HRM for MBA Students
Lecture 7
Rewarding people:
the management of rewards and
performance
Learning outcomes
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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
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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
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Payment by time
Performance-related pay or ‘incentive
pay schemes’:
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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
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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, decisionmaking, 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