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NON FINANCIAL REWARDS

PILAR SCARPATI

What is non financial rewards?

In employment, it is a reward to a worker other than extra pay. Many non-financial rewards are bonus such as company cars, free private medical care, and free pension entitlement. However, an employee may be rewarded, for example, by being given a better office or a bigger budget to control, or by being given the choice of where to take a posting in a company. Non-financial rewards can be very cost-effective for companies because, in contrast with a pay increase, little or no income tax or national insurance contributions are paid.

Non financial rewards outcome Non-financial Programs incentive and reward programs

structured to motivate positive behavior change through means other than money (i.e. “Publicizing, Performance”, “Providing Additional Technical Support”)

Motivate and retain employees (A motivated employee will achieve a great deal. A demotivated employee will be slow, horizontal to error and not likely to achieve).

Helps to build feelings of confidence and satisfaction in employees

Can be very important for their long-term effect.It refers to non-monetary benefits to staff provided in

recognition of their performance.

Advantages

Non-financial measures offer 3 clear advantages over measurement systems based on financial data:

1)Financial evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They do not deal with progress relative to customer requirements or competitors, nor other non-financial objectives that may be important in achieving profitability,

competitive strength and longer-term strategic goals.

2) Critics of traditional measures argue that drivers of success in many industries are "intangible assets" such as intellectual capital and customer loyalty, rather than the "hard assets" allowed on to balance sheets. Although it is difficult to quantify intangible assets in financial terms, non-financial data can provide indirect, quantitative indicators of a firm's intangible assets.

3) Non-financial measures can be better indicators of future financial performance. Even when the ultimate goal is maximizing financial performance, current financial measures may not capture long-term benefits from decisions made now.

Disadvantages

1) unlike accounting measures, non-financial data are measured in many ways, there is no common denominator. Evaluating performance or making trade-offs between attributes is difficult when some are denominated in time, some in quantities or percentages and some in arbitrary ways.

2) Lack of causal links is also an issue. Many companies adopt non-financial measures without articulating the relations between the measures or verifying that they have a bearing on accounting and stock price performance. Unknown or unverified causal links create two problems when evaluating performance: incorrect measures focus attention on the wrong objectives and improvements cannot be linked to later outcomes.

3) Lack of statistical reliability: whether a measure actually represents what it purports to represent, rather than random "measurement error". Many non-financial data such as satisfaction measures are based on surveys with few respondents and few questions. These measures generally exhibit poor statistical reliability, reducing their ability to discriminate superior performance or predict future financial results.

4) Although financial measures are unlikely to capture fully the many dimensions of organizational performance, implementing an evaluation system with too many measures can lead to "measurement disintegration". This occurs when an overabundance

of measures dilutes the effect of the measurement process. Managers chase a variety of measures simultaneously, while achieving little gain in the main drivers of success.

Raising wages and incentive pay does not help to reduce turnover. Raising compensation only in fact increased turnover rates. Turnover declined when the employer combined pay increases with efforts to improve career development and corporate communications and efforts to provide flexible staffing (i.e. non-financial rewards programs)

Conclusion

Although non-financial measures are increasingly important in decision-making and performance evaluation, companies should not simply copy measures used by others. The choice of measures must be linked to factors such as corporate strategy, value drivers, organizational objectives and the competitive environment. In addition, companies should remember that performance measurement choice is a dynamic process, measures may be appropriate today, but the system needs to be continually reassessed as strategies and competitive environments develop.