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What is Reward ?
Reward is the benefit received for performing a task. Total reward embraces everything that employees value in employment relationship. It means all the tools available to the employer that may be used to attract, motivate and retain employees. Fig: Reward System Model

Financial Reward

Business strategy Reward Strategy Non-Financial Reward

Enhanced Individual & Group Performanc e Enhanced Organizational functioning & Effectiveness

HRM Strate gy

REWARD STRAGEGY OBJECTIVES All compensation elements exist to achieve some purpose. Below is a review of the following compensation objectives: Competitiveness Motivation Administrative Effectiveness Cost control Cost Benefit Efficiency Tax Considerations Capital Accumulation Social Concern Government Compliance

Competitiveness: Organizations often cite Playing competitively as their primary compensation goal. The organizations do not appear to be as concerned over matching going average salary rates as their traditional counterparts. Instead, these organizations compete with incentive and variable pay (gain sharing plans, profit sharing, stock option plans that extend down into the lower ranks, etc.) Motivation: Many organizations utilize compensation as a means to shape individual and group behaviours. While the Older counterparts stress the merit of the individuals

3 achievement and reward for both merit and individual production, the New organization is far more likely to reward the total organization and the team responsible for an achievement (rather than a few select key individuals). Interestingly, organizations utilizing team sharing pay practices do not tend to use formal performance appraisals. (Performance appraisals appear to alienate both the bottom 20% of a work population and the top 20%, leading to a similar exodus from each group). While older organizations stress the merit of individual achievement, new organizations are more likely to reward team effort.

Administrative Effectiveness: Oftentimes, pay plans are utilized because they are administratively simple and inexpensive. Administering base salaries is much less complicated than benefits or incentives. The pay plans used by organizations often appear unsophisticated compared to the complex pay schemes of Old organization competitors. Simple, straight forward pay plans are the rule. Cost Control: Compensation plans can also be designed to ensure cost control. For example, sales compensation that is only paid when profit or sales are achieved. The earlier organizations appear to pay less due to: Lower salary levels Higher retirement and health benefits Much higher equity compensation

Cost/Benefit Efficiency:

4 Government can affect compensation practices with tax laws, making certain types of compensation less expensive than others. For example, U.S rules relating to stock options and Employee Stock Options (ESOPs). Lower salary levels, higher benefits, and use of stock options translate into more cost effective use of compensation dollars in New organizations. Cash conserving approaches are a reflection of many New organizations working environments. Tax Considerations: Clearly, the use of stock options and benefits require an understanding and appreciation of tax codes, but rarely does one hear of this objective as being the driving force for the use of any particular compensation plan in firms. This is a change from previous decades within the U.S and Canada, where Older organizations often found their compensation designs dictated by tax accountants. Capital Accumulation: A primary goal of several compensation elements is the creation of assets and estates for managers or employees (allowing employees to believe they are owners). Capital accumulation has traditionally been the province of only management pay. This has changed. Now organizations utilize both technology and stock options or equivalents. Starbucks, Cisco, Microsoft, and Netscape, followed by such stalwarts as Bank of America, have expanded the participation in these plans to mailroom.

In the 1990s, many workers were willing to trade higher salaries at more secure and stable companies in exchange for stock options in organizations. Due to the fact that stock option programs required the employee to stay with the company for a set number of years before vesting (receiving full ownership of the stocks), these programs increased loyalty. In many cases in the 1990s employee stock option plans created millionaires. In recent years, however, they have proved a false promise for employees of the many software and technology firms that have gone under. The market, according to Esther Dyson, Chairman of EDventure Holdings, was sending people the wrong

5 signals by promising them $500,000, $5 million or $50 million for a couple of years work. Social Concern: Some compensation elements exist simply because owners, management, and boards utilize social concerns in their decision making regarding compensation elements. For example, long term disability plans. Organizations often appear to have a concern for their human resources not shared by their older counterparts. This is reflected in turnover statistics and compensation plans pointed toward future (not present) compensation. Because the Internet is available to many employees both at the office and from their homes, organizations can communicate information that otherwise might not be known. This allows organizations to communicate both their plans and objectives more often and at less expense than is done by previous firms. Government Compliance: Pay plans are often designed for no other purpose than to meet government compliance issues. This is not as much a concern in the 2000s as it was in the late 1970s and 1980s. New organizations are too busy in a fight for survival brought about by foreign competition and technology changes to spend enormous time and effort on government compliance. Few believe, however, that the labour laws, equal and minimum pay laws, retirement plan laws and reporting, and other rules and regulations will disappear. All countries shape compensation plans in some manner. Matching Goals: The compensation plans used often depends on the way in which an organization prioritizes these discussed objectives. Often times two are more objectives can be conflict, making them difficult to be achieved by a single compensation plan. Because no two organizations have exactly the same goals, there is a diverse use of compensation elements.

The Nine Criteria for Developing a Reward strategy: 1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labour ? 2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis through base salaries or will it fluctuate depending on such pre established criteria as performance and company profits? 3. Performance Versus Membership Will compensation emphasis performance and tie pay to individual or group contributions, or will it emphasize membership in the organization- logging in a prescribed number of hours each week and progressing up the organizational ladder? 4. Job versus individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job. 5. Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)? 6. Below-market versus Above-market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels ? 7. Monetary versus Non-monetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress Non-monetary rewards such as interesting work and job security.? 8. Open versus Secret Pay Will employees have access to information about other workers compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay) ? 9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firms units?

COMPENSATION BASICS Compensation is the value that an employee receives in the form of either money or benefits in return for the performance/efforts put by him. An organization exists to accomplish specific goals and objectives. Individuals are hired to achieve these goals. At the same time these individuals have their own needs for joining the organization. These needs could be in terms of money or goods and/or goods and/or services. Working for an organization satisfies the security needs of an individual initially and gradually helps him climb the motivational ladder. This thing which the employer provides to the employee is called the compensation system.

Compensation system should Make the employee realize the major objectives of the organization. Help in attracting and retaining talent that an organization needs. Encourage employees to develop the skills and abilities that they need to perform the job. Motivate employee to perform effectively. Create the type of culture the organization seeks to engender Compensation systems consist of many elements in addition to pay for work, these components must be coordinated to work together. Employees compensation is a major cost of doing business. A wide variety of federal and state regulations effect Compensation systems. Employees, either directly or through collective bargaining arrangements, may desire to participate in the determination of compensation. The cost of living varies tremendously in different geographic areas, an important consideration for forms with multiple locations. In most organizations the compensation systems involves a multifaceted package, not just pay for work and performance. The components of compensation system can be roughly divided into direct (wages) and indirect (benefits). This can be better understood from the model below.

Compensation System Indirect

Base pay Salar
Wage

Direct
Merit pay

Protection Programme s
Medical Life Insurance Pension Social Security

Pay for time not Worked

Vacation Holiday Sick leave

Services and Perquisites

Incentive pay
Bonus Commission Piece rate Profit sharing Stock option Shift

Deferred pay
Saving plan Stock purchase Annuity

Recreational facilities Car Financial planning Low cost of free

As can be seen in the figure compensation system is divided into direct and indirect pay. Direct pay: All forms of direct (i.e. cash) compensation made to employees in exchange for their contribution to an organization is called direct pay. The Direct Component Of Compensation system is: Base pay Base pay comprises of two parts salary and wage. Salary is given to permanent employees while ages are given for menial works.

Merit pay An incentive plan implemented on an institutional wide basis to give all employees an equal opportunity for consideration, regardless of funding source. Incentive Pay incentive pay comprise of: Bonus it is primarily one shot reward for excellent work with no commitment to future payout.

10 Commission-Generally given when an employee exceed the bench marked output. Piece rate it gives payment for each item produced. Profit sharing Profit sharing, when used as a special term, refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on companys profitability in addition to employees regular salary and bonuses. Stock option A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the options pay-off (and therefore its value). Thus it is a contract to buy (known as a call option) or sell (known as a put option) a certain number of shares of stock, at a predetermined or calculable (from a formula in the contract)price. Shift differentials-Typically; shift differential pay is approved for positions in departments that require around-the-clock coverage or operations that consistently require late evening coverage. At the discretion of the supervisor, shift differential can be approved for shifts in which 50 percent or more of the scheduled work hours are between 2 p.m. and 8.a.m. Shift differential is paid on an hourly basis for all regularly scheduled hours worked on a shift that has been approved for shift differential. Shift rate differentials are established for evening and night shifts.

Deferred Pay is also a component of direct pay. It comprises of: Saving Plan-A plan that allows employees to contribute to an investment pool managed by an employer. Stock purchase-many large companies offer Employee stock purchase plans (ESPP) that let you buy your employers stock at discount. These plans are offered as an employment incentive, giving you an opportunity to share in the growth potential of your companys stock (and by implication, work hard to keep the stock price soaring) Annuity-Refers to contract offered by insurance companies which allows you to save funds for retirement on a tax-favoured basis and then if you choose, receive a guaranteed income payable for life or for a certain period such as five or ten years.

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Indirect pay All forms of non direct 9i.e. non cash) compensation made to employees in exchange for their contribution to an organization is called indirect pay. Indirect pay comprises of : Medical benefits-In order to bring down the rapid increases in health insurance costs, organizations are increasingly establishing fitness programs and facilities to help the employees stay in good physical conditions. Life Insurance Insurance is an important way to provide a true sense of security to the employee. He feels relieved knowing that even if he meets a mishap, his family will not be deprived of any benefits. Pension An employee feels valued when he gets pension. It makes him feel that hes an valuable employee for the organization even after he has retired. Social security It keeps an employee happy and a sense of security. Vacation, holiday and sick leave At lower levels employees are usually allowed a certain amount of paid sick days in addition to vacation and holiday. At the higher levels salaried employees may have fewer sick days but for managers and executives the norm against work absence is so strong that the concept of sick days may be meaningless. Recreational facilities, car, low cost or free meals These are also some of the indirect benefits that an employee gets from the employer.

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Theories affecting Compensation: Organizations frequently make the mistake of thinking that the primary motive of working is money. To an extent it may be true but not entirely because if it was entirely true then why several workers at various companies objected to working overtime. Many factors influence an employee in his performance and his satisfaction with his work. Some reward that successfully motivates certain workers does not work for others. The equity and expectancy theories can explain employees reaction to compensation systems.

Exercise
You all have been working with organizations, list down what you expect from your organization in return of the effort which you put in. Also tell what do your organization expects you to give the organization.

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Equity theory.
Equity theory says that employees judge if they are treated fairly in comparison with others in terms of input/outcomes ratio. Inputs include experience, education, special skills, efforts and time worked. Outcomes include pay, benefits, achievement, recognition or any other rewards. Humans are complex beings so their way of judging fairness is equally complex. An employee continually compares the skills and efforts that he puts in the organization with the reward and recognition that he receives for it. The problem that he faces here is that inputs and outcomes are two different units therefore the next best thing that he does is that he compares his income outcome ratio with someone elses income outcome ratio. This other person may be his colleague or working for some other company. A sense of inequity arises when the comparison process uncovers an imbalance between inputs and outcomes of employee compared to others. When inequity is perceived the individual tries to relieve the tension created by such an inequity. An employee may perceive the ratio of his/her rewards to be less favourable than others (see figure). For example, a system analyst may think that he puts in more efforts than programmer of the same

14 community who receive the same pay. In such a case the police office may try to reduce his enquiry by Reducing efforts Trying to procure higher pay for themself. Seek employment in a community where they are paid according to their expectations. Individuals also realize when they are over rewarded. In such case they try to work harder so that the balance is restored.

Person

Comparison other
Others Rewards = Others Contribution = Others Contribution = Equity

My rewards(outcomes) My Contributions (Inputs) My rewards My Contributions =

Others Rewards

Inequity (under Reward)

Actions to restore Equity from Under Reward Inequity: 1. The person could asks for a raise 2. The person would reduce contributions (works less hard) 3. The person could try to get other to increase contribution (Work 4. Last Resorts: Quit or choose another comparison other = others Rewards = Others Contribution Inequity (over Reward)

Harder) My rewards My Contributions (

Action to restore Equity from Over Reward 1. The person could increase contributions (work Harder, Cultivate additional skills) 2. The person could ask for a pay cut 3. The person could attempt to get other a raise 4. The person could attempt to get other to reduce his contribution 5. Last Resorts: Quit the Job or choose another comparison other

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Satisfaction with pay Surveys have showed that employees are never satisfied by the pay that they receive. They always feel that they should get more in terms of compensation even though they have no complains with their career or the organization they work for. One possible reason for their dissatisfaction could be Comparison. Individuals compare their pay with a variety of sources both internal and external to the organization. Even the highly paid executives feel they are not as well paid as entertainers, who earn even more. A successful compensation system needs to incorporate the equity concerns of all participants in the employment relationship. This can be achieved by establishing a system wherein both internal and external comparisons of pay levels are taken into account. It is more important to focus on specific employees who are dissatisfied with compensation than the overall level of satisfaction.

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EXERCISE
Take an example of when you felt that the salary level you got was not good and analyze the reasons behind that. In case that has not happened to you personally take a case of an employee or colleague who was disgruntled with his salary and write down the key reasons for his dissatisfaction

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Designing Equitable Compensation Systems: There are three elements of equity: Internal External Individual

Internal Equity: It refers to the relationships amongst jobs in an organization. It has also been felt that people in higher positions in the organization are to be paid more than that of the lower position holding people. For example the president of a company is expected to earn more than the vice-president. Among other things compensation is presumed to be correlated with the level of knowledge, skill and experience required to do the job successfully. External Equity: it refers to comparison of similar jobs in different organizations. For example, pay received by the president of various manufacturing companies. A president of a $10 billion would certainly earn more than a president of a $1 million company. It is presumed that the doubling of company size requires more knowledge, skills and experience on part of the leader. Individual Equity It refers to comparison of the individuals in the same job with the same organization. For example the human resource manager establishes through internal and external comparisons that the secretaries in the organization should receive between $1000-$2000 per month. The problem that arises h=now is that how much to pay who? Should pay difference be based on performance or should it be on the long service? Employees must perceive that these questions are answered fairly for individual equity to exist. There are certain procedures for establishing internal, external and individual equity with an organization. The procedures will be covered in the next session.

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Job Description
Reward Managing Internal equity Managing External equity Managing Individual equity

Job Analysis

Review of Learning
1. What are the objectives of Reward Strategies? 2. What are the criteria for Developing a Reward Strategy? 3. What are the components of Equity Theory? 4. What are the elements of Equity?

Benefits