Ch-8 Financial rewards

Meaning of financial reward

Financial rewards comprise all rewards that have a monetary value and add up to total remuneration-base pay, pay contingent on performance, contribution, competency or skill, pay related to service, financial recognition scheme, and benefits such as pensions, sick pay and health insurance.

Incentives and rewards

Rewards provide tangible recognition to people for their achievements and contribution. Rewards can be either financial or non-financial. o Financial rewards consist of job-based pay. o And person-based pay. Incentives are intended to encourage people to work harder and achieve more. They are supposed to provide direct motivation.

o Incentives are generally financial but they can take the form of nonfinancial rewards such as promotion or a particularly interesting assignment.

The theoretical framework

The theoretical framework is based on the concepts of extrinsic and intrinsic motivation. Extrinsic rewards are those that arise when something is done to or for people to motivate them. This includes rewards such as increased pay, praise or promotion.

 Intrinsic rewards arise from the work itself and include interesting and challenging work, responsibility (feeling that the work is important and having control over ones resources), freedom to act (autonomy), scope to use and develop skills, and abilities and opportunities for advancement and growth.

Maslows (1957) hierarchy of human needs

human needs are arranged in a hierarchy of significance, starting with physiological and safety needs that are best satisfied by money. Once these basic needs are satisfied individuals progress to higher needs not associated with money social, esteem and, ultimately, self-fulfilment.

Herzbergs (1968) motivation hygiene theory

motivation is affected by two factors: one consists of the satisfiers or motivators such as achievement and responsibility, which are effective in motivating people. The other consists of the dissatisfies or hygiene factors such as pay and working conditions, which serve primarily to prevent job dissatisfaction while having little effect on positive job attitudes.

Deci and Ryans (1985) cognitive evaluation theory (CET)

placing strong emphasis on monetary rewards is likely to reduce interest in the work itself, thus reducing motivation. In other words, extrinsic rewards fall down intrinsic interest.

Conclusions on the theory:

But as Gerhart and Rynes (2003) commented: Although the ideas developed by Maslow, Herzberg and Deci have had considerable appeal to many people, the prevailing view in the academic literature is that the specific predictions of these theories is not supported by empirical evidence. Steers (2001) contended that: Motivation theories that were discredited long ago still permeate current textbooks.

The role of money

Pay is often ranked as being less important than other factors such as job interest, although the extent to which such rankings are genuine has been questioned. Money can motivate because it is linked directly or indirectly with the satisfaction of many needs. Money acts as a symbol in different ways for different people, and for the same person at different times. However, according to Herzberg (1968) money does not result in lasting satisfaction. Some people will be more motivated by money than others.

Views about the importance of pay:

Typically, Pay is somewhere down the list after job interest, achievement, recognition and development opportunities. As kohn (1998) sated: Numerous studies have shown that when people are asked what is most important to them about work, money ranks well behind such factors as interesting work or good people to work with.

Factors affecting satisfaction with pay

As lawler (1990) points out, peoples feeling about the adequacy of their pay are based upon comparisons they make between their own and others. External market comparisons are the most critical because they are the ones that strongly influence whether individuals want to stay with the organization. Many people, however, are unlikely to leave for pay reasons alone unless the increase they expect from a move is substantial.

The main factors are the extent to which people feel that:
Their pay is equitable (the felt-fair principle). Their rate of pay or increase has been determined fairly (the principle of procedural justice). Their rewards are equal with their perceptions about their ability, contribution and value to the organization. Other aspects of their employment are satisfactory.

Job satisfaction and performance

Research has not established any strongly positive connection between satisfaction and performance. It can be argued that it is not job satisfaction that produces high performance but high performance that produces job satisfaction, and that a satisfied worker is not necessarily a productive worker and a high producer is not necessarily a satisfied worker.

Research on the effectiveness of financial rewards

Much research has been conducted on the effectiveness of financial rewards in terms of their impact on people and performance. A number of UK projects have produced negative results on the impact on people. But many studies have established a positive relationship between incentive pay and performance. A recurring theme in the negative studies was that the problems arise because of the ways in which schemes were introduced and operated within particular contexts rather than because of the principles upon which they were based.

Research projects producing mainly negative result:

Kessler and purcell (1992): Research into individual performancerelated pay (PRP) was conducted over a three-year period in nine private and public sector organizations of varying sizes and operating in different product and labor markets. Material was also gained from interviews with over 60 senior and management figures.

The main findings and conclusions were that: PRP was seen as a means of targeting pay to those who most deserve it and thus provides better value for money than inflexible, less discriminatory increases related to cost of living or service. Management often experienced difficulties in operating the scheme because of the lack of formal supporting system, absence of prior management training and the highly subjective nature of assessments.

 The potential for distorting the system is perhaps at its greatest at the assessment stage. PRP depends on sending messages to individual members of staff but this involve the risk of sending the wrong messages.

Arguments for and against financial rewards

Arguments for financial rewards The most powerful argument is that those who contribute more should be paid more. It is right and proper to recognize achievement with a financial and therefore tangible reward. This is in accordance with the principle of distributive justice, which, while it states that rewards should be provided equitably, does not require them to be equal except when the value of contribution is equal.

 Arguments against financial rewards The main arguments against financial rewards are that: The extent to which contingent pay schemes motivate is unclear. The requirements for success are exacting and difficult to achieve. Money by itself will not result in sustained motivation; intrinsic motivation provided by the work itself goes deeper and lasts longer. People react in widely different ways to any form of motivation. Financial rewards may possibly motivate those who receive them but they can demotivate those that dont.

 Contingent pay schemes can create more dissatisfaction than satisfaction if they are perceived to be unfair, inadequate or badly managed. Schemes depend on the existence of accurate and reliable methods of measuring performance, contribution, competence or skill, which might not exist. Contingent pay decisions depend on the judgement of managers, which in the absence of reliable criteria can be partial, prejudiced, inconsistent or ill informed. The concept of contingent pay is based on the assumption that performance is completely under the control of individuals, when in fact it is affected by the system in which they work.

Criteria for effectiveness

The effectiveness of financial rewards in the shape of contingent pay depends on the following factors: There is accurate, consistent and fair assessment of performance or contribution. Pay differences can be related to performance or contribution differences and can be seen to be related. The principles of procedural and distributive justice are upheld. There is a climate of trust in the organization as Thompson (1992) commented; Where there is trust, involvement and a commitment to fairness, the (PRP) schemes work.

 Performance management systems function well. Line managers have the necessary skills and commitment. Stakeholders, including line managers, employees and employee representatives, have been involved in the design of the scheme. The scheme is appropriate to the context and culture of the organization.

 The scheme is not unduly complex. The purpose, methodology and effect of the scheme have been communicated and understood. There is a clear line of sight between effort and reward. Rewards are attainable and worth attaining.

Summaries of the factors that have found in various research projects to relate to the success of financial rewards in the shape of contingent pay plans are as follows: Study of De Matteo et al (1997): Communication and understanding of scheme Clarification of team goals Team independence Study of towers perrin (1997): Senior management commitment

 Employee support Emphasis on communication Related HR activities, e.g. training

The dos and donts of financial incentives:

Dos: Do tie financial incentives to valued behaviors. Do have good measurement system. Do have good communications. Do make the system complete, i.e. cover all relevant and valued aspects of performance. Do use financial incentives to supplement other rewards.

 Do make meaningful differentiations. Do set realistic goals. Do provide relevant skills and resources. Donts: Dont give in to hope and fad. Dont connect rewards and punishments. Dont rely on invalid behavior measurement tools. Dont keep things secrete. Dont break employee expectation.