HRM for MBA Students

Lecture 7Rewarding people:

the management of rewards and performance

Learning outcomes

• An understanding of the importance of pay in HRM

• An appreciation of the significance of fairness in rewards

• An appreciation of the main types of payment systems

• An understanding of how rewards fit with performance management systems

• An understanding of the importance of fringe benefits

• An understanding of the concepts of pay for competence or skills

• An appreciation of the cafeteria approach to rewards

• An understanding of the principles of job evaluation

• An understanding of the principles of performance management

Recent developments

• Rewards are of obvious concern to both employers and employees

• The emergence of HRM has produced or coincided with the great expansion of

– performance-related pay (a culture of

‘pay for contribution, not pay for

position’)

– performance management

Pay systems

• Management normally seek a pay system they believe will

– give the greatest degree of cost and supervisory control, and

– provide the best incentive for employees

• Pay and fringe benefits remain central features in contracts of employment and are always prominent issues in collective bargaining

Fairness

• Any pay system will fail if it is perceived by the employees to be unfair

• Fairness of pay is a comparative concept, not an absolute one

Types of payment system

• Payment by time

• Performance-related pay or ‘incentive pay schemes’:

– payment by results (PBR), in which the variable element is determined by some objective measure of the work done or its value

– merit-based systems, in which the variable element is related to an assessment of overall job performance by a supervisor or manager

Incentive pay schemes

• The 2004 WERS survey: – 40% of UK workplaces had incentive pay

schemes (more popular in the private sector than in the public), with a rising trend

– Incentive schemes were more common generally where product market competition was higher

Payment by time

• A fixed rate per hour, per shift or per week (‘wages’) or per month, per quarter or per year (‘salary’)

• In a pure payment-by-time system the employees’ performance can only be managed by supervision, or by custom or other social pressure

• The simplicity of the time rate system is its main virtue, but this is often compromised in practice by additional payments, ‘grade drift’ and proliferation of grades

Performance-related pay (incentive pay)

– Payment by results (PBR), in which the variable element is determined by some objective measure of the work done or its value

– Merit-based systems, in which the variable element is related to an assessment of overall job performance by a supervisor or manager

Payment by results (PBR)

• Piecework– The employee is paid a standard price for

each piece or unit of output

• Incentive bonus schemes – Schemes may be work-study-based in

production-oriented work

Merit-based pay

• Reflects an HRM approach to rewards

– Pay policy should reflect and support the business objectives and strategies of the firm.

– Pay should be part of a wider human resources strategy

– Pay policy and practices should help reinforce the dominant culture of the organisation

Criteria for merit-based pay• Employees are able to influence performance

• The reward is clearly and closely linked to the effort of the individual or group

• The reward closely follows the accomplishment that generated it

• Employees are clear about the targets and standards of performance needed

• It is possible to measure performance with fairness and consistency

• The pay systems use a clearly defined and understood formula

• There is a reasonable degree of stability in work methods

Pay for skills or competence

• Pay progression is linked to the number, kind and depth of skills which individuals develop and use

• The successful acquisition of skills blocks or modules results in an increment to basic pay

• The order in which each skill has to be attained may be determined by management

• The training and acquisition of skills must be accredited

• The system can be bureaucratic and costly

Non-pay benefits

• ‘Fringe’ or ‘employee’ benefits– to ensure that a competitive total

remuneration package is provided to attract, retain and motivate staff

– to increase the employee’s commitment to the organisation

– to take advantage of tax-efficient methods of rewarding employees

Typical non-pay benefits

• Pension schemes

• Personal security– Eg above-statutory sick pay, death-in-service

benefits, personal accident cover, medical insurance, etc

• Financial assistance

• Company car

The ‘cafeteria’ approach to rewards management

• Allows employees a degree of choice in their total remuneration package – eg by permitting them to take less in non-pay benefits and more in pay, or vice versa

• The total overall value of their compensation will be the same, whatever choices they make

• This allows individuals to tailor their rewards to their particular needs and alter them as their needs change

The cafeteria approach

• Advantages:– employee satisfaction– communication of the real costs of benefits to

employees and employers – determining the popularity of various benefits

• Disadvantages:– costing of non-pay benefits can be complex– possibly greater administrative costs– possible tax complications for employees

Job evaluation

• Determines the relative positions of jobs within a hierarchy

• Is a comparative process which determines grades but not rates of pay, which must be established by some other mechanism

• Is normally conducted by a panel on the basis of information obtained by means of job analysis

• Is a systematic but not infallible process• The job – not any current job-holder’s

performance – is what is evaluated

Points-factor job evaluation schemes

• Jobs are compared in terms of a number of separately defining characteristics or ‘factors’ – eg skill, knowledge, decision-making, etc

• Each factor is weighted to reflect its relative importance

• This is the only type of scheme that can give an employer a defence against an ‘equal value’ pay claim at a tribunal

Designing a points-factor scheme

• Select factors and decide on the number of levels required (typically between three and 12 factors)

• Allocate points to levels and weights to factors• Select benchmark jobs • Analyse benchmark jobs• Rank jobs according to points values• Determine the number of job grades and define

them in terms of points• Allocate jobs according to points values

Performance management

• ‘A means of getting better results from the organisation, teams and individuals by understanding and managing performance within an agreed framework of planned goals, objectives and standards’

Armstrong and Murlis (1994)

• Performance appraisal is central to performance management but performance management is more than appraisal

A typical performance management agreement

• A performance agreement between an individual and a manager setting out objectives, but also development needs

• Performance is continually monitored and assessed: – high performance is reinforced with praise,

recognition and the opportunity to take on more responsible work

– low performance is responded to by means of coaching and counselling

• Provision is made for the regular formal review of performance against the objectives, and the setting of any new performance agreement

Performance management and performance-related pay

• Performance management systems are typically linked to performance-related pay – but this is not essential

Key issues in rewarding people

• Rewards have to be actively managed to secure the maximum utilisation of human assets, and to attract, motivate and retain core employees

• We cannot ignore the importance of money in rewards packages

• Payment systems may be based on time, or may be variable in cases where an element of total pay is dependent on some measure of output or an assessment of overall performance

Key issues in rewarding people (Cont.)

• A ‘cafeteria’ system of rewards allows employees the flexibility to decide the composition of their total rewards package

• Performance management is really a management philosophy rather than just a set of techniques, and more comprehensive than simply performance-related pay or performance appraisal

• Since only an analytical job evaluation scheme can provide an employer with a legal defence in equal pay cases, its importance is growing