The main areas in which reward policies need to be formulated are:
- The relationship between rewards and business performances
- Flexibility
- The level of the rewards
- Market rates
- Equity
- Performance related rewards
- Pay structures
- Delegation and control
- Balancing financial and non financial rewards
- Reward mix and total remuneration
- Communicating the benefits
A reward policy needs to be formulated on how the pay levels should respond to fluctuations in the business performances. The business success can be shared with the employees through a profit sharing scheme or bonus payments which do not have a cost element in the future years.
- Flexibility
Reward policies should allow for flexibility in operating the reward system, in response to business fluctuations and the rapidly changing pressures to which the organisation and its employees are likely to be subjected to; the demand for different type of skills and variations in the market rates for the different categories of staff.
Flexibility can be achieved by:
- Increasing the proportion of variable performance related pay to the total pay package.
- Avoiding the use of rigid and hierarchical pay structures by such means as pay curves in where progression is dependent on competence and performance.
- Not having a mechanistic system of relating rewards to performance.
- Relating the pay rewards to merit and increases in the market rates thus avoiding a separate and explicit link with increases in the cost of living and giving scope to reward the good performers more and the poor performers less.
- Allowing a greater choice in the range of benefits employees receive.
- Recognizing that the organisation must respond quickly by the problems created by needs shortages, market rate pressures and flexing the pay arrangements accordingly.
The policy on the reward levels should determine whether or not the company needs to be a high payer, sometimes called its pay posture, the policy on where rates of pay and the fringe benefits should lie in relation to what comparable companies offer for similar jobs.
This policy links to the one on market rates. Fast moving profitable companies want top people and are prepared to offer top pay in order to stay a head of the competition. Other organisations are content paying closer to the median to keep pace with the market rates.
- Performance related rewards.
The extent to which performance governs rewards and how the two are linked together depends on the core values of the organisation. Thriving and growing companies may encourage an entrepreneurial spirit.
Entrepreneurship within an organisation should flourish if people believe that potential rewards justify the efforts and the risks that have to be faced into achieving them. They must expect that the value of their contributions will be rewarded appropriately.
- Market rates policy
Market rate pressures cannot be ignored completely when designing a salary structure. It might be decided that the salaries of certain jobs have to keep pace with the market rates. The salaries of other jobs will primarily be fixed by internal comparisons.
The main factor to consider in assessing internal factors influencing salaries is the degree to which theirs open market competition for staff. One has to consider that the company is operating in the local, national and international market. Therefore, market rate policies have to be flexible and continuously under review to suit the needs of the organisation and changes in the labour market.
- Equity
It is the perceived sense that pay policies are just and fair, because the pay matches individual contribution capacity and level of work carried out.
Absolute pay equity is an unattainable ideal. It is therefore difficult to reconcile the two aims of being equitable and competitive at the same time. To be able to attract the right quality staff, market forces have to be allowed to prevail.
- Pay structures
Some companies operate without pay structures quite successfully, but there are dangers: salaries will be dealt with inconsistently and inequitably unless there is strict central control.
By its name, a salary structure implies some form of rigidity. However, a structure can and should be no more than a framework within which salary policies are implemented.
- Control
It can be partly determined by the choice of the salary progression system and salary structure, but it is also the amount of flexibility that is allowed to managers to fix and change the salaries of their staff. This depends on the management style of the company i.e. the degree to which decisions are centralised and autocratic or decentralised and independent.
Some degree of control is necessary, but the aim is to delegate control to managers (line managers). The reward management procedures must therefore balance the extremes of rigidity and anarchy.
- Balancing financial and non financial rewards
Rewards have to be a balance between the mix of intrinsic and extrinsic rewards. Neither should be neglected since;
Financial rewards attract and retain staff and achieve short-term motivation while the non financial rewards achieve longer-term motivation and commitment.
- Total remuneration
The best mix of the various elements of remuneration (basic salary, profit sharing pensions, life insurance, cars and other fringe benefits) may vary at different levels.
For the junior staff, concentrate on the salary, with progression based on merit; life insurance provisions; subsidized canteens or lunch vouchers.
For senior management level, the aim is to concentrate on paying a competitive salary at a rate high enough to allow the individual to purchase the benefits they need. This is preferable than imposing benefits on individuals who do not want them.
- Communicating the benefits
Communication of whatever is considered to be reward e.g. money, the fairness of the system should be communicated.
Pay systems can de-motivate more than they motivate because they always seem to be unfair.
Therefore, it is important to motivate people by telling them what they have is worth having; tell them what they expect (expectancy theory) It is what people expect which motivates them more effectively and not what they already have. This begins with the recruitment process and ends with the manner in which retirement and severance are handled.
If they have been rewarded for doing well, that has to be communicated to them. This is true if they are going to be rewarded even better in the future.
