals have gained financial stability and money is no longer perceived as a reason for concern, these may need and seek something else; which recalls once again the Maslow’s hierarchy of needs.
These ideas are also supported by the findings of the “Employee attitude to pay – 2011” survey carried out by the CIPD (2012). The investigation revealed that employees attitude towards their employers has overall sensibly plummeted over the last four years (from +38 to the current +4). With specific reference to individual motivation to perform well, the investigation revealed that the net satisfaction score dropped from +46 (2008) to +24 (2011). The study indeed provided additional, important information to understand what is behind this employee negative outlook. Whereas the individuals who received a pay increase in 2011 (45 percent compared to 68 percent in 2008) received an average 2.5 percent pay rise, in the same period the Retail Prices Index inflation recorded a sensibly higher 5.2 percent rate. This has noticeably accounted for a reduction of the employees’ purchasing power and these cannot clearly pay their mortgages off with work-life balance.

The impact made by the exogenous context
Employee perception of reward is definitely affected by the economic climate, which clearly plays a considerable role in individual attitude to money. The effects caused on individual motivation by unexpectedly having less money than usual, due to their reduced purchasing power, could be hence inevitable; that is why employers, especially during downturn periods, should pay extra attention to the importance of properly communicating their staff the reasons for their pay decisions. It will not possibly help businesses to completely overcome the problem but it can if anything help them to cushion the blow. Findings of the CIPD “Employee attitude to pay – 2011” survey (2012) in fact also revealed that the net satisfaction score attributed by respondents to the explanation provided by their employers about their pay decisions decreased from +40 (2010) to +32 (2011).
It is not indeed only the economic factor which needs to be considered but, amongst the others, also the social one. Generation Y people, for instance, are in general considered to be particularly sensitive both to the financial component of reward and to work-life balance, albeit also in this case the aftermath of the past downturn altogether with the effects produced by the current slowdown seem to have made quite an impact on their attitude towards work.

The introduction of non-financial reward
The contrasting results provided by the different investigations conducted over the years on the motivational effects produced by cash suggested employers to extend and vary the composition of their reward packages, prompting them to add to the financial component of reward a non-financial component. Trying and motivating individuals only having recourse to cash should have very soon proved for employers to be somewhat of a bottomless pit. By contrast, offering employees opportunities for development and growth and provide for these training courses would have very soon showed to be beneficial to the business too. Trained, skilled and motivated staff can clearly effectually help employers to achieve competitive edge.

The changing content of the psychological contract
Employees have consequently become increasingly involved with their job activities. These aim at carrying out compelling jobs, influencing the way these have to be performed and yielding positive results to contribute to the organizational success. Individual level of expertise and capability has thus grown sensibly. Employees feel so confident when performing their job as to no longer regard job stability as a crucially important component of their psychological contract; the skills these constantly gain let them feel confident in terms of employability. The last phase of the psychological contract evolution hence also sees job stability switching to employability.
This evolution, notwithstanding, does not entail that all of the employees have the same wants and aim at being rewarded in the same way; the one-size in fact does not fit all. Not only are individuals different one another and have different needs, but individual preferences are also subject to change over time, with many external factors, that is to say social, economic, technological, political, legal, environmental and cultural, likely to make a considerable impact. There are clearly other factors which need to be duly taken into consideration when making decisions about how to reward whom. Individuals with a low Growth Need Strength (GNS), for instance, are likely to prefer more generous financial reward packages and the introduction of flexible working practices to personal growth and development. Offering these employees opportunity for development and career could also prove to be counterproductive.

Each individual is essentially expected to receive from his/her employer what is included in his individual psychological contract. The problem is that it is an unwritten contract so that, as suggested by Spindler (1994), individual expectations are implicit and neither stated nor defined and “employers/employees expectations take the form of unarticulated assumptions” (Armstrong, 2009).

Total reward can definitely help
Total reward can unquestionably help employers to develop programmes enabling them to offer individuals a reward-mix capable of meeting their employees’ needs, but in order to organizations properly operate these it is definitely crucial to find out what the individual preferences are. Total reward can definitely help employers to manage the how side of reward, but it is of paramount importance to previously investigate what individuals are actually truly interested in. This knowledge would clearly also help employers to design and develop reward packages consistent and coherent, from the composition point of view, with individual expectations.
How can Total Reward Statements help
Once effective base and variable pay systems have been developed, to stress and enhance the significance of their reward packages employers can have recourse to total reward statements. These tools providing employees a personalised, detailed indication of the worthiness of their take-up do not actually add any intrinsic value to what employees already receive from their firms, but aim at stressing and emphasizing that value.
Statements currently represent a sort of tool marking the conclusion of the employers’ quest to improve the worth of their value proposition; there is in fact apparently little at the moment which can be added to the employers’ value proposition. By reason of the current economic climate employers consider it more appropriate stressing the worth of the packages these already offer, rather than to make the extra efforts necessary to come up with additional forms of reward.

The likely future of reward
The future of reward, nonetheless, does not really look grim; there definitely is still room for improvement. Reward specialists have to literally squeeze their brains in order to come up with brand new and attractive reward options, possibly also proving to be inexpensive for employers, albeit this may apparently sound rather contradictory. In order for reward specialists to yield good results these need to investigate new opportunities which can arise working, for instance, side by side with tax and financial experts. Effectual reward options can in fact still be found in terms of voluntary benefits, especially for the undeniable positive effects these can produce both for employees and employers in terms of tax and NI savings. During periods characterised by financial hardships, for example, can prove to be particularly useful and welcomed by staff the agreements reached by employers with collective buying communities as well as staff discounts on household bills. These types of opportunities could actually prove to be particularly appreciated by the employees whose purchasing power has been weakened by an inflation whose rate is higher than that of their salary increase; never mind those employees who have not benefitted from any salary increase at all. Such initiatives might also effectively contribute to keep employees focused on personal development and job improvement, which in turn positively impact their performance and ultimately organizational performance.
The future of Total Reward
It is an axiomatic fact that total reward represents the only approach enabling employers to meet current and future employee expectations and wants and as such the only viable approach to reward management. Whatever the future development of reward, this is the only approach enabling organizations to properly, promptly and effectually adapt their offering to the changing content of the psychological contract and enabling organizations to provide their staff a comprehensive and adequate value proposition.
Despite it is everything but straightforward predicting how exactly total reward may develop in the future and which changes might be implemented in the composition of total reward packages, it can be argued that without question total reward still has a great future ahead of it.
Considering reward more extensively, or rather, from the reward management point of view, there are indeed three approaches which can be considered crucial and important for the future of reward, to wit: integrated reward, strategic reward and evidence-based reward management.
Integrated reward management
Integrated reward management is an approach according to which, as suggested by White (2005), each single element of reward supports and reinforces one another in order for organizations to attain their intended objectives. As contended by Armstrong (2010), nonetheless, this integration has not to be pursued just considering reward practices and policies, that is, just caring about reward integration, but also considering the vertical and horizontal integration options. The concept of vertical integration relates to the need to integrate reward strategy with the business strategy, whereas the horizontal integration is concerned with the alignment of reward strategy with HR practices and strategies; in particular, with those concerned with engagement, talent management, L&D and high performance (Armstrong, 2010).
Strategic reward management
Approaching reward management strategically is clearly of paramount importance. Employers should recognize the central importance of using a structured approach and planning in advance to avert to suddenly have to deal with the unexpected. As claimed by Brown (2001), strategic reward management aims at creating “reward processes which are based on beliefs about what the organization values and wants to achieve.” Strategic reward is basically concerned “with both ends and means” of reward and aims at determining how reward procedures will be in the future and at achieving reward management integration (Armstrong, 2010).

Evidence-based reward management
The third pillar of the typical reward system of the future is represented by the evidence-based feature, that is, an approach “based on fact rather than opinion, on understanding rather than assumptions” (Armstrong, 2010). This methodology will enable reward specialists to answer without hesitation to the question: “How do you know what you think you know?” which is the question that logical positivists considered crucial answer to when exploring beliefs (Ayer, 1959).

The role played by Reward Specialists
Reward specialists have to constantly investigate their business reward system and regularly come up with brilliant and ingenious ideas to improve and enhance it. Reward professionals have to regularly gain knowledge of the findings of the different investigations performed over time and of the theories emerged from these, which have hence to be critically evaluated and studied in order to find out whether these can be successfully and consistently applied within their organizations. In order for reward professionals to effectively perform their activities these need to pay extra attention to both theory and practice; as an anonymous once said “theory without practice is sterile, practice without theory is futile (Armstrong, 2010).” This concept was also stressed by McGregor (1960) who suggested that there is nothing as practical as a good theory; referring to theory as an assumption supported by the rigorous research carried out within the business telling how things are and not how things are supposed to be.

All of that has to be clearly supported by the constant observation and analysis of the results produced by the internal reward practices and continuous external benchmarking. Careful attention have to be paid and constant consideration to be given to good and best practices too; notwithstanding, since the one-size-fits-all approach in reward management is not really likely to effectively apply, to identify what it is really appropriate for an organization reward specialists should invariably draw inspiration from the concept of best fit (Armstrong, 2010).


Longo, R., (2012), The past, present and possible future of reward; Milan: HR Professionals [online].