Reward Systems

Overview

Reward systems usually mean what a person gets paid for their work. How rewards are decided can be an interesting process. You need to think about what makes you want to work, and then think about what other people might like to help them want to work.

Reward systems is the collective term used to refer to the benefits that people obtain in exchange for the contributions they make in the workplace. Alternative terms include remuneration, compensation, and pay.

Rewards and motivation

There are several links between motivation theories and the idea of financial rewards.

• Needs theory suggests that basic needs for food and shelter motivate us to try to earn at least a living wage.
• Equity theory proposes that if you perceive an inequity in your pay situation, you may be motivated to do something about it.
• From reinforcement theory, you might conclude that performance tends to be repeated if it is financially well rewarded.

Of all the issues in motivation, reward systems probably receive the most attention. These systems aim to:

• attract competent people to the organisation
• retain people in the organisation
• encourage people to perform well.

The third of these aims has been a particular focus of attention in New Zealand in recent years. Linking rewards to performance is seen as an important strategy in efforts to improve competitiveness, effectiveness, and efficiency.

Underpinning these efforts has been the idea that people withhold their best efforts if they see little relationship between what they do and how they are rewarded.

Components of a reward system

Reward systems have the potential to influence the things we do. The term reward system is usually taken to include:

• base pay
• incentive systems
• benefits.

Base pay

Base pay refers to the wages or salary people receive. As a minimum, pay is an important hygiene factor. Many authorities feel it is much more than that. Therefore, you have to get it right. There are several methods that organisations can use to determine pay levels.

Job-based pay systems

This is the traditional approach. People are paid on the basis of the job they fill. Big jobs attract big pay, and so on. Often, organisations use point-factor systems to gauge the size of jobs. In the point-factor method, evaluators assign points to jobs according to the degree to which the jobs contain selected factors. Commonly used factors include:

• responsibility
• problem-solving requirements
• education required
• skill required
• effort required
• working conditions.

Point-factor systems are declining in popularity for several reasons. They tend to reinforce the idea of hierarchy at a time when many organisations are endeavouring to become flat, lean, and responsive. They may encourage managers to build up layers and levels that attract the points needed for higher pay. They often encourage people to do only what is in their job description.

Survey-based systems

These are often used in conjunction with job-based systems. This approach involves surveying the labour market to determine pay rates for benchmark positions. All jobs within an organisation are linked to benchmarks and rates change in concert with benchmark changes.

Often, job- and survey-based systems are linked to performance appraisal. Good performance leads to a permanent increase in salary. This practice is also declining, as managers recognise that most performance appraisal systems are little more than highly subjective judgements that have little to do with performance. Traditional performance appraisal is increasingly seen as highly de-motivating.

Skill-based systems

Skill-based systems are an alternative to job-based and survey-based systems. Here, pay rates reflect the skills people possess rather than the position they occupy. Pay can be tied to the depth of skills a person possesses. This is similar to the apprentice-to-tradesperson progression found in many skilled trades. Alternatively, pay can be tied to breadth of skills or to the range of jobs people can perform - that is, multi-skilling.

Many people believe that skill-based approaches offer significant advantages. For example, they may enhance flexibility. There is some evidence that they reduce resistance to change, as people are rewarded for developing new skills and doing new tasks. Skill-based systems focus on the person, not the job.

Competency-based systems

Another approach is competency-based systems. Skill-based systems compensate staff for learning observable and testable skills. Competency-based systems take this concept one step further. They seek to recognise and reward the deeper competencies that lie beneath visible skills. Relevant competencies are those that create value for the organisation. They might include:

• customer service orientation
• innovation
• flexibility
• teamwork.

Identifying relevant competencies and then determining their extent in individuals is not an easy task. It requires careful and thorough analysis.

Team-based rewards

Most reward systems focus on the individual. Some organisations now emphasise the accomplishments of entire teams and have introduced team-based rewards.

This approach is another base-pay system, but it can include features of incentive systems. Some organisations have used this approach in conjunction with traditional, individual-based pay, so that part of an individual's pay comes from their personal contribution and part from the team's contribution.

One problem with team-based rewards may be that staff will not want to have freeloaders on their team. These people would not do their fair share of the work but would still receive the same pay as everyone else.

Incentive systems

Incentive systems are usually specifically intended to motivate the performance and accomplishments that the organisation values. Increased productivity is a common focus.

Bonus pay plans

Bonus pay plans provide bonuses to staff for achieving performance targets, or for making a special contribution such as a work improvement or completing extra tasks. They are common at executive level in New Zealand and may be becoming more widely available. Organisations may offer bonuses to groups as well as individuals.

Bonuses are sometimes called 'at risk' pay because the amount can vary from year to year, depending on performance. Critics have suggested that, in some cases, executive bonuses in New Zealand have become rather like permanent entitlements.

Profit sharing plans

Profit sharing plans distribute a proportion of net profit to some or all staff. The amount awarded usually varies according to the levels of profit and base pay.