Employee rewards Employee rewards and managing and managing performanceperformance
Dr. Jean (Qi) WeiDr. Jean (Qi) [email protected]@rhul.ac.uk
School of management RHULSchool of management RHUL
1515thth October, 2009 October, 2009
2
StructureStructure Part IPart I
Overview of employee rewardsOverview of employee rewards Strategic design of reward systemStrategic design of reward system International approaches International approaches Student task – case studyStudent task – case study
BreakBreak
Part IIPart II Overview of pay for performance Overview of pay for performance Problems with PRPProblems with PRP Student task – case studyStudent task – case study
SummarySummary
3
Part One: Overview of Part One: Overview of employee rewardsemployee rewards
• DefinitionsDefinitions Rewards, total rewards and reward managementRewards, total rewards and reward management• Importance of rewardsImportance of rewards• Reward management strategies and Reward management strategies and
modelsmodels• Strategic design of rewardsStrategic design of rewards• Case Study 1&2Case Study 1&2
4
RewardsRewards
““Employee rewards refer to all forms Employee rewards refer to all forms of financial returns, tangible services of financial returns, tangible services and benefits employees receive as and benefits employees receive as part of an employment relationship.” part of an employment relationship.”
(Bratton and Gold 1999)(Bratton and Gold 1999)
5
Types of rewardsTypes of rewards
■ ■ A motivational point of viewA motivational point of view Intrinsic rewards: Inner satisfaction by doing the job.Intrinsic rewards: Inner satisfaction by doing the job. Extrinsic rewards: Pay (wages, salary, commissions, Extrinsic rewards: Pay (wages, salary, commissions,
etc.,)etc.,) Benefits (pension, medical care, health Benefits (pension, medical care, health
care,care, housing, unemployment housing, unemployment
pension)pension)
■ ■ A total reward point of viewA total reward point of view Money, benefits, work and development (Rowley, 2003)Money, benefits, work and development (Rowley, 2003)
6
What is a total reward?
Base pay
Financial rewards
and benefits
Contingent pay
Variable pay (cash bonuses)
Total Remuneration
Total reward
Share ownership
Benefits
Transactional rewards
Source: Armstrong & Murlis (1998)
Relational rewards
Non-financial
rewards – those
arising from the
work itself and the
work environme
nt
+
Recognition
Work/life balances
Quality of working life
Career opportunities
Opportunity to use and develop skills
Autonomy
Meaningful work
Responsibility
7
Framework for analysing different ‘Deals’Framework for analysing different ‘Deals’
HIGH PAY – LOW HIGH PAY – LOW COMMITMENTCOMMITMENT
Hired GunsHired Guns(Stockbrokers)(Stockbrokers)
HIGH PAY – HIGH HIGH PAY – HIGH COMMITMENTCOMMITMENT
Cult-like Cult-like (Microsoft)(Microsoft)
LOW PAY – LOW LOW PAY – LOW COMMITMENTCOMMITMENT
Workers as CommodityWorkers as Commodity(Employers of Migrant Farm (Employers of Migrant Farm
Workers)Workers)
LOW PAY – HIGH LOW PAY – HIGH COMMITMENTCOMMITMENT
FamilyFamily(Starbucks)(Starbucks)
Low High
RELATIONALSource: Milkovich & Newman (2002)
High Low
TRANSACTIO
NAL
8
Employee benefitsEmployee benefits
Can benefits become strategic?Can benefits become strategic? If so, how?If so, how?
One way is to make sure that the benefits available One way is to make sure that the benefits available are attractive to high potential applicants and high are attractive to high potential applicants and high performers.performers.
A second way is developing a benefit specifically to A second way is developing a benefit specifically to attract a desired set of employees. E.g. day care attract a desired set of employees. E.g. day care centres, tuition reimbursement programmes.centres, tuition reimbursement programmes.
Most benefits are future or need care oriented, it is Most benefits are future or need care oriented, it is difficult to make linkage between performance and difficult to make linkage between performance and benefits. benefits.
9
Non-monetary rewardsNon-monetary rewards
1. Other titles: recognition awards, low cost/no cost 1. Other titles: recognition awards, low cost/no cost awards, hugsawards, hugs
and mugs etc. and mugs etc.
2. The 2. The great strengthgreat strength of non-monetary rewards is their of non-monetary rewards is their immediacy. immediacy.
3. The 3. The changechange in recent years has not been so much the in recent years has not been so much the increaseincrease
in the number of awards or the amount of individual in the number of awards or the amount of individual awards,awards,
but the rationalisation of non-monetary rewards but the rationalisation of non-monetary rewards programmesprogrammes
and their integration into the rest of the rewards and their integration into the rest of the rewards system. system.
4. Different forms4. Different forms Perquisites – Special eating areas, first class travel, club memberships Perquisites – Special eating areas, first class travel, club memberships
etc.etc. Recognition awards – Top sales, travel awards, gift certificates etc.Recognition awards – Top sales, travel awards, gift certificates etc. Psychic pay – special parking, lunch with the CEO etc.Psychic pay – special parking, lunch with the CEO etc. worksite policies – Casual dress codes, break areas, etc.worksite policies – Casual dress codes, break areas, etc. Family friendly policiesFamily friendly policies - - Flexible working hours etc. Flexible working hours etc.
10
What is reward management?What is reward management? Reward managementReward management “ “Reward management is concerned with the Reward management is concerned with the
formulation and implementation of strategies formulation and implementation of strategies and policies that aim to reward people fairly, and policies that aim to reward people fairly, equitably and consistently in accordance with equitably and consistently in accordance with their value to the organisation.” (Milkovich & their value to the organisation.” (Milkovich & Newman 2002)Newman 2002)
Principle objectives of RM:Principle objectives of RM: Attract and retain suitable employeesAttract and retain suitable employees Maintain or improve levels of employee Maintain or improve levels of employee
performanceperformance Comply with employment legislation and Comply with employment legislation and
regulations.regulations.
11
Business/HR
strategyRewardstrategy
Build capability
Grade and Pay
structure policy
Grade and pay
structure (base pay)
Total Remunera-
tionTotal
rewardImproved
Perfor-mance
Non-financialrewards
Employee benefits
Market analysis
Performance management
Job evaluation
Contingent pay
Learning and
development
Components of reward management Source: Armstrong and Murlis (2004)
12
Importance of reward management
• Reward systems can influence a number of HR processes and practices which in turn have an impact on organisational performance. E.g.. Recruitment and retention
• Employees see reward systems as signalling the importance the employer places on various activities or behaviours.
• The way in which employees are rewarded has a major influence on corporate culture.
• The reward system can help to define the status hierarchy and decision-making structure.
• Cost & form large part of business & method of competing.
• Attention-attracts public, institutional & government’s attention.
• Varied internationally
13
“Internal equity refers to the pay relationships between the jobs/skills/competences within a single organisation. The relationships form a pay structure that can support the workflow, is fair to employees, and directs their behaviour toward organisation objectives.”
• Factors that shape internal structure• Strategic choices in designing structure•Job-based or person based
“External competitiveness refers to the pay relationships among organisations – the organisation’s pay relative to its competitor.”
•Factors that shape external competitiveness •Designing pay levels, pay mix etc.• Balancing the internal and external pressures
Strategic design of
reward systems
Internal alignmentDetermining the
structure
External competitivenessDetermining the
pay level
14
Internal alignment
Job based
Job analysis
Job evaluation
Job based structure
Person based
Skills Competencies
Skill analysis Competency sets
Person based structure
External factors: Economic pressures
Government policies, laws/regulations
StakeholdersCultures and customs
Organisational factors:Strategy, technology, human capital, HR policy, employee
acceptance, cost implications
Internal structure:Levels
Differentialscriteria
15
External competitiveness
Set policy
Define market
Conduct survey
Merge internal & external pressures
Competitive pay levels, mix and structures
Labour market factors:
Nature of demandNature of supply
Product market factors:
Degree of competitionLevel of product demand
Organisational factors:
Industry, strategy, size, individual manager / owner
16
Approaches to international rewards (1)Approaches to international rewards (1)
Should reward packages be based on Should reward packages be based on (1) the salary level of the (1) the salary level of the homehome country country or or (2) the salary level of the (2) the salary level of the hosthost country? country?
Two main approaches: Two main approaches: The going rate approachThe going rate approach The balance sheet approachThe balance sheet approach
17
Approaches to international rewards (2) Approaches to international rewards (2)
The going rate approachThe going rate approach
Based on Based on local local market ratesmarket rates Relies on survey comparisons among: local Relies on survey comparisons among: local
nationals (HCNs), expatriates of same nationality nationals (HCNs), expatriates of same nationality and expatriates of all nationalitiesand expatriates of all nationalities
Compensation based on the selected survey Compensation based on the selected survey comparisoncomparison
Base pay and benefits may be supplemented by Base pay and benefits may be supplemented by additional payments for low-pay countries additional payments for low-pay countries
(Source: Dowling and Welch, 2004:145)
18
Approaches to international rewards (3)Approaches to international rewards (3)
Advantages:Advantages: Equality with local Equality with local
nationalsnationals SimplicitySimplicity Identification with host Identification with host
countrycountry Equity amongst different Equity amongst different
nationalitiesnationalities
Disadvantages: Disadvantages: Variation between Variation between
assignments for same assignments for same employeeemployee
Variation between Variation between expatriates of same expatriates of same nationality in different nationality in different countriescountries
Potential re-entry Potential re-entry problemsproblems
The going rate approach
(Source: Dowling and Welch, 2004:145)
19
Approaches to international rewards (4)Approaches to international rewards (4)
The balance sheet approachThe balance sheet approach (the most widely (the most widely used)used)
Based on Based on home-countryhome-country pay and benefits pay and benefits
Adjustments to home package to balance additional Adjustments to home package to balance additional expenditure in host countryexpenditure in host country
Financial incentives (expatriate/hardship premium) Financial incentives (expatriate/hardship premium) added to make the package attractiveadded to make the package attractive
(Source: Dowling and Welch, 2004:146)
20
Approaches to international rewards (5)Approaches to international rewards (5)
Advantages:Advantages: EquityEquity --between assignments for --between assignments for
the same employeethe same employee --between expatriates of the --between expatriates of the
same nationalitysame nationality Facilitates expatriate re-entryFacilitates expatriate re-entry Easy to communicate to Easy to communicate to
employeesemployees
Disadvantages:Disadvantages: Can result in great inequalityCan result in great inequality --between expatriates of --between expatriates of
different nationalitiesdifferent nationalities --between expatriates and --between expatriates and
local nationalslocal nationals Can be complex to Can be complex to
administeradminister
The balance sheet approach
(Source: Dowling and Welch, 2004:148)
21
Case study 1: Strategic employee rewards at
Richer Sounds
• How is Richer Sounds’ business strategy reflected in its rewards?
• What other types of rewards might be considered?
• How might the type be influenced by its business strategy?
Source: From Marchington and Wilkinson, 2002
22
Case study 2 Case study 2 Pay under scrutiny as recession bitesPay under scrutiny as recession bites
To what extent is cutting pay a good idea To what extent is cutting pay a good idea for employers in an economic downturn?for employers in an economic downturn?
How would you motivate and retain good How would you motivate and retain good performers in the current economic performers in the current economic situation?situation?
Source: The Times July 17Source: The Times July 17thth, 2008, 2008
23
24
Part Two: Performance related pay (PRP)
• Definition• Main forms of PRP• Reason for using PRP• Advantages and disadvantages• Problems with PRP• Case study 3&4
25
What is PRP?What is PRP?
PRP is the payment that is in PRP is the payment that is in addition to base pay and the addition to base pay and the payment that ties to performance payment that ties to performance measure of individual, group and measure of individual, group and firm level. (Armstrong 1999)firm level. (Armstrong 1999)
Focus of PRPFocus of PRP1.1. Coverage Coverage 2.2. Measurement (e.g. results, behaviours)Measurement (e.g. results, behaviours)3.3. Link between pay and performanceLink between pay and performance
26
Main forms of PRPMain forms of PRP Payment –by-results schemes: pay linked Payment –by-results schemes: pay linked
directly to output such as productivity directly to output such as productivity bonus, sales incentives etc.bonus, sales incentives etc.
Performance schemes: pay Performance schemes: pay notnot linked linked directly to output but overall business goals. directly to output but overall business goals. Individual PRP and team based pay etc.Individual PRP and team based pay etc.
Financial participation scheme: such as Financial participation scheme: such as profit sharing paid in cash or shares via profit sharing paid in cash or shares via some form of equity-based arrangementsome form of equity-based arrangement
27
Types of performance measureTypes of performance measure
Level of Level of aggregationaggregation
ResultsResults BehavioursBehaviours
IndividualIndividual Individual Individual incentivesincentivesSales Sales commissionscommissions
Merit payMerit payMerit bonusesMerit bonusesSkill-based Skill-based /competence /competence basedbased
CollectiveCollective Group incentivesGroup incentivesGain-sharingGain-sharingBusiness unit Business unit plansplansProfit sharingProfit sharingStock plansStock plans
Merit pay for Merit pay for groupsgroups
Source: Gerhart and Rynes (2003) .
28
Historical development of PRPHistorical development of PRP
• Early 1900s, it was very uncommon for a person to Early 1900s, it was very uncommon for a person to have rewards based on individual contribution, have rewards based on individual contribution, profit sharing bonuses, stock options, plus choices profit sharing bonuses, stock options, plus choices among various benefit and services.among various benefit and services.
• 1930s and 1940s, group based gain-sharing plans 1930s and 1940s, group based gain-sharing plans gained ground to solve production problems and gained ground to solve production problems and improve productivity.improve productivity.
• In 1953, 50 percent of US workers were paid by In 1953, 50 percent of US workers were paid by some type of group based incentive plans.some type of group based incentive plans.
• During 1960s and 1970s, the use of all forms of During 1960s and 1970s, the use of all forms of PRP plans declined. Only about 20 percent of PRP plans declined. Only about 20 percent of manufacturing workers were paid under incentive manufacturing workers were paid under incentive plans.plans.
• By 1990s, forms of PRP diversified. By 1990s, forms of PRP diversified.
29
Reasons for using PRP? PerspectivePerspective
ssTheoriesTheories
Economic Economic perspective perspective
Motivational Motivational perspectiveperspective
Psychological Psychological perspectiveperspective
Institutional Institutional perspectiveperspective
Legitimacy Legitimacy theorytheory
Agency theoryAgency theory examines the relationship between principals (e.g. examines the relationship between principals (e.g. shareholders) and agents (e.g. CEOs). It sees the remuneration as shareholders) and agents (e.g. CEOs). It sees the remuneration as one way of motivating the directors to manage the company in line one way of motivating the directors to manage the company in line with the shareholders’ wishes. with the shareholders’ wishes.
MaslowMaslow (1970) the hierarchy of needs: physiological, safety, love, (1970) the hierarchy of needs: physiological, safety, love, esteem needs and self actualisation.esteem needs and self actualisation.
Expectancy theoryExpectancy theory (Vroom,1964) states that employees will only (Vroom,1964) states that employees will only be motivated by a reward if they see that reward as being something be motivated by a reward if they see that reward as being something worthwhile, believe that they will receive the reward for achieving worthwhile, believe that they will receive the reward for achieving the appropriate performance.the appropriate performance.Equity theoryEquity theory (Adams, 1963) places the emphasis of PRP on a (Adams, 1963) places the emphasis of PRP on a comparison with others both internally and externally, rather than comparison with others both internally and externally, rather than just considering the absolute monetary incentive. just considering the absolute monetary incentive.
Institutional theory takes the view that often companies structure Institutional theory takes the view that often companies structure themselves in order to be like others, rather than for reason tailored themselves in order to be like others, rather than for reason tailored to their individual circumstances.to their individual circumstances.
Companies need to structure their activities in order to achieve Companies need to structure their activities in order to achieve legitimacy in the constituencies from which they draw resources. legitimacy in the constituencies from which they draw resources.
30
Empirical evidence for using PRPEmpirical evidence for using PRP
HR purposeHR purpose PRP as a motivator, to promote business strategies, PRP as a motivator, to promote business strategies,
to retain good performers, a communication tool, to retain good performers, a communication tool, better than nothing etc. better than nothing etc.
Institutional reasonsInstitutional reasons Best practice, following the leading companies.Best practice, following the leading companies. Legitimacy Legitimacy Very little empirical support.Very little empirical support.
Source: Wei (2008) ‘’Pay for performance in China: A case study of knowledge based firms’
Small sample, not generalisable. Each of these theories on its own is an incomplete explanation of why firms using PRP, but together they explain behaviour more fully.
31
Why companies use PRP?Why companies use PRP?Market practicesMarket practices
Need for corporate governance Need to attract and retain
Implement PRP
Set measures and goals and communicate with employees
Managers’ actions and behaviours
PRP award
Effect on Individual’s self worth Monetary award Increased human capital
for future negotiationsSource: Wei (2008) ‘’Pay for performance in China: A case study of knowledge based firms’
Business performance
Luck (external factors)
32
What’s happening in reality?What’s happening in reality?
1,158 respondents had PRP 59% introduced this prior to 1998 23% discontinued this between 1990-1998 74% believed that PRP improved performance but
respondents mainly HR specialists 67% felt that PRP gave a clear message about organisational performance 57% believed PRP rewarded people in a fair way 14% thought PRP worsened perceptions about fairness 21% thought that PRP schemes made their most impact on
the behaviour of high performers 4% thought they had an impact on average performers and
4% an impact on poor performers. 41% thought no change to average performance and 52% thought no real change in poor performanceSource: A survey done by CIPD in 2003.
33
Advantages and disadvantages Advantages and disadvantages of PRP formsof PRP forms
AdvantagesAdvantages DisadvantagesDisadvantagesIndividual PRPIndividual PRP(E.g. Merit (E.g. Merit pay, individual pay, individual bonus, bonus, incentives incentives etc.,)etc.,)
Substantial contribution to raise Substantial contribution to raise productivity, to lower costs, and to productivity, to lower costs, and to increase earningsincrease earningsLess direct supervision is requiredLess direct supervision is requiredIt helps costing and budgetary It helps costing and budgetary control.control.
Greater conflicts between Greater conflicts between employees and managersemployees and managersMistrust between employees Mistrust between employees and managementand managementObstacles of introduce new Obstacles of introduce new technology or unwillingness technology or unwillingness of employees to suggest new of employees to suggest new productionproduction
Team PRPTeam PRP(Cash profit (Cash profit sharing, stock sharing, stock options, gain-options, gain-sharing, team sharing, team incentives incentives etc.,)etc.,)
Low administrative costLow administrative costImproved communicationsImproved communicationsClear performance and reward linkClear performance and reward linkFoster teamworkFoster teamworkStimulating ideas and problem Stimulating ideas and problem solving. solving. Better reflect how work is Better reflect how work is performed.performed.
Profit influenced by many Profit influenced by many factors beyond employee factors beyond employee controlcontrolMay be viewed as an May be viewed as an entitlemententitlementCan be complexCan be complexCan be administratively Can be administratively complicatedcomplicatedDifficult to set equitable Difficult to set equitable targets for all teamstargets for all teams
34
Main problems with PRPMain problems with PRP
■ ■ Problems with strategyProblems with strategy Clarity and communication of scheme objectives Clarity and communication of scheme objectives
linked to business goals.linked to business goals. PRP becomes part of base pay.PRP becomes part of base pay.
■ ■ Problems with designProblems with design The link between pay and performance, pay and effortThe link between pay and performance, pay and effort Narrow differentialsNarrow differentials Lack of employee or line managers’ participationLack of employee or line managers’ participation Culture issuesCulture issues
■ ■ Problems with processProblems with process Lack of transparency, line management involvementLack of transparency, line management involvement Poor appraisal system and communication channelPoor appraisal system and communication channel
35
Case study 3 Case study 3 Incentives shift for Taiwan tech workersIncentives shift for Taiwan tech workers
How was the PRP changed in the case?How was the PRP changed in the case?
What can we learn from the shifting What can we learn from the shifting composition of the PRP illustrated in the composition of the PRP illustrated in the case?case?
Source: The Financial Times September 25, 2008Source: The Financial Times September 25, 2008
36
Case study 4 Case study 4 Fat cat row over public sector payFat cat row over public sector pay
What are the problems with executive What are the problems with executive pay in the public sector?pay in the public sector?
How would you solve the problems with How would you solve the problems with executive pay as a HR specialist?executive pay as a HR specialist?
Source: The Sunday Times November 11, 2007Source: The Sunday Times November 11, 2007
37
ReferencesReferences Rowley “The management of people: HRM in Rowley “The management of people: HRM in
context” (2003) Spiro Business Guidecontext” (2003) Spiro Business Guide Marchington and Wilkinson “People management Marchington and Wilkinson “People management
and development: HRM at work” 2and development: HRM at work” 2ndnd (2002) CIPD (2002) CIPD Brown and Armstrong “Paying for contribution: Brown and Armstrong “Paying for contribution:
Real PRP strategies” (1999) Kogan PageReal PRP strategies” (1999) Kogan Page Thorpe & Homan “Strategic reward systems” Thorpe & Homan “Strategic reward systems”
(2000)Pearson(2000)Pearson Milkovich & Newman “Compensation” (2002) 7Milkovich & Newman “Compensation” (2002) 7thth
McGraw-HillMcGraw-Hill Reilly “New reward II: Issues in developing a Reilly “New reward II: Issues in developing a
modern remuneration system” (2003) IESmodern remuneration system” (2003) IES Armstrong & Murlis “Reward management: A Armstrong & Murlis “Reward management: A
handbook of remuneration strategy and practice” handbook of remuneration strategy and practice” (2004) 5(2004) 5thth Kogan Page Kogan Page
