Chapter: Business Science : Managerial Behavior and Effectiveness : Designing The Managerial Job

Pay and Rewards

This management discipline is concerned with the formulation and implementation of strategies and policies, the purposes of which are to reward employees fairly, equitably and consistently in accordance with their value to the organisation.

Pay and Rewards


Work performance is affected by:


Job characteristics and (physical) work environment




Abilities and skills




The willingness to perform



Rewarding Employees

n    Major strategic rewards decisions:


n    What to pay employees


n    How to pay individual employees


n    What benefits to offer


n    How to construct employee recognition programs


n    What to pay


n    Need to establish a pay structure


n    Balance between:


n    Internal equity – the value of the job for the organization


n    External equity – the external competitiveness of an organization‘s pay relative to a pay elsewhere in its industry


n    A strategic decision with trade-offs


Definition of Reward Management


      This management discipline is concerned with the formulation and implementation of strategies and policies, the purposes of which are to reward employees fairly, equitably and consistently in accordance with their value to the organisation.


      It deals with design, implementation and maintenance of reward systems (processes, practices, procedures) that aim to meet the needs of both the organisation and its stakeholders.


Philosophy of Reward Management

n    Strategic sense: long-term focus & it must be derived from the business strategy


n    Total Reward approach: considering all approaches of reward (financial or not) as a coherent whole; integration with other HRM strategies


n    Differential reward according to the contribution


n    Fairness, equity, consistency, transparency


Economic theories (partially) explaining pay levels

n    Supply & Demand: labor market factors


n    Efficiency wage theory: attraction of better employees, motivation, reducing fluctuation leads to high wages


n    Human Capital theory: productivity differences


n    Principal – Agent Theory: inequality in the information leads to „agency costs‖


n    The effort bargain: collective bargaining


The 4Ps of Reward

n    Pay


n    Salary, bonus, shares, etc.


n    Praise


n    Positive feedback, commendation, staff-of-the-year award, etc.


n    Promotion


n    Status, career elevation, secondment, etc.


n    Punishment


n    Disciplinary action, withholding pay, or criticism, etc


Strategic Reward Management

n    Where do we want our reward practices to be in a few years time? (vision)


n    How do we intend to get there?  (means)


Reward Strategy



n    A declaration of intent that defines what the organisation wants to do in the longer term to develop and implement reward policies, practices and processes that will further the achievement of its business goals and meet the needs of the stakeholders.

n    It gives a framework to other elements of reward management.


The structure & content of a Reward strategy

n    Environment analysis:


n    Macro-level: social, economical, demographic


n    Industrial level


n    Micro-level: competitors


n    Analysis of the „inner environment‖: strategy, job evaluation, financial conditions…


n    Gap-analysis


n    Guiding principles


n    Broad-brush reward strategy


n    Specific reward initiatives




A systematic process

n    For defining the relative worth/ size of jobs/roles within an organisation


n    For establishing internal relativities


n    For designing an equitable grade structure and grading jobs in the structure


n    To give an input for reward considerations


Dimensions of job evaluation

n    Relative or measured to an absolute scale


n    Relative: compares jobs to one another within the company


n    Absolute: compares to an „independent‖, external measure


n    Analytical or non-analytical (global)


n    Analytical: measures factors or elements of the jobs


n    Non-analytical: measures the job as a whole


Wage gaps


n    Wage gaps can occur in companies using international benchmarking in job evaluation. The cause is simple:


n    The market of top managers is usually international: they earn international wages, or they leave the firm


n    The market of workers with little or no qualification is local in (nearly) every case: they earn local wages.


n    In less developed countries this can lead to enermous wage gaps between the „top‖ and „bottom‖ employees.




Components of Total Remuneration


n    Base pay: Base pay is the fixed compensation paid to an employee for performing specific job responsibilities. It is typically paid as a salary, hourly (or in some situations piece rate). There is a tendency towards market orientation and the increasing role of qualifications.

n    Contingent pay: Individual contingent pay relates financial rewards to the


n    individual performance, organisation or team performance,


n    competence,


n    service,


n    contribution or


n    skill of individual employees.


Consolidated pay: built into the base pay


Variable pay: provided in the form of cash bonuses (increasing role nowadays).


n    Employee benefits: Elements of remuneration given in addition to the various forms of cash pay.


Contingent pay

n    Individual contingent pay is a good motivator (but to what extent?) for those who receive it.


n    It attracts and retains better workers.


n    It makes labour related expenditures more flexible.


n    It can demotivate those who don‘t receive it (depends on performance measurement)


n    Can act against quality and teamwork.


Types of individual contingency pays

n    Performance-related: increases basic pay or bonuses related to assessment of performance


n    Competence related: Pay increases related to the level of competence


n    Contribution-related: pay is related both to inputs and outputs


n    Skill-based: pay is related to acquisition of skills


n    Service-related: pay is related to service-time


Team based pay

n    Pay is related to team performance


n    It can encourages teamwork, loyalty and co-operation


n    It can be demotivating on individual level (encourages social loafing) Organisaton-wide schemes


n    Profit-Sharing Plans – organization-wide programs that distribute compensation based on an established formula designed around profitability


n    Gain Sharing – compensation based on sharing of gains from improved productivity


n    Employee Stock Ownership Plans (ESOPs) – plans in which employees acquire stock, often at below-market prices


Employee benefits

n    Attractive and competitive total remuneration


n    Provide for the personal needs


n    Increase commitment toward the organisation


n    Tax-efficient


Main types of Employee benefits

n    Pension schemes


n    Personal (and family) security: different types of insurances


n    Financial assistance: loans, house purchase schemes, discount on company services…


n    Personal needs: holidays, child care, recreation facilities, career breaks…


n    Company cars and petrol


n    Intangible benfits: quality of working life…


n    Other benefits: mobile phones, notebooks…


n    Cafeteria systems


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