Performance and Rewards

Concept of Rewards in Organizational Context

Rewards and incentives contribute to strategy implementation by changing employee behavior in the organization. A well design reward system is consistent with organizational goals, visions, missions and job performance. Victor Vroom of the Yale School of Management produced a motivational theory known as Vroom’s Expectancy Theory.

The theory says that employees will be motivated to do certain things when they perceive that a certain reward will be forthcoming, so managers should tie rewards to performance.

In managerial term, reward can be describe as the total return given by an employer to an employee for rendering his/her services towards the organizational objectives. Every individual either of any level or position asks for return from the organization before involving in any type of activities, which is termed as the reward. It retain worker’s attention and inspires him/her to perform the task. Moreover, a reward is a pay-off for performance which is directly concerned with the level of motivation and job satisfaction.

Therefore, management of reward in an organization helps to motivated and retains employees at work. It is a essential aspect of HRM because a well-framed reward system will lead towards organizational productivity and employees’ satisfaction. Moreover, reward management is the procedure of creating, implementing and controlling an effective reward system in the organization that aids to maintain and improve organizational performance. It promotes the strategic purposes of attracting, motivating and retaining employees. Reward or compensation management generally focuses on how the employees can be retained or motivated at work.

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What is a Reward?

Reward means a thing given to any one because of his contribution to organization. A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of an employment relationship.

In simple terms, reward may be defined as – ‘a bundle of returns offered in exchange for a cluster of employee contributions’.

It is concerned with both financial and non-financial rewards and embraces the philosophies, strategies, policies, plans and processes used by organizations to develop and maintain rewards systems.”

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Characteristics of Rewards

• It must have value in itself or because of what it represents
  
  
• It must be relevant or important to the individual
  
  
• It must be associated with, or serve, a purpose
  
  
• It needs to have a behavioral effect on the person receiving the reward (although the actual effect may differ from the intended)
  
  
• There must be conscious recognition on the part of the receiver and giver that an act of rewarding has taken place

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Intrinsic and Extrinsic Rewards

It is possible to separate rewards into extrinsic and intrinsic rewards.

Extrinsic Rewards: The employees receive extrinsic rewards from the firm or some external partner and an extrinsic reward is commonly of monetary value.

Example: salary, wage-rise, bonuses or other monetary benefits.

Intrinsic Rewards: The intrinsic rewards are of a more intangible nature and are linked to the work task and are not of monetary value. The intrinsic reward can for example be that the employee is increasing its decision-making authority, is given more complex tasks or achieves a higher position within the organization hierarchy.

Example: achievement, variety, challenge, autonomy, responsibility, and personal and professional growth.

They also include status, recognition, praise from superiors and co- workers, personal satisfaction, and feelings of self-esteem. Intrinsic rewards increase feelings of self-esteem and accomplishment.

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Facts to Be Considered in Rewards System

The following points can be considered as facts to be considered in reward system:

• Nobody works for you, everybody works for himself.
  
  
• Your employees don’t care about what you want one tenth as much as they care about what they want.
  
  
• Your job is to create a reward system through which, you get what you want and the right things get done.
  
  
• No reward system works if people lack the Ability, the Authority, the Training or the tools to do the job.
  
  
• Use punishments and negative sanctions only when nothing else works. A positive reward system is a solid solution for shaping long term behaviour.

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Linkage Between Performance and Rewards

The linkage between performance, rewards and satisfaction may be established by following figure:

The value of the expected reward to the individual combines with the individual’s perception of the effort involved in attaining the reward and the probability of achieving it, to produce a certain level of effort. This effort combines with the individual’s abilities and traits, and the way he or she sees the task, to yield a specific performance level.

This resulting level of performance leads to intrinsic rewards (or negative consequences if the performance level is lower than expected) that are inherent in the task accomplishment, and perhaps to extrinsic rewards. (The wavy line in the model leading to the extrinsic rewards indicates that those rewards are not guaranteed since they depend on how others assess the individual’s performance and on the organization’s willingness to reward that performance).

The individual has his or her own idea about the appropriateness of the total set of rewards received, which, when measured against the rewards actually received, results in the level of satisfaction experienced by the individual, the individual’s experience will then be applied to his or her future assessments of the values of rewards for further task accomplishment.

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Constraints in Linking Rewards With Performance

Following are the constraints in linking rewards with performance:

• Statutory Compulsions
• Industry Wise Wage Boards
• Operative Long Term Settlements
• Labor Unrest in the Event of such a Venture
• Lack of Mutual Trust
• Lack of Visional and Innovative Approaches on the part of Management
• Lack of Concerted Efforts and Commitments ‰

The greatest single obstacle to the success of today’s organizations is the giant mismatch between the behaviour we need and the behaviour we reward.

For example: We need top managers to make sound, long range decisions, but we reward for short-term profits, and threaten their jobs when profits take a dive.

We need managers to conserve costs and minimize red tape, but reward them with budget increases and new staff when they create more red tape.

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Designing Reward System

Four main questions in relation to designing reward system are:

• Who should be rewarded?
• What rewards should be given?
• How should assessment be done for deciding the rewards?
• How rewards should be given? ‰

We shall discuss each issue with examples of practices in the Indian organizations.

Whom to Reward?

Rewards are symbols of appreciation and recognition. Rewards reinforce what the organization values and wants to be strengthened. So, almost every one related to the organization can be covered by the reward system.

Individual Employees: Individuals showing exceptional behaviours and high performance should be rewarded. Individuals are being rewarded by all organizations that follow a reward system.

Example: At Cognizant “statistically speaking, the top performers have progressed about 70 percent quicker, and have received cash award up to three times higher than the others in the organization. That pretty much sums up our performance ethic.”

Teams

As already stated, individuals work in teams, and the organizations need strong, cohesive, competent and self managed teams. Therefore, in future more and more rewards should be given to teams. Teams need to be empowered by giving high performing teams more autonomy and resources.

Example: In Tata Cummins, which runs operations through self managed teams of workers, each team is given money every month to use for raising the level of performance. Teams also include departments. High performing department should also be recognized and rewarded.

Organization

Exceptional performance by the organization needs to be celebrated. Every one belonging to the organization then has a sense of pride.

Outsiders

Customers, suppliers vendors, etc. can also be covered in the reward system. Example: At ICICI recognition extends to the employees’ family as well: employees’ children who excel in academics or extracurricular activities are recognized through scholarships and sponsorships.

What to Reward?

As already stated rewards are meant to reinforce desirable behavior, high performance, values, etc., whatever the organization wants to be strengthened and promoted further. Some of the following aspects can be rewarded:

• Organizational level performance: Profit, market share, customer satisfaction, employee satisfaction, achievement index of one thrust area to be declared every year exceptional events like new product launch, export award, crossing a significant milestone, etc. should be celebrated.
  
  
• Unit/Department level performance: Internal customer satisfaction, innovations leading to efficiency, achievement index of one thrust area to be declared in advance, quality, culture building, teamwork, creativity, internal customer service, cost reduction, strategic initiatives, etc.
  
  
• Speed and efficiency: The Qualifiers for speed and efficiency are: increase in efficiency, cost savings for the company, and earnings/ rewards for the company.
• Loyalty: Employees can also be rewarded for their loyalty.
  
  Example: When employees complete their first year with Hughes Software they are presented a watch; when they complete five year, they (and their families) are given a company paid holiday.
  
  
• Innovation: Innovation is a very valuable aspect for which employees can be rewarded. The purpose of this reward is to promote: Innovation, creativity and performance excellence; Initiative taking and doing an extra yard; a climate of experimentation and learning that focus continuously on new ways to create added value for customers and shareholders.
  
  
  Example: Gujarat Gas gives “innovation helps” reward for an idea given by an employee who has resulted in cost reduction/ improved efficiency.
  
  
• Upholding values: Such a reward is given to promote human and business competencies. Values and behaviors should be demonstrated in the following areas: Visible market or product beak-in; Achieving strategic contract; Successful customer partnership; Great enhancements in customer satisfaction. Demonstrated behaviors are:
  • Puts forth views influentially because of the deep insight in the matters.
  • Handles all customer situations with confidence
  • Shares knowledge, skills and experience in a clear, concise and open manner

How Should Assessment Be Done?

A tricky question is how to decide who should be rewarded. In some cases the criteria may be quite objective (e.g. production, selling, etc.). However, in most cases some judgment is required. Different ways are used to reduce subjectivity in decision making. One way is to have a team decision rather than individual choices. Various methods have been used as illustrated below.

How Do Organizations Reward?

Rewards are given to recognize outstanding work of individuals, teams (units and departments including) or other connected with the organization. It is important to communicate appreciation in public. Celebrating achievement in public boosts the value of the reward. Exceptional performance by the organization, crossing a milestone or launching of a new product, etc. may be celebrated organization-wide with small gifts (the same to all employees, from the top to the lowest level).

Individuals or team rewards may include monetary rewards, computers, family holiday plans, stock/share options, declaration in the newsletter, medals and certificates (to be given in a function by Unit/Department Head/CEO, also a person who collects four medals or so may be given some intrinsic/extrinsic reward), visit to other plants, visits abroad, etc.

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Implication of Reward and Performance Management System for Managers and Organizations

Implications for Managers

A number of clear implications for how managers should reward subordinates are as follows: ‰

• Determine the rewards valued by each subordinate. If rewards are to be motivators, they must be suitable for the individuals. Managers can determine what rewards their subordinates seek by observing their reactions in different situations and by asking them what rewards they desire.
  
  
• Determine the performance you desire. Managers must identify what performance level or behaviour they want, so they can tell subordinates what they must do to be rewarded.
  
  
• Make the performance level attainable. If subordinates feel the goal they are being asked to pursue is too difficult or impossible their motivation will be low.

Implications for Organizations

A number of implications for organizations are as follows:

• Organizations usually get what they reward for. The organization’s reward system must be designed to motivate for desired behaviour and results.
  
  
• The job itself can be made intrinsically rewarding. If jobs are designed to fulfil some of the higher needs of employees (such as independence or creativity). They can be motivating in themselves. This implication is obviously the basis of many job- enrichment programmes; however, those individuals who do not desire enriched jobs should not be made to take them.
  
  
• The immediate supervisor has an important role in the motivation process. The supervisor is in the best position to define clear goals and to provide appropriate rewards for his or her various subordinates. The supervisor should therefore be trained in the motivation process and given enough authority to administer rewards.

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Common Fallacies in Reward System

It is believed that one can observe a lot just by watching. Look around your workplace and you will certainly find examples of the right behaviour being ignored or punished and the wrong behaviour being rewarded. For example does your organization:

• Need better results but reward those who look busiest and work the longest hours?
• Ask for quality work but set unreasonable deadlines? ‰ ‰
• Want solid solutions to problems but reward quick fixes?
• Talk about company loyalty but offer no job security and pay the highest salaries to the most recently hired and those who threaten to leave?
• Need simplicity but reward those who complicate matters and generate trivia?

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Performance – Linked Rewards

Linkage of Performance with rewards can be shown through the following diagram:

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Case Study: Rewards and Recognition at Different Companies

Insurance Company

A large insurance company with more than 30,000 workers has continually moved toward a more innovative, participative culture. Traditional performance hurdles were raised in all parts of the organization; hence, linking pay directly to the attainment of unit business objectives and to individual and group performance made sense.

Features of the company’s reward and recognition system now include the following:

• Performance bonus: Total budget of 2% of eligible employees’ salaries; 50% participation rate; $1,000 average award.
  
  
• Employee recognition: Non-cash (that is, theatre tickets, dinners); 75% participation rate; designed to increase commitment to specific objectives.
  
  
• Skill-based pay: Pay increases for identifying, mastering, and using skills, not required for functional responsi- bilities; those in $20,000 to $57,000 pay range participate.
  
  
• Gainsharing: Productivity improvements (quality and quantity) measured and tracked; gains shared equally by employees in a group or office.
  
  
• Self-developed rewards: Units given opportunity to design their own incentive compensation systems which can differ from company wide systems.
  
  
• Lump-sum salary increases: Employees can elect to receive 100% of their merit increases for two years as lump sum; nonexempt employees with five or more years’ service eligible. Employee surveys indicate significantly higher morale and motivation and a stronger relationship between performance and rewards.

Restaurant Chain

A rapidly growing restaurant chain had a clearly defined market niche. With superior service and more than 40 units well placed in expanding metropolitan areas, all looked well. But turnover of managers was 45%. For very long hours and a host of headaches, they were paid an average of $26,000. The problem was not just the level of pay, but the basis for the pay level. Size of store, not performance, drove salary.

The performance-based reward system: Because growth was strategically important for the chain to develop national name recognition, deter competitors, and attain economies of scale in purchasing and services, it decided to provide an incentive for sales above a targeted level. Food and labor costs could not stray outside of targets. Things worked fine for a time.

Then fast growth required managers to move from small to larger stores, often before their incentive plans could really pay off. The emphasis on sales came at the expense of customer service. The time to serve customers increased steadily, and store cleanliness declined; competitors began to infiltrate the market. Despite better training, better systems, better machines, and higher wages for the hourly people, the service problems drove down sales.

The equity plan: Simply put, the store manager’s job, even with incentives, was a real pain: long hours, weekend work, labor shortages, personnel problems. Top management realized it needed to make the gain worth the pain.

That means providing a base salary and tying incentive compensation to controllable profits (that is, profit minus rent and depreciation). Managers of larger stores had some advantage, but small store managers could gain significant incentive pay by holding down labor costs and shrinkage. Because the sales volume goals were still there, the incentive to provide excellent service to maintain a customer base was strong. A portion of the monthly bonus went into a reserve fund, to be paid out when employment contracts expired.

Turnover plummeted. Average compensation for managers rose from $26,000 to $75,000 in just over one year. Sales increased 40%.