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Compensation, Recognition and Rewards in relation to employee performance

According to Gerhart, B. & Milkovich, G. T. (1992) Employee compensation: Research and

practice, they indicated that one of the strongest determinants of employee attitudes, motivation
and behaviours is compensation, they noted that pay in its various forms, affects employee–
organization relationships.
David A Decenzo and Stephen P. Robbin (2008) Personnel / Human Resource Management 3rd
edition Prentice Hall of India New Delhi (pp 425), says employees exchange work for rewards.
Probably the most important probably the most important reward, and certainly the most obvious
is money.
Before compensating an employee, the human resource department should design pay structures
that will attract, motivate and retain competent employees, and that will be perceived as fair by
the employees. Fair meaning a wage or salary that is adequate for the demands of the job.

Compensation of employees is affected by a number of issues. These are;

1. Government policies, in this case the employment act specifically states the minimum
wage an organization can pay their employees. In Kenya we have the employment act.
2. Compensation is also determined by the workers union which has to agree with the
organization on the salaries, wages and allowances etc of their members.
3. Compensation of the employees is also determined by the top management philosophy on
how much it should pay their employees, so as to be the employer of choice in order to
attract and retain the best employees.
4. Etc

Incentive Compensation Plans

David A Decenzo and Stephen P. Robbin (2008) have indicated that, in addition to the basic
wage structure, organizations that are sincerely committed to developing a compensation system
that is designed around performance will want to consider the use of incentive pay, in addition to
the basic wage / salary. Hence incentives can be paid based on individual, group, or organization
wide performance.
1. Individual Incentives;
This are incentive pay offs for individual performance. For example it can be based on
how much an individual has generated against the set targets and the tasks are
2. Group Incentives;
As described on the individual incentives as compensations, the same can be used on a
group basis. That is, a team of five individuals can be paid for their combined
performance. They make the most sense where employees’ tasks are inter – dependent
and thus require cooperation.
3. Organizational wide incentive
The goal of organization wide incentive is to direct the effort of all employees towards
achieving overall organizational effectiveness. This type of incentive produces rewards
for all employees based on organizational cost reduction or profit sharing.

Rewards can be termed as the process of acknowledging employees according to their value to
the organization on desired out comes. For example in achieving their targets and even
surpassing them within the given period. This can be either financial or non financial. According
to David A Decenzo and Stephen P. Robbin (2008) Personnel/ Human Resource Management
3rd edition Prentice Hall of India New Delhi (pp 396 – 397) indicate that employees expect good
job performance to be rewarded by an organization, and they further seek rewards that will
satisfy their individual goals or needs.

Therefore, organizations use rewards to motivate employees. They rely on rewards to motivate
job candidates to join their organization and as well rely on rewards to get to come to work and
perform effectively once they are hired.

David A Decenzo and Stephen P. Robbin (2008) Personnel / Human Resource Management 3rd
edition Prentice Hall of India New Delhi pp 411 assert that performance is concerned with
results. Performance measurement asks the question, did you as an employee get the job done?
To reward people in the organization, therefore requires some agreed-upon criterion for defining
The ways in which employees are rewarded can make a very big impact on the effectiveness of
an organization and its relationship to the employees. For example just like a child being given a
black forest cake after arranging their bedroom, cleaning the house etc, rewards and recognition
can be powerful tools for employee motivation and performance improvement. As indicated the
rewards can either be financial or non financial, such as cash bonuses and fully paid trips,
sponsorship to further their education, stock awards, and a wide variety of company-paid perks,
like car allowances, paid parking, and gift certificates.

Other types of rewards and recognition may be less tangible, but still very effective. These non-
financial rewards include formal and informal acknowledgement, assignment of more enjoyable
job duties, opportunities for training, and an increased role in decision-making, e.g rewarding an
employee by giving her / him an acting capacity when their immediate boss are away. These non
financial rewards are very meaningful to employees and so, very motivating for performance

According to Michael Armstrong (2009) Armstrong’s Handbook of Human Resource

Management Practice 11th Ed, Kogan Page, London, pp 736 – 737, he gives the aims of reward
• Reward people to for the value they create
• Reward the right things to convey the right message about what is important in terms of
behaviours and out comes
• Develop a performance culture.
• Help to attract and retain the high quality people the organization needs
• Develop a positive employment relationship and psychological contract.
• Operate fairly – employees feel they are treated justly in accordance with what is due to
them because of their value to the organization.
• Operate transparently – people understand how reward processes operate and how they
are affected.
• Etc
Therefore Michael Armstrong (2009) finds this as the benefits of rewarding employees
 The different types of rewards will make a deeper and longer - lasting impact on the
motivation and commitment of people.
 It enhances the employment relationship which is created by the reward system therefore
appealing to employee needs.
 It makes the organization an employer of choice and a great place to work since it
differentiates it self in the recruitment market by delivering a positive psychological


There are a number of different types of reward and incentive programs aimed at both individual
and team performance.

In some organization, human resource have come up with special rewards designated for senior
managers as explained by David A Decenzo and Stephen P. Robbin (2008) Personnel/ Human
Resource Management 3rd edition Prentice Hall of India New Delhi pp 442. They say that the
logic of offering these perks from the organization’s perspective is to attract and keep good
managers and to motivate them to work hard in the organizations interest. A part from the
standard rewards offered to employees, some benefits are reserved for privileged executives.
They range from an annual physical examination in best hospitals to interest free loans, payment
of life insurance premiums, club membership, company vehicle, consulting contracts after
retirement, etc.

For the rest of employees some organizations have come up with insurance facilities, which is a
popular benefit offered to employees. This can be life, health and accident. Because of
skyrocketing cost of medical, most companies prefer health / medical covers which are necessity
for workers and their families. This is done with the idea of increasing the performance of
employees. This on its own is a motivation factor that makes such an organization an employee
of choice.

Organizations should also come up with social and recreational events that accommodate for
employees, their spouses, or the entire families. These particular events provide employees to
develop cohesiveness among themselves, as well as commitment and loyality to the organization.
Organizations can also provide counseling services to ensure that employees don’t have
underling issues that hinder them from being productive.


Human Resource management should encourage the use of bonus programs. This is the process
of rewarding an individual accomplishment. Though it is more emphasized in sales organizations
to encourage sales people to generate additional business or higher profits, this can also be
applied in recognizing group accomplishments. Bonuses should be encouraged to both
individuals as well as group performance either departmental, groups etc.

Bonus programs should be structured in a way that they are not considered as entitlements or
regular merit pay, rather than a reward for outstanding work.

Therefore bonuses are legitimate means of rewarding outstanding performance, and they argue
that such compensation can actually be a powerful tool to encourage future top-level efforts.

Profit Sharing

This refers to cases where funds to be disbursed to employees by taking a stated percentage of a
company's profits. The amount given to an employee is usually equal to a percentage of the
employee's salary and is disbursed after a business closes its books for the year. The benefits can
be provided either in actual cash or via contributions to employee's 401(k) plans. A benefit for a
company offering this type of reward is that it can keep fixed costs low.

The idea behind profit sharing is to reward employees for their contributions to a company's
achieved profit goal. It encourages employees to stay put because it is usually structured to
reward employees who stay with the company; most profit sharing programs require an
employee to be vested in the program over a number of years before receiving any money.
Unless well managed, profit sharing may not properly motivate individuals if all receive the
share anyway. A team spirit (everyone pulling together to achieve that profit) can counter this—
especially if it arises from the employees and is not just management propaganda.
Stock Options

David A Decenzo and Stephen P. Robbin (2008) pp 440 – 1, state that stock options allow
employees to purchase a specific amount of the company’s stock, depending with their seniority
at a fixed price. They are generally authorized by a company's board of directors and approved
by its shareholders. The assumption being that good management will increase the company’s
profitability and, therefore the price of the stock. Hence stock options are viewed as performance
based incentives.

The number of options a company can award to employees is usually equal to a certain
percentage of the company's shares outstanding.

Like profit sharing plans, stock options usually reward employees for sticking around, serving as
a long-term motivator. Once an employee has been with a company for a certain period of time
(usually around four years), he or she is fully vested in the program. If the employee leaves the
company prior to being fully vested, those options are canceled. After an employee becomes
fully vested in the program, he or she can purchase from the company an allotted number of
shares at the strike price (or the fixed price originally agreed to). This purchase is known as
"exercising" stock options. After purchasing the stock, the employee can either retain it or sell it
on the open market with the difference in strike price and market price being the employee's gain
in the value of the shares.


Recognition has a timing element: it must occur so that the performance recognized is still fresh
in the mind. If high performance continues, recognition should be frequent but cautiously timed
so that it doesn't become automatic. This ensures a focus on recognizing the efforts of
employees. Furthermore, like rewards, the method of recognition needs to be appropriate for the
achievement. This also ensures that those actions which go farthest in supporting corporate goals
receive the most attention. However, an entrepreneur should remain flexible in the methods of
recognition, as different employees are motivated by different forms of recognition. Finally,
employees need to clearly understand the behavior or action being recognized. Recognition can
take a variety of forms. Structured programs can include regular recognition events such as
banquets or breakfasts, employee of the month or year recognition, an annual report or yearbook
which features the accomplishments of employees, and department or company recognition
boards. Informal or spontaneous recognition can take the form of privileges such as working at
home, starting late/leaving early, or long lunch breaks. A job well done can also be recognized
by providing additional support or empowering the employee in ways such as greater choice of
assignments, increased authority, or naming the employee as an internal consultant to other staff.
Symbolic recognition such as plaques or coffee mugs with inscriptions can also be effective,
provided they reflect sincere appreciation for hard work.


Armstrong (2009) Armstrong’s Handbook of Human Resource Management Practice 11th Ed,
Kogan Page, London

David A Decenzo and Stephen P. Robbin (2008) Personnel / Human Resource Management 3rd
edition Prentice Hall of India New Delh

Gerhart, B., & Milkovich, G. T. (1992). Employee compensation: Research and practice. In
M. D. Dunnette & L. M. Hough (Eds.), Handbook of industrial and organizational psychology,
(Vol. 3, 2nd ed., pp. 481–570). Palo Alto, CA: Consulting Psychologists Press.