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Employee rewards and managing performance

Employee rewards and managing performance. Dr. Jean (Qi) Wei Jean.wei@rhul.ac.uk School of management RHUL 15 th October, 2009. Structure. Part I Overview of employee rewards Strategic design of reward system International approaches Student task – case study Break Part II

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Employee rewards and managing performance

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  1. Employee rewards and managing performance Dr. Jean (Qi) Wei Jean.wei@rhul.ac.uk School of management RHUL 15th October, 2009

  2. Structure • Part I • Overview of employee rewards • Strategic design of reward system • International approaches • Student task – case study • Break • Part II • Overview of pay for performance • Problems with PRP • Student task – case study • Summary

  3. Part One: Overview of employee rewards • Definitions Rewards, total rewards and reward management • Importance of rewards • Reward management strategies and models • Strategic design of rewards • Case Study 1&2

  4. Rewards “Employee rewards refer to all forms of financial returns, tangible services and benefits employees receive as part of an employment relationship.” (Bratton and Gold 1999)

  5. Types of rewards ■ A motivational point of view Intrinsic rewards: Inner satisfaction by doing the job. Extrinsic rewards: Pay (wages, salary, commissions, etc.,) Benefits (pension, medical care, health care, housing, unemployment pension) ■ A total reward point of view Money, benefits, work and development (Rowley, 2003)

  6. What is a total reward? Total Remuneration Recognition Total reward Base pay Responsibility Contingent pay Meaningful work Non-financial rewards – those arising from the work itself and the work environment Autonomy Variable pay (cash bonuses) Financial rewards and benefits Opportunity to use and develop skills + Career opportunities Share ownership Quality of working life Benefits Work/life balances Transactional rewards Relational rewards Source: Armstrong & Murlis (1998)

  7. Framework for analysing different ‘Deals’ High Low TRANSACTIONAL Low High RELATIONAL Source: Milkovich & Newman (2002)

  8. Employee benefits Can benefits become strategic?If so, how? • One way is to make sure that the benefits available are attractive to high potential applicants and high performers. • A second way is developing a benefit specifically to attract a desired set of employees. E.g. day care centres, tuition reimbursement programmes. • Most benefits are future or need care oriented, it is difficult to make linkage between performance and benefits.

  9. Non-monetary rewards 1. Other titles: recognition awards, low cost/no cost awards, hugs and mugs etc. 2. The great strength of non-monetary rewards is their immediacy. 3. The change in recent years has not been so much the increase in the number of awards or the amount of individual awards, but the rationalisation of non-monetary rewards programmes and their integration into the rest of the rewards system. 4. Different forms Perquisites – Special eating areas, first class travel, club memberships etc. Recognition awards – Top sales, travel awards, gift certificates etc. Psychic pay – special parking, lunch with the CEO etc. worksite policies – Casual dress codes, break areas, etc. Family friendly policies - Flexible working hours etc.

  10. What is reward management? • Reward management “Reward management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organisation.” (Milkovich & Newman 2002) Principle objectives of RM: • Attract and retain suitable employees • Maintain or improve levels of employee performance • Comply with employment legislation and regulations.

  11. Build capability Non-financial rewards Employee benefits Market analysis Business/ HR strategy Reward strategy Grade and Pay structure policy Grade and pay structure (base pay) Total Remunera- tion Total reward Improved Perfor- mance Job evaluation Contingent pay Learning and development Performance management 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. Strategic design of reward systems Internal alignment Determining the structure External competitiveness Determining the pay level • “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

  14. External factors: Economic pressures Government policies, laws/ regulations Stakeholders Cultures and customs Internal alignment Organisational factors: Strategy, technology, human capital, HR policy, employee acceptance, cost implications Internal structure: Levels Differentials criteria Person based Job based Skills Competencies Job analysis Competency sets Skill analysis Job evaluation Person based structure Job based structure

  15. Labour market factors: Nature of demand Nature of supply External competitiveness Product market factors: Degree of competition Level of product demand Set policy Define market Conduct survey Merge internal & external pressures Competitive pay levels, mix and structures Organisational factors: Industry, strategy, size, individual manager / owner

  16. Approaches to international rewards (1) • Should reward packages be based on (1) the salary level of the home country or (2) the salary level of the host country? • Two main approaches: The going rate approach The balance sheet approach

  17. Approaches to international rewards (2) The going rate approach • Based on local market rates • Relies on survey comparisons among: local nationals (HCNs), expatriates of same nationality and expatriates of all nationalities • Compensation based on the selected survey comparison • Base pay and benefits may be supplemented by additional payments for low-pay countries (Source: Dowling and Welch, 2004:145)

  18. Advantages: Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities Disadvantages: Variation between assignments for same employee Variation between expatriates of same nationality in different countries Potential re-entry problems Approaches to international rewards (3) The going rate approach (Source: Dowling and Welch, 2004:145)

  19. Approaches to international rewards (4) The balance sheet approach (the most widely used) • Based on home-country pay and benefits • Adjustments to home package to balance additional expenditure in host country • Financial incentives (expatriate/hardship premium) added to make the package attractive (Source: Dowling and Welch, 2004:146)

  20. Advantages: Equity --between assignments for the same employee --between expatriates of the same nationality Facilitates expatriate re-entry Easy to communicate to employees Disadvantages: Can result in great inequality --between expatriates of different nationalities --between expatriates and local nationals Can be complex to administer Approaches to international rewards (5) 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 Pay under scrutiny as recession bites • To what extent is cutting pay a good idea for employers in an economic downturn? • How would you motivate and retain good performers in the current economic situation? Source: The Times July 17th, 2008

  23. 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

  24. What is PRP? PRP is the payment that is in addition to base pay and the payment that ties to performance measure of individual, group and firm level. (Armstrong 1999) Focus of PRP • Coverage • Measurement (e.g. results, behaviours) • Link between pay and performance

  25. Main forms of PRP • Payment –by-results schemes: pay linked directly to output such as productivity bonus, sales incentives etc. • Performance schemes: pay not linked directly to output but overall business goals. Individual PRP and team based pay etc. • Financial participation scheme: such as profit sharing paid in cash or shares via some form of equity-based arrangement

  26. Types of performance measure Source: Gerhart and Rynes (2003) .

  27. Historical development of PRP • Early 1900s, it was very uncommon for a person to have rewards based on individual contribution, profit sharing bonuses, stock options, plus choices among various benefit and services. • 1930s and 1940s, group based gain-sharing plans gained ground to solve production problems and improve productivity. • In 1953, 50 percent of US workers were paid by some type of group based incentive plans. • During 1960s and 1970s, the use of all forms of PRP plans declined. Only about 20 percent of manufacturing workers were paid under incentive plans. • By 1990s, forms of PRP diversified.

  28. Reasons for using PRP?

  29. Empirical evidence for using PRP • HR purpose PRP as a motivator, to promote business strategies, to retain good performers, a communication tool, better than nothing etc. • Institutional reasons Best practice, following the leading companies. • Legitimacy Very little empirical support. 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. Source: Wei (2008) ‘’Pay for performance in China: A case study of knowledge based firms’

  30. Why companies use PRP? Need for corporate governance Need to attract and retain Market practices Implement PRP Set measures and goals and communicate with employees Managers’ actions and behaviours Luck (external factors) Business performance PRP award Effect on Individual’s self worth Monetary award Increased human capital for future negotiations Source: Wei (2008) ‘’Pay for performance in China: A case study of knowledge based firms’

  31. 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 performance Source: A survey done by CIPD in 2003.

  32. Advantages and disadvantages of PRP forms

  33. Main problems with PRP ■ Problems with strategy Clarity and communication of scheme objectives linked to business goals. PRP becomes part of base pay. ■ Problems with design The link between pay and performance, pay and effort Narrow differentials Lack of employee or line managers’ participation Culture issues ■ Problems with process Lack of transparency, line management involvement Poor appraisal system and communication channel

  34. Case study 3 Incentives shift for Taiwan tech workers • How was the PRP changed in the case? • What can we learn from the shifting composition of the PRP illustrated in the case? Source: The Financial Times September 25, 2008

  35. Case study 4 Fat cat row over public sector pay • What are the problems with executive pay in the public sector? • How would you solve the problems with executive pay as a HR specialist? Source: The Sunday Times November 11, 2007

  36. References • Rowley “The management of people: HRM in context” (2003) Spiro Business Guide • Marchington and Wilkinson “People management and development: HRM at work” 2nd (2002) CIPD • Brown and Armstrong “Paying for contribution: Real PRP strategies” (1999) Kogan Page • Thorpe & Homan “Strategic reward systems” (2000)Pearson • Milkovich & Newman “Compensation” (2002) 7th McGraw-Hill • Reilly “New reward II: Issues in developing a modern remuneration system” (2003) IES • Armstrong & Murlis “Reward management: A handbook of remuneration strategy and practice” (2004) 5th Kogan Page

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