Reward Management (RM) has been defined as the distribution of monetary and non-monetary rewards to employees in an effort to align the interests of the employees, the organisation, and its shareholders (ONeil, 1998). In addition ONeil (1998) also suggests that a RM system can serve the purpose of attracting prospective job applicants, retaining valuable employees, motivating employees, ensuring legal requirements relating to direct and indirect rewards are not violated, assisting the company in achieving human resource and business objectives, and ultimately assisting the organisation in obtaining a competitive advantage.
Various conflicts in the RM system can affect the benefits that can be obtained. It has been argued that performance management systems only provide superficial motivations and have little effect on underlying behaviours and attitudes. Although the RM system can have some limitations, there is strong argument for the benefits, and logic also deems it as a credible strategy to assist in improving employee performance.
The implementation and application of RM within the subject organisation has provided many opportunities for increased performance. Limitations and inequities have been recognised in the system employed, mainly due to the lack of assessment and changes to the system in order to align it with organisational objectives.
Reward Management theory
Reward management involves defining, facilitating, and encouraging performance. The positive effects a successful RM system can provide to employee performance and in turn organisational success and competitive advantage are clear. This appeal has driven many organisations to take up RM as part of their performance management stratagem.
The RM system falls into the broader process of the performance management model within the organisation, as stated by Clark (as cited in Human Resource Management, 2000). This involves the continual process of setting performance objectives, measuring outcomes, providing feedback on the results, providing rewards which are linked to desired outcomes and finally evaluating and making amendments to objectives and activities of the system.
When developing an effective RM procedure as part of organisational strategy many considerations must be addressed. ONeil (1998) suggests the following key methods of linking pay to performance; ascertain the value of the job, setting the pay structure of the job as well as grouping jobs into various levels and setting individual wages, creating a link with performance, and the communication and administration of the system. Similarly, Cascio (1991) suggests that the combination of the following five requirements along with a performance based pay system can also have a very significant impact on performance. The first of these is skill variety, where a wide variety of tasks or procedures is available to the employee. Next is task identity, where the employee can clearly identify the output of a task as a product of their efforts. This is followed by task significance, where the work is recognised as important and meaningful. After this comes autonomy, where the employees have a major say in work planning and execution. The final requirement is feedback, where employees receive constructive advice or criticism on their performance.
The rewards offered can be extrinsic such as wages, incentives and bonuses, or intrinsic such as job satisfaction, an internal feeling of worth and a sense of well being on the job.
ONeil (1998) suggests six minimal criteria for the design of a performance based pay system. The first of these criteria is that the reward system should be self-funding, that is, the performance increases should as a minimum offset the cost of the rewards provided. The second criterion is that the distribution of the rewards must be consistent, fair and justifiable. In addition reward plans must be transparent and clearly communicated. The third criterion is that the draft system should be tested amongst various scenarios to determine the impact on the employees and the business. The fourth criterion is to ensure that the system is integrated with all other HRM functions, and that the employees can control and influence the performance outcomes. Communication of the system is the fifth criterion, the system, its objectives and the rewards must be effectively communicated to all participants. The final criterion is that the system must be evaluated on a regular basis to ensure the objectives and returns are being achieved. In addition RM has strong links with the following Human Resource Management (HRM) functions; job analysis, recruitment, performance assessment and union management relations.
As stated by Lawler (2002) individual based pay should be used to reward persons for their skills, knowledge and competencies relative to their external market value. Multiple pay for performance approaches should be used as rewards. Reward systems should be tailored to fit the characteristics and requirements of the individuals that an organisation wishes to attract and retain.
Reward Management in the subject organisation
The subject organisation is a national company which was formed in 1976 and has thirteen branches throughout Australia. The core business activities are the importation, sales, hire, and spare parts backup of various types materials handling and mobile equipment throughout Australia. In addition the company is also a national fleet management service provider. The company employs approximately 179 blue-collar workers of which 110 were in field service and the remaining 69 are workshop based, 57 sales and management staff, 64 administration staff, and 4 senior managers. In March 1998, the organisation was acquired by a foreign multinational, which possesses an extensive network of materials handling companies globally. Following the acquisition there has been constant changes to the structure of the organisation and the direction of the business.
The organisation has implemented and maintained a reward management system in which there are three independent schemes; one for the blue-collar workers, a second for sales and spare parts personnel and the final system for senior management. There is no scheme available to reward middle management and administration staff. The system has been operating for over ten years with little changes to its structure and with varying degrees of success. Only the first two systems (see appendix) will be reviewed as the details of the senior management rewards scheme were not readily available.
The organisation recently surveyed all employees covered by reward schemes. The survey revealed that although many of the employees were dissatisfied with the reward schemes in place, they still preferred them in some form rather than having no incentive based pay scheme. In addition the individual reward scheme was favoured over a wide ranging bonus scheme which would reward all employees when company goals and performance objectives were achieved.
Blue-collar rewards scheme
The spotters fee rewards the employee for providing leads from which a major overhaul (over $2000.00 revenue), equipment sale, or hire / service contract has been won. The reward offered is a taxable $100.00 cash bonus paid via the payroll system.
This reward is very effective in generating new and increased business, however it is also subjected to much criticism. Kohns reservations (as cited in Human Resource Management In Australia, 1998) on the effects of rewards on long term behaviour are confirmed by the some of the recipients of this reward. Some of the longer-term employees have recognised inadequacies in the rewards system and are only exhibiting behaviour that provides them with the greatest rewards for minimal effort. Due to the fixed dollar value, the reward stays the same regardless of the profit margin of the overhaul, sale or hire. This results in some workers taking advantage of this and obtaining numerous low value repairs and obtaining multiple rewards. Other more conscientious workers spend more time and effort to obtain fewer repairs of higher profit margin which are of more benefit to the company, and are subsequently rewarded less. Additionally, although this reward is available to all blue-collar workers, only the field service workers had any chance of obtaining the reward as they have direct contact with the customers. The workshop based workers have little if any contact with customers and as such have no real chance of providing the behaviour which would lead to the reward.
There are several remedies required in this case. Firstly the scheme must be amended to be more equitable, In addition the actions required to achieve the reward should be made achievable. As stated by ONeil (1998) one the obstacles to the effectiveness of performance based pay is the inherent difficulty on the choice of rewards to be offered to the participants to ensure that they are considered achievable and valuable enough to motivate increased performance. Possible changes could have included, compensating workshop workers by introducing an addition to the scheme specifically for them. This addition would seek to reward them for carrying out major overhauls within budgeted time and cost targets. The final remedy should be to link the value of the reward paid to the gross profit instead of revenue.
Employee introduction fee
This reward was introducing to aid the recruitment process by motivating existing employees into providing referrals of prospective employees to the company, who in turn are employed and placed on permanent employment. The reward offered is a taxable $500.00 cash bonus paid via the payroll system.
This reward has been very successful in assisting the organisation to source additional trades qualified workers and does not appear to have any limitations.
Years of service allowance
The years of service allowance was initially introduced to reduce staff turnover and reward years of service. The reward offered is a taxable $5.00 cash bonus per week for the first year and a further $2.50 per week for all additional years, paid via the payroll system.
In principle this is a credible reward, however the value of the reward has not changed in over ten years and is perceived as insignificant and worthless. The dollar value of this reward should be reviewed and amended if it was expected to have any real impact on retaining staff.
Enterprise bargaining agreement (EBA)
During the last seven years, in an effort to obtain maximised productivity gains, the company has negotiated and implemented three EBAs per branch. The EBAs were tailored to the requirements of the respective branches. Wage increases in the order of three to four percent per annum were awarded in return for the agreed productivity increases. Due to the difficulties encountered whilst negotiating previous EBAs, the final EBA negotiated offered the employees a seven percent wage increase over two years without the employees providing any additional productivity gains.
The EBAs negotiated have provided significant productivity increases to the company. Unfortunately due to the fact that the employees had to trade numerous productivity improvements for the wage increases, the employees are perceiving that the company is trying to erode their conditions and entitlements. The productivity increases have therefore come a very high price due to some of the problems that have been encountered during previous negotiations, such as strikes, overtime banns, go slows and being black banned from various customer sites. The current EBAs have ceased to be productivity and performance orientated, and have been reduced to a two or three year contract by which annual wage increases are paid. There does not seem to be a long term solution to this problem, however the company is considering Australian Workplace Agreements in some branches. This option would not be viable in all branches due to the nature of some of the union bodies that represent the employees in some of the branches.
National competency standards
The national competency standards were implemented following numerous requests from the service department personnel to be financially rewarded based on their individual qualifications and abilities rather than their position. During the evaluation process the personnel were assessed against the standards and two requirements had to exist before the employees were awarded any unit. Firstly the employee had to hold a pre determined qualification or skill, and secondly the employee had to be able to apply the skill to the minimum requirement of the unit being assessed. When various units in addition to base units had been awarded, the employee progresses to the next classification and base wage. Each increase in classification was rewarded by a ten-percent wage increase.
Most of the service personnel who were not directly involved in the negotiation and implementation process did not have a clear understanding of the system and its application. Due to this lack of understanding by the service personnel, a lot of mistrust was created when the employees pre-conceived expectations were not met. This was compounded when numerous long serving staff with minimal qualifications but with extensive experience and knowledge were awarded lower base wages than younger and shorter serving workers with numerous qualifications and with standard ability and experience. Recognising these problems the organisation has offered to send the more experienced employees back to TAFE to obtain recognition of prior learning, this would in turn enable them to be awarded the additional units. Unfortunately many of the older service department employees have refused to go back to TAFE to justify the skills and abilities that they held.
The national competency standards have not been clearly communicated to the workforce, nor have they been effectively implemented. Most of the problems encountered with this reward could have been reduced or even eliminated if the reward was clearly communicated to all of the workers that were effected by it. The current remedy for this reward could involve an on the job skills assessment for all the older service department employees by an independent third party. If the assessment is successful this would validate their existing skills and qualify them for a higher classification. If however the assessment does not validate their skills it could have a negative impact on the morale of the employees being assessed and would further aggravate the current tension.
Sales and spare parts rewards system Commission scheme
The companys commission scheme plays an essential role in motivating and rewarding the multi-territory sales force. The scheme is quota-based compensation, meaning salary plus commission proportional to sales beyond the quota. It also has the advantage of being fairly simple. The commission scheme also rewards spare parts personnel who achieve gross profit results in excess of budget.
One of the main problems with the commission scheme relating to sales is that it can be inequitable. Various sales people around the country covering different territories are paid base salaries depending on the cost of living in their territory. However all the sales people are given the same commission rates and quotas regardless of the economic climate and sales levels of their respective territories. Another shortcoming is that many of the opportunities for the sales person to achieve high commissions by selling products or services with very high profit margins are reduced by the capping of various commissions and also by splitting the commissions over several years. This has led to some sales personnel seeking out numerous low margin sales and neglecting the more difficult sales with very high profit margins. The commission available to spare parts personnel is accepted as fair and achievable.
Possible remedies in this case would be to provide more achievable quotas based on territory, economic conditions and historical sales data. In addition the capping should be removed for a trial period and the results assessed against objectives and budgetary constraints.
Additional gaps and conflicts
Middle management is not covered by any reward scheme. Salary increases are on occasion based on the outcomes of performance appraisals, however a positive performance appraisal does not necessarily constitute a salary review. Since the sale of the business in 1998 the organisation has become flatter and leaner, this has given the middle managers larger workloads and more responsibility than in the past. During the current economic climate it has become increasingly difficult for the middle managers to achieve all of the budgeted targets which have been set, regardless of how hard they work. All the effort and unpaid time being worked in order to strive towards the targets is going unrewarded. This is having disastrous effects on the morale and turnover of middle management. As stated by Jordan and Morriss (1997), effort must be rewarded as well as performance. This embodies the concept of not only how well a manager performs, but also the difficulty of their task and the effort put into it. Middle management plays a significant role in the operation and profitability of the organisation and as such should be included in the rewards scheme. Possible options could include share options and profit share. In addition there should be some form of recognition for above average effort regardless of wether targets have been achieved or not. This could most likely be in the form of intrinsic rewards.
Due to the nature of the work carried out by the administration staff and the difficulties encountered in setting and measuring performance targets, they are also excluded from any reward schemes. All administration staff should be taken into consideration and included in an amended reward system. In order to keep the system simple, performance targets and measurement could be based on error rates.
Kohn (as cited in Human Resource Management In Australia, 1998) suggests that extrinsic rewards only provide short-term compliance and do not influence long term behaviour. This is a very valid point, however long term behaviour should not necessarily be linked to rewards alone. Long-term behaviour should be the product of effective communication, mutual respect and the alignment of goals between the employee and their employer. Kohn (1998) also suggests that linking performance to the individual can undermine teamwork. In contrast Wah (2000) states that compared with other companies, the best-performing organisations devise their pay scheme so that the high-performing employees get an excessively larger portion of the merit budget and are provided with variable rewards based on their performance ratings. Similarly when considering the effects of rewards on job satisfaction and performance Bailey et al (Managing Organisational Behaviour in Australia, 1987) refer to laboratory experiments which found greater job satisfaction was reported by employees who receive higher rewards for performance. Furthermore rewarding employees in proportion to their current performance is positively linked to future job performance. These comments build a very strong case for the implementation of performance based rewards.
In recent years the subject organisation has been constantly changing to keep abreast of competitors and remain profitable under adverse economic and market conditions. As the organisation has changed, their policies and practices, including all reward schemes should have been regularly evaluated and amended accordingly to ensure all organisational objectives were being met. Most of the problems encountered in the past could have been minimised or eliminated if the reward scheme had the following attributes; it rewarded all employees, was developed with the input of the employees, was considered valuable by the employees, and communication was open, honest and effective. Furthermore the RM scheme would be most successful if there was a combination of extrinsic and intrinsic rewards and employees had a choice of rewards available.
Several moral factors have been recognised. Firstly is the assumption that rewards systems are using employees as a means and not as ends in themselves. Although this is a valid point which is at the heart of effective HRM practices, if taken to the extreme it could also be argued that paying people to work is also using the employee a means and not an and in themselves, thus unethical. The implications of this perception can also be applied to the traditional master servant relationship, and the inequity of social and economic classes. A common sense approach must be adopted which logically assumes that under the right conditions people will perform better if they are provided with rewards that they perceive as valuable. The second moral factor is the effects on the individual of withholding the reward, especially if they have put in an extraordinary effort to achieve the target but have fallen short. It such cases withholding the reward could be perceived as punishment for not achieving and could have destructive consequences on the individuals morale and motivation.
The bottom line for the organisation is strictly monetary. It includes factors such as the net operating profit, cost restraints or reward scheme pay off. Unfortunately HR issues and people problems are not generally classed as bottom line issues unless they involve strikes or other forms of industrial action.
There has been much discussion of RM within organisations. Kohns argument (as cited in Human Resource Management In Australia, 1998) on the shortfalls and limitations of RM appear to be outnumbered by argument in favour of the use of rewards as part of a performance management system which is integrated with organisational objectives.
Discussions in favour of financial rewards have been numerous. Collins, Stoner & Yetton (Management In Australia, 1985, p546) state The reward system of the organisation guides the actions that generally have the greatest impact on the motivation and performance of individual employees. Similarly, Wah (2000) argues that companies which treat their high-performing employees significantly better than those that don’t are the best-performing companies around and they reside in the upper quartile of shareholder returns. In addition Lawler (as cited in, Readings In Contemporary Employment Relations, 1998) states that if all the psychological rewards are removed employees will grudgingly remain at work, however if all the financial rewards are removed they would most likely leave.
As most of the literature suggests, employee performance is a vital element in organisational survival and success. The systems developed and applied to facilitate the management of employee performance are therefore major contributors to the overall success of performance management. To remain effective the RM process should not be isolated from other HRM functions, in addition the process must be dynamic and constantly aligned to organisational strategy. In these instances long term benefits for all stakeholders can be realised.