REWARD MANAGEMENT
QUESTION NUMBER ONE
In a typical organization, employees have this habit of holding on to their paychecks and then comparing them to what their co-employees have received. Comparison between salaries is a common occurrence and often provides a chance for employees to determine if they are given just compensation for effort exerted and performance shown. Equity Theory explains this situation by stipulating that employees judge the equity of their pay by comparing the work, qualification, and pay for jobs similar to theirs.
Equity Theory is an effective basis for executing a reward management system and determining pay differences among employees. Each employee in the organization performs specific and distinct tasks and functions which are mostly interrelated as they are all designed for the purpose of meeting the general organizational goals. Employees know that their inputs to the organization should be rewarded with commensurate compensation. The motivation of employees to perform well is affected if they perceive that they are not being justly rewarded for the amount of effort they have exerted in comparison to their colleagues. In order to maintain the balance between input and compensation, an organization has to clearly define performance measures for each employee and each employee must be encouraged to perform well through effective work behaviors. The employees must be made to understand that differences in skills, specialization and performance would be individually recognized through the right compensation. In connection to this, fresh university graduates who would be soon part of the workforce get out of school with varying degrees and distinct area of specialization. Organizations who would hire these graduates must take into consideration their specific skills in relation to the job position that they would fill. Pay systems in every profession varies as each specialization also varies. This is shown in a Ministry of Manpower study on differences in mean starting salary of University graduates with Law students getting higher pay than Arts graduates. It is reasonable to conclude that Law professionals have a different level of competency than Arts graduates, thus the difference in starting pay. An important key here is for the organization to be able to stick to the specified pay rate for each skill and performance measure in order to ensure that input and compensation maintain their equilibrium.
Every job position inside an organization from entry level employees to managers/higher designations are created with specific descriptions of functions and responsibilities. Each also follows a hierarchy as one employee develops seniority and competency. The job descriptions in each level are related to each other as they are all aimed at accomplishing the organizational goals and objectives. The relationships in the job levels form the organization’s Internal Alignment. Internal alignment helps shape a pay structure that is devised to support the organization strategy and the work flow, be fair to employees and motivate behavior toward organization objectives.
Finally, an organization needs manpower in order to operate and accomplish its objectives. All employees are given due compensation for their contributions to organizational goals. Pay structures are patterned on either the tasks, behaviors and responsibilities of an employee and how they perform on the job (job-based) or on the skills, knowledge and competencies possessed by the employee for the particular job (skill- or person-based). For an organization to succeed, it needs employees who have the ability and skills to contribute to overall organizational performance. Upon hiring, these skilled employees are presented with tasks and responsibilities. The expectations for effective performance are laid down to them. An organization needs these employees to use their skills in order to perform well so that their pay system would be justified as well as organizational goals would be met. One approach to measuring work content and performance is through a Job Analysis, a systematic process of collecting information that identifies and determines in detail the similarities and differences of a particular work in relation to the importance of the duties for that given work. It determines the compensable job factors that help an organization to specify the pay structure appropriate for the job. A job-based pay approach compensates only as much as the work performed is worth regardless of any additional skills the employee may possess. In contrast, a skill/competency-based pay structure recognizes and pays for the highest level of skills or competency the employees acquired regardless of the work performed. The difficulty lies in the fact that one organization cannot totally ignore the employee’s knowledge and skills with regards to his job description. Conversely, it is difficult to define a person’s job-related knowledge or competency in light of the work content. Therefore, in reality, pay structures need to be mixed. Focus can not be given only to the skills and competencies of the employee without considering his/her task performance and vice versa. Real organizational success relies on both job and person and no evidence has proven that job-based pay structures already replaced the skill/competency-based pay structure.
QUESTION NUMBER TWO
Employee motivation and performance are influenced by an effective reward system. Designing a successful employee reward system is important in any organization in order for it to motivate employees to use their skills and abilities to achieve effective performance and to contribute to overall organizational objectives. One motivational theory called Equity Theory explains that employees are motivated to perform well when they perceive that their efforts and the behaviors they show at work are rewarded with just compensation. Employees who perceive that colleagues who execute the same effort are given more compensation would react negatively and performance might be adversely affected. The organization has to address this issue by ensuring that increases in performance are matched by commensurate increases in pay.
As discussed above, employee performance is critical to the reward system. An organization can not reward performance if it does not have a mechanism for measuring it. Employee performance (f) is said to be dependent on three general factors: (1) skills and ability to perform task (S); (2) knowledge of facts, rules, principles, and procedures (K); and (3) motivation to perform (M). An organization needs good-performing employees to succeed. It needs to hire people with skills, ability and competency. These people should be able to maintain good performance during their stay in the organization and the organization has to constantly monitor employee performance to determine those who are highly skilled. After the organization is able to accomplish selection and maintenance of good-performing employees, it can now shift its focus to supplementing the employees’ skills and competencies through additional trainings. Finally, it can work on the employee motivation by encouraging the employees to use both their innate and acquired skills in the performance of their tasks in ways that contribute to organizational performance. Employee performance becomes the basis for the pay that the employee is due to receive.
The pay system is usually seen as an entitlement wherein going to work, performing well and avoidance of being fired would merit payment for the employee. Companies today, however, advance the so-called Pay-for-Performance Plan which is a movement from the entitlement-focused orientation to one that views pay as a varying factor with some measures of individual or organizational performance. It is a system of increased compensation (bonuses, incentives, privileges etc) in exchange for increased performance key to organization success. The purpose is to motivate employees to strive for excellence. This plan takes into consideration efficiency, equity and compliance. The pay-for-performance plan measures performance of assigned work and tasks in line with quality, customer and stakeholder satisfaction, and costs. The performance of the employee should surpass the organization’s standards in order for him or her to receive additional rewards. The organization wants to rewards those employees who do not only accomplish goals and contribute to effective organizational performance but also those who develop commitment to the organization’s mission. Two sample cases of how pay-for-performance plan is adopted are those of NKF and Japanese companies. NKF, as a charity organization, needs professional fund raisers to help in their charity work in order for them to focus on providing services to their targeted beneficiaries. The organization wants to incentivize performance of fund raisers based on funds raised. There is also a concern as to how much their new CEO should receive since the former chief executive resigned. NKF wants to reward its CEO with the amount due the position by considering the size of the job, how the pay package was determined, presence of any salary benchmarking and the measured performance of the chief executive. The organization is currently considering basing the CEO’s pay to solutions employed by well-known charities like Oxfam and also presenting the salary as a ratio of the charity organization’s total expenses. Furthermore, a survey conducted by the Japan Federation of Employers’ Associations in 1998 revealed that about 20 percent of Japan’s companies had adopted a performance-based pay system and other 30 percent are considering of adopting it. The companies wish to adopt the pay for performance system in an effort to cut costs and increase productivity. Merit-based pay enables companies to reward workers who produce more and innovate, thus lowering labor costs as a percentage of revenue. Generally, compensation and rewards must help organizations attract and retain skilled employees; encourage employees to build new skills; and gradually foster commitment to the organization.
QUESTION NUMBER THREE
Every organization wishes to retain good performing employees by recognizing their performance and paying them in a manner commensurate to their contributions to organizational performance. Jane in the case has been with the manufacturing firm for six years as Assistant Supervisor. Her length of stay illustrates the commitment she has established with the company and her position connotes seniority. However, her pursuit of greater responsibility made her apply for a job of a similar nature with a foreign multinational firm. This decision made her realize that her present compensation is paid more at the new company. The Human Resource Manager must orient Jane on the internal alignment and pay model concepts. She should know that her present position in the manufacturing company is only one of the many positions that comprise the organization. All the jobs in the company are interrelated since the company has its own unique set of goals and objectives to accomplish for it to suffice the needs of customers as well as its stakeholders. The employees are given due compensation based on Efficiency (how well they do on the job through quality performance, effective customer service, delighting stockholders and controlling labors costs); Fairness (prevailing model of measuring employee contributions and needs inside the organization); and Compliance (existing federal and state policies and law on compensation). Jane should be made aware that although she is applying for a similar position in a multinational company, the pay would not guarantee to be the same. The multinational company has broader context as it operates in different countries. Therefore, job positions in the company would be of greater extent as various factors are considered in their design like cultures of countries where the company has offices and market preferences in those countries. The customer base is also wider as it extends across national borders. Thus, customer service and operational costs are more extensive and complicated. Furthermore, multi-national companies operate in various countries with varying state labor laws and policies. The company has to pattern its pay structure on the model dictated by the law in every specific country of operation. The broader scope of responsibility and the international labor laws that the multinational company has to face merit higher compensation compared to the local operation of Jane’s present organization. These realities must be explained to Jane in order to address her concern that she is being underpaid in her present company.
Furthermore, Jane should know that every organization has its external competitive policy. Organizations do not exist on their own rather it is a part of a larger business environment where competitors are present. The organization has to make sure that it is paying its employees based on how they are able to accomplish designated tasks, how they supplement the organizational performance and how competitors pay employees for the same job designation. External competitiveness policy decisions include how much employees are being paid in comparison to how much competitors pay and what forms of base pays, incentives, and bonuses would complement the compensation objectives. Some employers may set their pay levels higher than their competitors, hoping to attract the best applicants. Others tie their base pays to that of their competitors but has more room for incentives based on performance. Different employers deliberately choose to pay above or below competitors’ pay levels which makes a single “going rate” in the labor market for the same job nonexistent. The key is for external competitiveness to ensure that employees are being paid based on the extent of their responsibility and how good their performance is, to show that the company recognizes and values its manpower. An organization’s external competitive policy should be strategic enough to select and retain the best employees and to control labor costs so that the organization’s prices of products and services can remain competitive.
QUESTION NUMBER FOUR
The notion that employee performance is a critical component of reward system makes Performance Appraisals and Performance Management of paramount importance to compensation decisions. After all, employees work to elicit good performance worthy of a good pay. Performance Appraisal systems are methods of income justification to determine if the salary or compensation received by an employee is backed up by good performance in line with the company’s standards. Performance Management, on the other hand, is the systematic process by which an agency involves its employees in improving organizational effectiveness in the accomplishment of agency mission and goals ( 2006). Both systems aim to monitor and evaluate performance, rate it and then reward good performance. However, companies must be aware of the nine errors commonly encountered in the performance appraisal process. First is the halo error wherein the appraiser gives favorable ratings to all job duties based on an overall, general impression of the ratee’s one job function. The second is horn error which is the opposite of halo when a rater gives negative ratings across all performance dimensions based on an unfavorable performance in one dimension. Third, first impression error occurs when a negative or positive opinion on the ratee developed by the rater early on the rating period affects the evaluation of future performance. Fourth is recency error wherein opinion on employee performance at the end of the review period becomes central in the employee’s ratings for the entire period. Fifth is leniency error wherein a rater sees everything good on the rater and gives ratings higher than what is deserved. Sixth is severity error which focuses on everything bad about the rater and gives ratings lower than what is deserved. Seventh is central tendency error which is the tendency of the rater to assign average ratings for all dimensions. Eighth, clone error happens when the rater gives better ratings to employees who he/she sees as having the same behaviors, attitudes and personality as his/hers. The last is spillover error which is a continuing unfavorable rating to an employee for performance errors in previous rating periods. In order to correct these errors and maintain the central purpose of pay system i.e. to reward performance based on evaluation and appraisal, an organization needs three things. First, it needs to have a concise definition of performance which may include the set of competencies that employees possess or acquire. Merit increases may be linked to employee’s ability and willingness to demonstrate key competencies. Second, there is a need for a continuum of performance measure that describes different levels from low to high. Lastly, the organization has to determine the amount of merit increase to be given to each level of performance. Organizations must clearly set specific measure of performance and each performance measure must be given specific compensation amount. When the reward and compensation system is seen as just and appreciative of good performance, employees would deliver more effectiveness and commitment to organizational objectives.
Credit:ivythesis.typepad.com
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