It involves developing and implementing strategies and policies to reward employees fairly, equitably and consistently based on their contribution to the organization.
Characteristics of reward strategies
- Reward should be valuable to the recipient.
- Reward must be distributed equitably.
- Reward should be visible.
- Reward levels should be flexible to reflect changes in performance.
- Reward costs should be kept low.
Market compensation rates analysis
- Demand for and supply of labor: when there is low demand and high supply, the wages will be low and vice versa.
- Ability to pay: ability to pay depends on the profits of the organization. The higher the profits, the higher should be the pay.
- Labor unions: well-organized trade unions have more substantial bargaining power and can negotiate for higher wages.
- Cost of living: during inflation, real wages fall, and therefore a wage increase should be considered to compensate for that
- Prevailing wage rates: market wages should be considered in order to retain and attract competent workers.
- Job requirements: basic wages depend primarily on the difficulty and physical and mental effort required in a particular job
- Productivity: the higher the productivity, the higher the pay
- Government regulations: minimum wages play a very important role in determining the wages
- Age and potential: in most cases where there is child labor, the children are pay less than adults
- Educational qualification: the higher the educational qualification, the higher should be the pay.
- Work experience: an employee who is more experienced should get higher wages
- Promotion possibilities: if there are chances of getting a promotion, then low wages can be paid
- Hazard involved in the job: if the risks are high, then the wages will also be high
- Stability of the job: casuals should be paid higher than the permanent employees
- Demand for the product: if the demand for the product is high, wages too should be high.
- Industry’s role in the economy: if it plays a key role, then the wages should be high, e.g., wages in agriculture are low compared to the ones in manufacturing.
- Time wages – under this method, wages are paid on the basis of time spent on the job irrespective of the amount of work done. The unit of time may be a day, week, or month
- Piece wages –under this system, remuneration is based on the amount of work done or output of a worker. One unit of output is considered as one piece, and a specific rate of wage and is paid per piece
- Balance of debt method – this method is a combination of time and piece wage systems. If the wages calculated at the piece rate exceed the time rate, the worker gets the credit. On the other hand, if time wages exceed piece wages, the worker is paid time wage, and the deficit is carried forward as debt to be recon served in the future.
Performance-related pay is a financial reward to employees whose work is considered to have reached a required standard or above average.
Advantages Performance-related pay
- Managers can use a defined framework for setting goals. It should improve individual productivity and performance
- Employees are more likely to focus on what they need to do to improve if this is directly linked to pay
- A good PRP system will reward the best performers
- It is an effective way of dealing with poor performance
- Rewarding high performance can assist in retaining staff
- It provides a direct incentive for employees to achieve defined work targets
- The contribution an employee makes is recognized with a tangible reward
- A healthy performance-based culture can be developed with its introduction
Disadvantages of Performance-related pay
- Employees can be de-motivated if the goals set are too hard to achieve
- Too much of the process relies on the quality of judgment made by a manager.
- It reduces pay equity and can make a company liable to costly equal pay challenges if not operated fairly.
- The performance appraisal process can be affected detrimentally because of the focus on financial reward rather than developmental needs.
- Team spirit and cooperation can be hindered.
- As reward is made for a short-term quantifiable goal, it can be too narrowly focused.
- There is a danger that employees can expect an additional payout year on year. In a low inflation climate, the rewards might not appear to be that great.
Non – financial rewards and benefits
Non-financial incentives are the types of rewards that are not a part of an employee’s pay. They usually don’t cost much but carry a lot of weight. As companies continue to cut employee pay, non-monetary employee incentives are more important than ever.
Benefits of non-financial reward
- Personal and career development opportunities.
- Flexible working options.
- An attractive work environment.
- Supportive line management.
- Recognition of individual achievement.