The need for compensation management and systems

Reward management is not just about money. As shown in these diagram, it can be involved with intrinsic as well as extrinsic rewards and with non-financial as well as financial rewards. Intrinsic rewards occur from the nature the work itself. Decenzo and Robbins ( 2005, p. 274) explained that intrinsic rewards are self - initiated rewards like pride in one's work, a feeling of accomplishment or being area of the job. Intrinsic rewards related to responsibility and accomplishment these are inherent in individuals and not imposed from outside the house. Alternatively, extrinsic rewards happen from the factors from the job framework such as financial rewards, campaign and benefits. They may be external to the job and result from outside source.

All pay back systems derive from the assumptions of attracting, keeping and motivating people. Rewards are of two type - Financial and non-financial rewards. Many people view money as the only real motivator but many reports have discovered that among employees surveyed, other non financial incentive also motivate them and impact the amount of performance. A recently available study of reward practice by CIPD's demonstrates higher proportion of employers have followed a "total praise" approach, in which they make an effort to align the financial and non-financial elements.

Non financial rewards indirectly increase employees' budget. It differs from workers to workers. For example an employee may value office furniture and other could find it useless whereas financial rewards can be wages, bonuses, or indirectly paid ill leaves and paid getaway. They are simply mainly of three types such as revenue sharing, job evaluation and merit score. However, Decenzo and Robbins (2005) categorized financial rewards as shown in the diagram above as performance founded, implied membership centered and explicit membership based. They described that performance based mostly use commissions, piecework pay strategies, incentive system, group bonuses, merit or other node of payment for performance whereas membership founded rewards include cost of living rises, benefits and salary raises due to the labour market conditions, seniority, qualifications, and specialised skill. Membership-based rewards may get many employees on the whole when the magnitude of the reward rises with seniority. Though, there are drawbacks: They discourage poor performers from departing and people from leaving the business, they indirectly motivate job performance. However, Seniority-based rewards lessen turnover because the price tag on leaving raise with the employer's duration of service.


Employees' motivation depends upon the belief of achieving the prize, i. e. their anticipations. Motivation theory describes why people at work act in the way they are doing, and what organisations can do to persuade visitors to apply their efforts and abilities in ways that will assist to attain the organisation's goals as well as satisfying their own needs. Everyone has their own needs and a different set of goals. Employees can motivate themselves in several ways that will guide them to anticipate that their goals will be performed whereas management can motivate people through methods like pay, advertising and compliment.

Motivation is important because there is 'incentive'. People work because they get income to spend on their person, family and culture needs. Some needs are the basics of life, what specific needs to endure physiologically. Maslow described the hierarchy of needs with essential physiological needs at the bottom and increasing through safety, interpersonal needs and ends in the necessity for self-fulfillment. However, some critics say that there is little empirical information to aid this model. Herzberg differentiated between firstly 'hygiene' extrinsic factors such as pay and company strategy and steps that will cause dissatisfaction in the workplace if absent or inadequate. Subsequently, 'motivators ' which are intrinsic factors such as the worth of the task, attainment, understanding, responsibility and prospect of growth that may positively motivate people. Maslow's Hierarchy of Needs and Herzberg's Two Factor Theory are a "content theory" of motivation". They both claim that needs should be satisfied for the employee to be determined but, Herzberg argue that only the higher degrees of the Maslow Hierarchy (e. g. self-actualisation, esteem needs) act as a motivator. The rest of the needs can only just cause dissatisfaction if not described obviously. Thus he stated that satisfaction and dissatisfaction weren't necessary related.

Taylor developed his theory of "scientific management where he made three assumptions in his observation: Man can be involved with maximising money, Folks are regarded as individuals and they can be treated like machines. Taylor possessed analyzed what stimulated people at work that was money. He though employees should be payed for what they proved helpful and pay should be associated to the amount produced Workers who work less would be paid less and Staff who does more than usual would be paid more. The main restriction in Taylor's procedure is that it overlook that all individual is unique Subsequently, money is not an important motivation for everybody. Taylor ignored the actual fact that people help reasons other than financial prize.

Other theories of inspiration have been developed as well that are believed to concentrate on cognitive or process ideas that are how people consider their 'reward'. Expectancy theory distinguishes two factors of value and probability. People value praise according to the level it satisfies their needs of security, community esteem, accomplishment and autonomy. Armstrong also will abide by the fact that Expectancy is the chance that reward depends upon effort where there is more work, the bigger the reward but Marchington and Wilkinson (2006, p. 325) argue that is not really a fixed and there could be other models of expectation at differing times. For that work to be useful to the company, individuals have to have the correct capability and the right understanding with their role. The idea implies that low determination will be product of jobs where there is little worker control. (Marchington and Wilkinson 2006, p. 326)

Two other theories of motivation are significant to think about. Latham and Locke developed goal theory which describes that both performance and inspiration are improved if people have challenging and monitored goals but accepted when there exists feedback on performance. On the other hand, Equity Theory which advocates that folks are more determined when they are cured equitably and demotivated if they're cured inequitable while they deserved more than that.


Reward strategy is a declaration of intent that defines what the organization needs to do in the longer term to build up and put into practice reward policies, procedures and processes that will further the achievements of its business goals and meet the needs of its stakeholders. (Armstrong 2006, p. 643) Pay back is more than payment and benefits. Thus, an incentive strategy must consider many aspects of the workplace to be able to both attract and keep quality value employees doing the correct things in the correct way in order that they the organisation is prosperous.

Reward guidelines provide rules for the implementation of praise strategies and the look and management of reward process. Basically, every employer must obey four major plans (White & Druker 2000): internal alignment, external competitiveness, employee contributions, management of the pay system. Many research and studies on reward strategy has unveiled that folks are difficult and desire is a sophisticated process. What's obvious is the fact that while financial incentive is essential, for many individuals other factors are also, and can become more, important. Rewards are designed to promote behaviour that will contribute right to the achievements of the organisations purpose. Compensation systems should maintain line with the next

HR Strategy

Business Strategy

Organization Culture

The elements of reward management and their interrelationship can be shown in the number 1. 2

Figure 2. 2: Rewards management: elements and interrelationships

Source: Michael Armstrong, 2006, A Handbook of RECRUITING Management Practice, p. 630

The elements of a rewards management system are

Job Evaluation

Job evaluation can be an organized method for defining the relative value or size of jobs within an organisation in order to institute inside relativities. It offers the foundation for designing a fair grade and pay composition, grading careers in the composition, taking care of job and pay relativities and guiding the success of similar purchase work of equivalent worth. However, there's been many criticism of job evaluation by some HR professionals, in the late 1980s and early on 1990s A amounts of major charges were made against it in many organisation. Critics argued that this was not only bureaucratic and rigid, but also time-consuming and unsuitable in the current organisations.

2. 4. 2 Quality and Pay Structure

Pay class is something indicating rate and shows the rate at which a worker gets basic pay. It is also a way to compare ranks, which might have different titles in different services. Pay grades facilitate the career method by giving a flat selection of salary whereas Pay framework refers to the different levels of purchase jobs or sets of jobs by discussing their point as determined by job evaluation as compare to market rate surveys. it offers scope for pay increment in accordance with competence or contribution.

Market Rate Analysis

Market rate reveal the actual salary of some jobs. It is dependant on the makes of demand and supply of the labour market. If an company pays off below the "market rate" then it will probably have trouble in recruiting and retaining suitable staff. To learn the market rate an organisation must do pay surveys. It can help to obtain and keep high quality staff and response to market pressures.

There are several ways in which a company can obtain data on market rates such as Local occupation businesses, Job centres, Job adverts in countrywide newspapers

2. 4. 4 Contingent Pay

Contingent pay measures what do we value and what we are ready to purchase? It refers pay for individual that relates to performance, competence, contribution or service.

Employee Benefits

Benefits can be defined as all the indirect financial repayments an employee receives for continuing his / her employment with the business. Benefits are generally available to all firm's employees and includes such things as time off with pay, health insurance and life insurance coverage, and child care facilities. (Dessler 1997, p503)

Today many organisations respect benefits to be an important approach in incentive management in order to accomplish a competitive advantages in labour markets. Both financial and non-financial benefits play an important function as it pertains to entice, keep and motivate employees. As an addition to basic pay financial benefits may improve an organisations ability to appeal to and keep employees, and non-financial benefits allows organisations to meet the specific needs of the employees.


Allowances may be regarded as additional to base pay. Exemplory case of it might be meal allowances where some employees in any organsation are given a amount of cash for a meal.

Performance Management

Performance Management identifies an activity, which frequently actions are it occurs. It really is a means of obtaining greater results by taking care of performance according to create of designed goals and competency successes. It motivates people to do the right things by specifying their goal.

Non-Financial Rewards

It refers to rewards that are not related to pay but rather satisfaction due to the work itself like recognition, success, responsibility, autonomy, and leadership skill.

Total Remuneration

Total remuneration identifies all the monetary incentive and benefits than a worker received for working in the company.

Total Rewards

A total incentive refers to all the rewards which exist like financial aspects of incentive of basic pay, any bonuses and extra financial benefits with the non-financial benefits at the personal and organisational level. WorldatWork (2006) released a complete rewards construction that proposed to advance the idea and help experts think and implement in new ways. Today, experts mostly use the terms "total rewards, " "total compensation" or "settlement and benefits" to describe the joint strategies. You will find five elements of total rewards, each which includes programs, procedures, elements and measurements that alongside one another define an organization's technique to draw in, motivate and keep employees. These elements are:




Performance and Recognition

Development and Profession Opportunities


Many industries of occupation use remuneration systems which contain direct relationships to specific performance and results. On an individual basis this may be payment by results (PBR) for example bonus, piecework, percentage, work-measured techniques and pre-determined movement time systems, measured day work (MDW), appraisal/performance related pay, market-based pay and competency and skills structured pay.

2. 5. 1 Performance Related Pay

Performance-related pay (PRP) is a way of remuneration that links pay development to an examination of specific performance. Performance pay may be thought as "any remuneration practice where part or all of remuneration is based straight and explicitly on employees' assessed work behaviour and/or measured results" (Shields 2007, p. 348). Performance related pay is generally used where employee performance can't be correctly measured in terms of result produced or sales achieved. Like piece-rates and percentage, performance related pay is a form of incentive pay. Individual performance is evaluated frequently (usually once per season) against agreed targets is recognized as performance appraisal. Then employees are grouped into performance organizations - which determine what the compensation will be. The method of reward consists of a cash extra and/or increase in wage rate or salary.

However performance related pay is not so understandable in the mind of experts. Thorpe and Homan (2000) accounts both for research stating the particular one of the primary features of performance related pay is that it attract and sustain good employee while other research shows that performance-related pay fails to motivate and that the employees generally respect the performance-related pay system as unfair used.

Some drawbacks may be rewarding employees individually will hardly any to encourage teamwork and, such schemes also usually completed only once a year diagnosis and payout, which may weaken any incentive effect. If an employee rated less than reasonable receives no increase whatsoever under an appraisal pay scheme their motivation and morale may be badly affected. Thus, it is important to focus appraisals on the diagnosis of performance, the identification of training needs and the setting up of targets, not on any based mostly pay.

2. 5. 2 Individual Repayment by Results (PBR)

The goal of any PBR structure is to give a direct relationship between pay and efficiency: the better the employee works, the bigger their pay. This immediate hyperlink means that bonuses are stronger than in other schemes. However, in recent years traditional reward, piecework and work-measured plans have decreased, as many employers have transferred to 360-degree feedback, also called 'multi-rater reviews' that is worker development feedback that comes from all over the employee. Nevertheless, repayment by result fails because materials shortages or delays can affect production and Individual skills aren't rewarded and indeed the most skilled may be placed onto more complicated and possibly less worthwhile work.

2. 5. 3 Piecework, Reward Techniques and Commission

Piecework is easy and simple method of PBR - workers are paid at a particular rate for every single 'part' of result. This means the system is simple to use and understand, although open to the shortcoming that it's often at the trouble of quality. Pieceworkers must be paid at least the national least wage.

Incentive bonus techniques is where for instance an extra repayment is paid when creation exceeds the established threshold, or where there's a raise in sales which surpasses given targets. Variable bonuses may also be paid with regards to performances achieved against pre-determined standards so the higher the performance achieved, the higher the amount of bonus produced. However, Armstrong (2006, p. 635) described that bonus payment are related to success of income and or to other financial focuses on.

Time rates are used when employees are payed for the amount of time they spend at the job. The normal form of the time rate is the each week wage or monthly wage. Usually the time rate is fixed in relation to a standard working week (e. g. 40 hours weekly). Time worked above this standard is known as overtime. Overtime is generally paid more than the typical time-rate. It reflects the excess contribution of the employee. The main advantages of time-rate pay are they are appropriate for organisations that desire to employ workers to present general assignments (e. g. financial management, supervision, and maintenance) where worker performance is challenging to evaluate.

Commission is a payment designed to employees predicated on the value of sales achieved. For example, in sales careers, the seller may be paid a share of the selling price or a flat amount of every unit sold (Werther & Davis 1997 p. 411). The rate of commission depends on the selling price and the quantity of effort required to make the deal. Armstrong (2006, p. 638) mentioned that commission provide a direct financial bonuses and get high performing sales personnel.

2. 5. 4 Measured Day Work

Measured day work (MDW) has been developed from both specific PBR and basic wage rate plan. Salary is continuous and will not vary in the small amount of time so long as that the targeted performance is preserved. MDW systems need performance expectations to be located through some framework and undergo adjustments as required. It will involve full dedication of management, workers and trade unions. The pay structure is regularly created by job analysis and with full worker agreement. MDW is now somewhat strange. It suits organisations where a high, secure, expected level of performance is necessary, rather than highest potential specific performance.

2. 5. 5 Market-Based Pay

Market-based pay identifies the salary level available in the market for the same kind of work. Factors that help to consider the market rate are: the abilities that are necessary are extensively accessible, the unemployment level on the whole versus the employment rate and the job's requirement of specialised skills. It really is usually used in conjunction with other satisfying plan like performance appraisal, but may be element of a reward strategy integrating several performance elements.

2. 5. 6 Competency and skills-based pay

Competency and skills-based pay techniques are more common nowadays. There a direct relationship between your attainment, development and effective use of skills and competencies and the individual's pay. Competency and skills-based techniques measure the actual worker is inputting to the job. Competency based systems have become popular because many organisations use competencies in staffing and in performance appraisal for non-pay reason, such as training. There can be an increasing development for pay to be associated to the abilities of the average person. Competency structured pay is used together with an existing individual performance related pay design and will praise them not based on their performance but competencies. Leadership skill or team-working may be examples of competencies. Reward is given for the skills already gained and for the acquirement of new skills that might be helpful in other careers in the same job band. This can promote multi-skilling and increased flexibility.


Group pay plans include those based on the performance of the team, herb or company. Team-based pay gained its importance with the increased interest in teamworking. It reflects the performance of the team. It is not easy to define the team, the goals, and the right compensation. Peer group pressure may also be useful in increasing the performance of the whole team. Company based mostly performance pay strategies derive from the whole company performance. The most common forms of this technique tend to be predicated on overall earnings (profit posting), gainsharing systems. They are effective where communications and employment relationships are good Show incentive plans entail the provision of stocks to employees. In the journal of knowledge management, Milkovich and Wigdor, (1991) said: "Team-based rewards may probably result in a loss of drive because of thoughts of inequity anticipated to a perceived ''free-riding'' of other team members and the use associated with an equality principle when allocating rewards alternatively than an equity-based principle". (Milne 2007, p. 33)

2. 6. 1 Gainsharing

Gainsharing is a pay scheme that links personnel' pay to the success of organisational goals by worthwhile performance above a pre-determined target. This is always led by procedures of efficiency, performance and quality. Gainsharing seeks to build up these indicators by improving communications, staff participation and promoting teamwork. It ought to be element of a complete long-term strategy to maintain a highly effective system through involvement and sharing. It could thus be used as an alternative for reward/piecework schemes, where quality is at times lost to amount. The complete employees and management who have any connection in the product of the organisation should be included in any gainshare plan. Marchington and Wilkinson (2006, p. 336) remarked that such scheme contain the merit that employees perceive their contribution to the full total effort of the organisation and they do not consider themselves as specific models. They further stated that gainsharing plan will have an impact on the role of trade union as their collective bargaining can be less important in identifying wages or union will think employees will be more committed to the organiastion.

2. 6. 2 Earnings Sharing

Profit Posting means rewarding employees a percentage of the business's gains. Singh (2006, p 385) defines "profit sharing usually will involve the perseverance of organization's gains at the end of the fiscal season and the distribution of a share of the gains to workers qualified to share in the wages. " Profit showing helps employees to create part of oganisation success. However, Beardwell and Holden (1997, p. 574) argued that there surely is little data that such strategies have any great result on the performance, desire or attitudes of employees.

2. 6. 3 Talk about Ownership Schemes

Businesses whose stocks are traded over a stock exchange can offer shares to its promising employees. This compensation method can motivate employees to be focused on the business in the long run. There will vary strategies available which companies may use to offer stocks such as

2. 6. 3. 1 Share Incentive Schemes

Under this scheme employer provides employees shares immediately or ask them to buy. This motivates staff to be engaged in the performance of the company. The Share Motivation Plan, recently known as the employee show ownership plan. For instance, In the united kingdom, an organization using an ESOP can provide employees shares worthwhile up to 3, 000 every year.

2. 6. 3. 2 Cost savings Related Share Option Schemes (SAYE)

All employees and directors reap the benefits of this system All scheme users get the to buy a number of shares (normally at a lower price than their current price) after three, five or seven years. In this era of time, employee participants save an expected amount to pay for the shares. When the shares increase in price, employees have a income when they choose the shares. No income tax is paid on any benefits made on these shares.


According to Beardwell and Holden (1997 p. 555) the pay system is influenced by the next

2. 7. 1 Values about the Need for the Job

If employment is considered to be of high value, the salary size of the job will be higher when compared with other jobs.

2. 7. 2 Personal Characteristics

Individual characteristics like era, experience, education, skill influence the salary of your person.

2. 7. 3 Labour Market

The demand and offer of labour affect pay dedication. A business must match its pay recover of its competition' before setting up its own pay structure.

2. 7. 4 The Strategies and Plans of the Company

Each company has it own remuneration coverage and strategy that determine the salary of its employees.

2. 7. 5 Federal government Rules and Regulation

The government usually intervene for the welfare of employees like we've the identical opportunity Act, career right Function 2008, and the work relation Take action 2008. Organisations have to consider each one of these Act before setting a fair payment program.

2. 7. 6 Power of Bargaining Group

Trade union action may impact the pay level. They can bargain for a rise in salary.

2. 7. 7 Cost of Living

Due to high inflation rate, the cost of living tends to increase. Thus, this might have an effect on the salary of worker.

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