reward system

International reward International reward systemsystem

Submitted by Submitted by Deepankar vermaDeepankar verma

Mba 4 bMba 4 b11048039121104803912

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Overview of rewardsOverview of 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

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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)

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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)

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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

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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)

Hig

h L

ow

TR

AN

SA

CTIO

NA

L

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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.

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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.

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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.

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Business/HR

strategy

Rewardstrategy

Build capability

Grade and Pay

structure policy

Grade and pay

structure (base pay)

Total Remunera-

tion

Total reward

Improved 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)

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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

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“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

Strategic design of

reward systems

Internal alignmentDetermining the

structure

Internal alignmentDetermining the

structure

External competitivenessDetermining the

pay level

External competitivenessDetermining the

pay level

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Internal alignment

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

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

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External competitiveness

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

Labour market factors:

Nature of demandNature of supply

Product market factors:

Degree of competitionLevel of product demand

Product market factors:

Degree of competitionLevel of product demand

Organisational factors:

Industry, strategy, size, individual manager / owner

Organisational factors:

Industry, strategy, size, individual manager / owner

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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

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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)

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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


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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


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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-Facilitates expatriate re-

entryentry 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


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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

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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

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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

reward system

Documents

rewards employee rewards

extrinsic rewards

rewards system

base payfinancial rewards

benefits employees

benefits pension

travel awards

recognition awards