Chapter 12

Organizational reward system

Concerned with selection of types of rewards to be used
by organization
Organizational rewards
Rewards that result from employment the organization;
includes all types of rewards, both intrinsic and extrinsic
Intrinsic rewards Internal to individual and are normally
derived from involvement in certain activities or tasks
Examples Job satisfaction and feelings of
accomplishment
Extrinsic rewards Directly controlled and distributed by
organization and more tangible than intrinsic rewards
Examples Pay and hospitalization benefits
Although differing, intrinsic and extrinsic rewards are closely
related
Often an extrinsic reward provides recipient with intrinsic
rewards
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12-3

 Management must recognize what employees

perceive as meaningful rewards
Pay is usually the first, and sometimes the only,
reward most people think about
However, rewards should be viewed in the larger
perspective as anything employees value
May include things such as
Office location
Allocation of certain pieces of equipment
Assignment of preferred work tasks
Informal recognition

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 Returns benefiting organization through

distribution of awards can be realized only
if desires of employees are known
Organizations should learn what employees
perceive as meaningful rewards, which is
not necessarily what management
perceives
Traditionally, managers have assumed they are
fully capable of deciding just what rewards
employees need and want
Unfortunately, this is often not true
Studies have shown that employees tend to rank
lack of recognition as the most probable reason
good employees quit their jobs
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 Another false assumption is exemplified by fact that

most organizations offer same mix of rewards to all
employees
Studies show that many variables can influence
employee preferences for certain rewards. They
include
Age
Gender
Marital status
Number of dependents
Years of service
For example, older employees are usually much
more concerned with pension and retirement
benefits than are younger employees
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 When selecting types of rewards to offer, intrinsic

benefits that might accrue as a result of the
rewards need to be considered
Managers and employees alike consider only
tangible benefits associated with a reward
External factors that place limitations on an
organizations reward system also exist
These factors (usually beyond the control of the
organization) include such things as
Organizations size
Environmental conditions
Stage in product life cycle
Labor market

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 Free enterprise system is based on the premise that

rewards should depend on performance
Performancereward relationship is desirable at
Organizational or corporate level
Individual level
Employees will be motivated when they believe such
motivation will lead to desired rewards
Many formal rewards provided by organizations are
not related to performance
These rewards are almost always determined by
organizational membership and seniority; they
include
Paid vacations
Insurance plans
Paid holidays
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 Other rewards, such as promotion, can and should be

related to performance
Opportunities for promotion may occur only rarely
When available, higher positions may be filled
On basis of seniority
By someone outside the organization
Primary organizational variable used to reward employees
and reinforce performance is pay
Even though many U.S. companies have some type of
pay-for- performance program, most do a poor job of
relating the two
Surveys repeatedly show that employees do not have
much confidence about a positive relationship exists
between the two
Evidence shows that paying for performance is working
at the highest levels in many companies
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 Why is the practice not more widespread?

Not easy to do; much easier to give everybody
the same thing, as evidenced by the ever-popular
across-the-board pay increase
Relating rewards to performance requires that
performance be accurately measured, and this
is often not easily accomplished
Requires discipline to actually relate rewards to
performance
Many union contracts require that certain rewards
be based on totally objective variables, such as
seniority
No one successful formula for implementing a payfor-performance program has yet been developed

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 Trust in management
If employees are skeptical of management, it is
difficult to make a pay-for-performance program
work
Absence of performance constraints
Jobs must be structured so that an employees
performance is not hampered by factors beyond
his or her control
Trained supervisors and managers
Supervisors and managers must be trained in
setting and measuring performance standards
Good measurement systems
Performance should be based on criteria that are
job specific and focus on results achieved
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 Ability to pay
Merit portion of the salary increase budget must
be large enough to get the attention of employees
Clear distinction among cost of living, seniority, and
merit
In absence of strong evidence to the contrary,
employees will naturally assume a pay increase is
a cost-of- living or seniority increase
Well-communicated total pay policy
Employees must have a clear understanding of
how merit pay fits into the total pay picture
Flexible reward schedule
It is easier to establish a credible pay-forperformance plan if all employees do not receive
pay adjustments on the same date
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 An employees general attitude toward the job

Organizational reward system often has a significant impact on
level of employee job satisfaction
Manner in which extrinsic rewards are dispersed can affect
intrinsic rewards (and satisfaction) of recipients
There are five major components of job satisfaction:
Attitude toward the work group
Attitude toward the company
Attitude toward management
General working conditions
Monetary benefits
Other components include
Employees state of mind about the work itself
Life in general
Health, age
Level of aspiration, social status, and political and social
activities
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 JS is not synonymous with Organizational

morale Employees feeling of being
accepted by and belonging to a group of
employees
Through common goals
Confidence in desirability of those goals
Desire to progress toward the goals

Morale is the by-product of a group

Job satisfaction is more an individual state
of mind
Two concepts are interrelated in that job
satisfaction can contribute to morale and morale
can contribute to job satisfaction
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 The path of least resistance Attempts to explain

belief that a satisfied employee is necessarily a good
employee
If a performance problem exists, increasing an
employees happiness is far more pleasant than
discussing with the employee his or her failure to
meet standards
Although happiness eventually results from satisfaction,
the latter goes much deeper and is far less tenuous than
happiness
Two propositions concerning the satisfactionperformance theory exist
Traditional view is that satisfaction causes
performance
Satisfaction is the effect rather than the cause of
performance
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 Performance leads to rewards that result in a

certain level of satisfaction
Rewards constitute a necessary intervening
variable in the relationship
Another position considers both satisfaction and
performance to be functions of rewards
Satisfaction results from rewards, but current
performance also affects subsequent
performance if rewards are based on current
performance
Research evidence generally rejects the more
popular view that satisfaction leads to performance
It does provide moderate support for the view
that performance leads to satisfaction

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 Evidence also strongly indicates that

Rewards constitute a more direct cause of
satisfaction than does performance
Rewards based on current performance enhance
subsequent performance

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 It has been clearly established that job satisfaction does

have a positive impact on
Turnover
Absenteeism
Tardiness
Accidents
Grievances
Strikes
Experience, gender, and performance can have a
moderating effect on these relationships
Organizations prefer satisfied employees simply
because they make the work environment more
pleasant
Although a satisfied employee is not necessarily a high
performer, there are numerous reasons for cultivating
employee satisfaction
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 Wide range of both internal and external factors affect an

employees level of satisfaction
Surveys have found that the top drivers of employee job
satisfaction were
Pay, and benefits
Job security, and feeling safe in the work environment
Flexibility to balance work and life
Job satisfaction and motivation are not synonymous
Motivation is a drive to perform
Organizational reward systems can influence both job
satisfaction and employee motivation
It affects job satisfaction by making the employee more
or less comfortable as a result of the rewards received
It influences motivation primarily through the perceived
value of the rewards and their contingency on
performance
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12-20

 Compensation
All extrinsic rewards that employees receive in
exchange for their work
Composed of base wage or salary, any incentives or
bonuses, and any benefits
Base wage or salary Hourly, weekly, or monthly
pay employees receive for their work
Incentives Rewards offered in addition to the base
wage or salary and are usually directly related to
performance
Benefits Rewards employees receive as a result of
their employment and position with the organization
(Examples: Paid vacations, health insurance, and
retirement plans)
Pay
Refers only to actual dollars employees receive in
exchange for work
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12-22

 Policies must deal with following issues:

Minimum and maximum levels of pay Taking into
consideration
Worth of job to organization
Organizations ability to pay
Government regulations
Union influences
Market pressures
General relationships among levels of pay (e.g.,
between senior management and operating
management, operative employees, and
supervisors)
Division of total compensation dollar (i.e., what
portion goes into base pay, incentive programs,
and benefits)
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 Organizations must also make decisions

concerning
How much money will go into pay increases for
the next year
Who will recommend them
How raises will generally be determined

Another important decision concerns

whether pay information will be kept secret
or made public

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 Many organizations have a policy of not disclosing payrelated information

Information about pay system as well as individual pay
received
Justification for pay secrecy
To avoid any discontent that might result from employees
knowing what everybody else is being paid
Many employees, especially high achievers, feel very
strongly that their pay is nobody elses business
Drawbacks of pay secrecy
Difficult for employees to determine whether pay is
related to performance and does not eliminate pay
comparisons
May cause employees to overestimate pay of their peers
and underestimate pay of their supervisors
Can create feelings of dissatisfaction
Employees may become suspicious
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 Some companies actually forbade employees to

discuss and/or disclose their pay
In 1992, the National Labor Relations Board
(NLRB) ruled that forbidding employees to discuss
their pay constitutes a violation of the National
Labor Relations Act
Womens groups in U.S. and UK have begun to
challenge pay-secrecy rules stating that they
perpetuate income gap between men and women
A compromise on issue of pay secrecy is to disclose
pay ranges for various job levels within the
organization
Clearly communicates general ranges of pay for
different jobs, but it does not disclose exactly
what any particular employee is making

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 Theory holds that while true worth of jobs to

employer may be similar, some jobs (especially
those held by women) are often paid a lower rate
than other jobs (often held by men)
Drawback
Determining worth of the jobs in question is
difficult
How should job worth be established?
U.S. courts have generally rejected cases based on
comparable worth claims
Although comparable worth has generally
floundered in court, it has received considerable
attention
At the collective bargaining table
In the political arena
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 Little doubt exists that inadequate pay can have a very

negative impact on an organization
Pay dissatisfaction can influence employees feelings
about their jobs in two ways:
Can increase desire for more money
Can lower attractiveness of the job
An employee who desires more money is likely to engage
in actions that can increase pay
These actions might include
Joining a union
Looking for another job
Performing better
Filing a grievance
Going on strike
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 All of the consequences (except performing better)

are generally undesirable by management
Better performance results only in those cases
where pay is perceived as being directly related to
performance
When job decreases in attractiveness, the employee
is more likely
To be absent or tardy
To quit
To become dissatisfied with the job itself

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 Equity theory of motivation holds that

Employees have a strong need to maintain a
balance between what they perceive as their
inputs to their jobs and what they receive from
their jobs in the form of rewards
Employees who perceive inequities will take
action to eliminate or reduce them
Pay equity concerns whether employees believe
they are being fairly paid
For example, if an employee believes he or she
is underpaid, that employee will likely reduce
expended effort by working more slowly,
taking off early, or being absent
Similarly, if an employee believes she or he is
being overpaid, that employee is likely to work
harder or for longer hours
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 Several dimensions of equity to be considered

when looking at pay equity
Internal equity Addresses what an employee
is being paid for doing a job compared to
what other employees in the same
organization are being paid to do their jobs
External equity Addresses what employees
in other organizations are being paid for
performing similar jobs
Individual equity Addresses issue of
rewarding individual contributions; is very
closely related to the pay-for-performance
question
Organizational equity Addresses how profits
are divided up within the organizations
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 Employee interpretations of pay equity are based

on their perceptions
Organizations should make these perceptions as
accurate as possible
An employee can also feel good about one or more
equity dimensions and feel bad about others
For example, an employee may feel good about
his or her pay in comparison to what friends
working in other organizations are making
She or he may also believe the company profits
are fairly distributed within the company
However, this same person may be very unhappy
about his or her pay relative to several other
people in the same organization

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 Based on the idea that employees will be satisfied with

their pay when their perception of what their pay is
and of what they think it should be agree
Happens when employees feel good about internal
and external equity of their pay
Present pay is a primary factor influencing an
employees perception of equity
Persons wage history and perception of what others
are getting also have an influence
For example, employees who have historically
received high pay tend to lower their perception
of present pay
Similarly, the higher the pay of friends and peers,
the lower ones individual pay appears to be
These factors account for the fact that two people may
view the same level of pay in a very different manner
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 An employees perception of what pay should be depends on

several other factors, including
Job inputs
Includes all the experience, skills, and abilities an
employee brings to the job in addition to the effort the
employee puts into it
The perceived inputs and outcomes of friends and peers
Refer to the individuals perception of what friends and
peers put into their jobs and what kind of pay they get
in return
Nonmonetary outcomes
Refer to the fact that certain nonmonetary rewards can
sometimes substitute for pay, at least up to a point
It makes allowances for employees who believe their pay
exceeds what they think it should be
Research has shown that in such cases, people often
experience feelings of guilt, inequity, and discomfort
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12-42

 Role of human resource manager in overall

organizational reward system is to assist in its
design and to administer the system
Administering the system Carries responsibility
of ensuring that system is fair to all employees
and that it is clearly communicated to all
employees
Ensuring that the system is fair places burden of
minimizing reward inequities and employees
perceptions of reward inequities squarely on the
human resources manager
Little doubt exists that organizations need to do a
better job of explaining and communicating their
compensation system to employees
Many tools and techniques are available to assist
human resource managers in designing and
administering compensation systems
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