financial & non financial rewards
TRANSCRIPT
Managing Human Capital MBA1 ‘C’
Table of Contents
1. INTRODUCTION............................................................................................................. 2
2. LITERATURE REVIEW.................................................................................................. 22.1 Financial Rewards............................................................................................................... 32.2 Non-Financial Rewards...............................................................................................12
3. CONCLUSION............................................................................................................. 14
4. REFERENCES..................................................................................................................................16
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1. INTRODUCTIONAn organisation can be efficient only if they will be able to utilize the
resources that they have with them appropriately. The resources usually include
infrastructure, workforce and capital, all of which are inter dependable but the
most important among them is the work force. Labour can be considered as one
of the most important resource so as to maintain or utilize the other resource
like infrastructure and capital. Any organisation that will be successful to persist
their employees will do well. Hence it is important on the part of the
organisation to handle the human resource effectively. The employees that are a
part of the organisation will have the qualities that are demanded by their job
description. Some of the employees might have high levels of skill that is
required for their job or might even have a lot of experience in that field. Each
person gets paid differently depending on their levels of skills and experiences.
Reward policy is a prerequisite for strategic management of pay and benefits.
Managers have always been interested in making arrangements for the
better performer to be paid more than the average performer. To support this
there are a lot of schemes currently available that are working towards the
objective. “The objectives of a policy towards payment could be described as ‘ to
remain competitive for labour whilst rewarding good performance and adopting
a position on pay which controls costs and is felt to be fair by all
employees’”(Tyson & York, 2000). This paper will focus mainly on employees
and what are the different ways employers use to manage them and retain them
within an organisation.
2. LITERATURE REVIEW
Pay and job security are the important factors that employee consider
when they are looking for jobs. Employees usually prefer to work with an
organisation that provides to them different types of pays and benefits. They
even desire rewards that could bring about improvement of their status in the
society. Rewards can be of two types:
Financial Rewards
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Non-Financial Rewards
2.1 Financial Rewards
Financial rewards consist of the payment methods that can be achieved
by the various assessments carried out in the organization. Some forms of
financial rewards are discussed below.
Base pay: Base pay is the amount of money given to a particular employee for
working in a specific position of employment in an organisation for specific
period of time.
Example 1: Mitchells & Butlers chairman will get a pay rise by 75 per cent up to
300,000 pounds.
Performance-based pay/ Competence based pay: These pays are considered
to be additional and add more value to the base pay an employee is set to get.
The employees can get these pays if they have performed well enough to fulfill or
satisfy a certain goal designed by the organisation. These pays are given to show
recognition and to imply the kinds of actions and attitudes that the organisation
wishes to reward for their employees. Competence based rewarding system uses
improvements in competence or any job related skills as criteria for increasing
the pay.
Advantages of Performance-based pay/ Competence based pay-
1. During time of low inflation, the only possibility for increases in pay is
through productivity improvement.
2. If rewards can be linked to objectives, it will help the employees to drive
towards the objectives.
3. Since there is clarity about rewards for obtaining the objectives, all the
staff can participate and try to achieve the objective thus increasing their
productivity level for the company.
Disadvantages of Performance-based pay/ Competence based pay-
1. This type of payment does not motivate employees.
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2. Initially there might be improvements, but there are chances that there
might be diminishing marginal utility to the organisation.
3. Objectives can change very quickly, so it cannot be used as a criterion for
performance reviews during the end of the year.
Example 2: Luxottica Retail is the home of LensCrafters, Sunglass Hut, Watch
Station and Watch world follows Performance based pay system. “Take
notice, performance pays. Those who perform their best will receive higher
raises” is what is found in their ‘Base Pay Program’ brochure. (Franke 2004,
p. 148)
Example 3: Procter & Gamble Co. one of the America’s top fortune 500
companies uses competency based pay system so as to obtain more
productivity level from their staff. (Berger & Berger, p. 145)
Example 4: Burger King provides its staff with competence related pays in
order to increase the efficiency of work.(Shields 2007, p.244)
Variable Pay: Variable pay is an “add-on” to a competitive base pay. This
means there is no risk for employees in loosing any base pay they are
adhered to. Instead it is an upside potential for them. Variable pay is truly a
win-win opportunity for the company as well as for its employees. Awarding
variable pay can be through profit sharing, bonuses, incentive schemes,
holiday bonus and deferred compensation.
Profit Sharing: The systems in which the payout is a function of some
measures of profits or profitability. The determinant for this particular
variable pay system can be accounted profits, operating profits, return on
assets and investments. Absolute profits maybe shared from the very first
value received or from the threshold value and the profitability measure may
apply to a company, division or any other organizational entity. Profit sharing
payments are usually made only if the company has been in profit for a
specific period of time. Profit sharing is generally calculated at the end of the
business year only after the profitability result of the organisation is
evaluated.
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Advantages of Profit sharing-
1. It has a positive impact and sends a message to the employees so that
they work together as a team so that the profits can be maximized.
2. All the employees are made to attain the same set of goals and are
rewarded equally thus decreasing the sense of competition between the
employees.
Disadvantages of Profit sharing-
1. The main disadvantage of this payment scheme is that the employees
will not be able to see their own work and actions that they put
forward when attaining the goals of the organisation and increasing
the overall profit of the company.
2. The true essence of Profit sharing is motivation but it will merely
remain as an entitlement that employees would enjoy.
3. Regardless of the contribution and effort offered by the employee,
they would be just receiving their profit sharing money. (Torrington,
Hall & Taylor 2002)
Example 5: TESCO PLC uses profit sharing schemes and the company has to
allocate money in millions to pay its employees based on this scheme. In one
report of Evening Standard, it was written that a total of 106 million pounds has
been allocated to reward the staff of Tesco who had invested in the profit sharing
scheme for their contribution in doubling the company’s profit.
Example 6: Profit sharing scheme followed by HP, awarded above 228 million
dollars to its employees around the world in 1996.
Example 7: Motorola distributes approximately 3 million dollars to its
employees through profit sharing scheme.
Employee Stock Ownership Plans: An Employee Stock ownership plan (ESOP)
is designed to give the employees significant stock ownership in the employers.
An adoption of ESOP would mean that the employees would have a share
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ownership of their own corporation. This scheme provides the employees of an
organisation with an option in buying of shares of their company at a reduced
price. Therefore the employees will have no obligation to buy the shares of the
company. (Mathis & Jackson 2008)
Advantages of Employee Stock Ownership Plan-
1. Major advantage of this scheme is that the organisation can receive
favorable tax treatment on the earnings for use in the ESOP
2. It gives employees a piece of action so that they can share in the growth
and the profitability of their organisation. This would make the employee
to be more focused and productive on the organisations’ earnings.
Disadvantages of Employee Stock Ownership Plan-
1. This type of sharing scheme can also mean that the employees both their
salary and retirement plans will totally depend on the performance of
their employers in the market.
2. It poses a major threat to those employees who are about to retire, as
their value of pension will be dependent on how well the organisation is
doing.
Example 8: Hy-Vee is an employee owned group of retail supermarkets located
in the Midwest of United States. This company provides ESOP to their employees
and is running successfully. Employees are enjoying their share of the
organisation and are contributing to its success. (Mathis & Jackson 2008, p. 404)
Example 9: United Airlines also exercises ESOP schemes. This scheme made the
unions of the company demand for increase in their pay. This was agreed but
only for a short term. The employees were locked in their stock scheme due to
which the company landed in an eventual bankruptcy.
Example 10: Infosys technologies employees earn in millions with the ESOP
scheme in place.
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Gain Sharing: “Gain sharing systems in which the payout represents a share of
the financial gains associated with improvements in the group or organizational
performance measures for long term. Commonly used criterions include costs,
productivity, material and supplies utilization, quality, timeliness or
responsiveness, safety, environmental compliance, attendance and customer
satisfaction. The foundation for these criterions is the current performance, past
performance or any improvements over the current performance.” (Belchers
1996, p. 11)
Advantages of Gain sharing-
1. The long-term aspect will provide steady earnings.
2. Employee participation helps to overcome the ‘them and us’ attitudes and
helps to build trust within the employees.
3. This scheme can also prove to encourage employees to be better problem
solvers.
Disadvantages of Gain sharing-
1. Individual employees contribution may go unnoticed and might not be
reflected when working within large teams. So the employees who work
very hard might get fewer amounts when compared to their effort they
put.
2. Complex schemes might prove to be difficult for the employees to
understand that scheme and difficult for the employers to explain.
3. Gain sharing requires ongoing management and must be reviewed
regularly to ensure that the effectiveness will be continued.
Example 11: NUMMI provides a number of gain sharing schemes. For employees
at NUMMI, pay is attached to increases in productivity and to performance based
on productivity and indicators to the quality of cars they produce. The presence
of NUMMI unions implies that the gain sharing system would stay for a long term
thus help the employees to motivate in sharing their ideas and enforce high
efforts within the factory. (Levine 1995, p. 50)
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Example 12: Mill Steel drives production with gain sharing plan. Unionized
production workers of Mill Steel Company have been able to increase their
earnings due to gain sharing plan. (Franke 2004, p. 164)
Example 13: A pharmaceutical plant in Lincolnton, N.C., obtained competitive
edge by following the gain sharing measures and employees received $825 by
the end of first quarter.
Scanlon Plan: This scheme is a combination of suggestion plan and a collective
incentive scheme. The suggestion plan was a part of the system for drawing ideas
from the workforce about improvements that could be jointly achieved by the
management and union. It operates a bonus depending on reductions achieved
by the workers in labour costs compared with the revenue obtained from the
sales. These rewards come from employee involvement in improving the
productivity and reducing costs for the organisation.
Advantages of Scanlon Plan-
1. It will help in developing a cooperative team culture in the organisation as
these plans help in solving problems as a team.
2. Team incentives reduce the trend of jealousness and complaints amongst
team members.
Disadvantages of Scanlon Plan-
1. There is high tendency that individual team members may feel that their
effort is more than the other members and they contribute more towards
the team success.
2. Complexity of the payout formulas may become hard for the employees to
understand.
Example 14: The first Scanlon plan had been adopted by the Timber Roots MTD
back in 1930s. Since they have put this plan in action, Timber Roots employees
have generated above 200 plant improvement suggestions and thus their
productivity level has increased to a greater extent.
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Merit Plans: Merit pay plans are links an increase in base pay to how
successfully an employee performs his or her job. The merit increases are usually
given if the employee has been successful in attaining some standard goals that
have been set by the organisation. A meaningful merit increase will catch the
attention of the top performers that will help in the organizational progress.
(Bohlander & Snell, p.461-462)
Advantages of Merit Plans-
1. These plans help in boosting the employees confidence and will have trust
in performance appraisal
2. It helps in encouraging the employees to work harder for the organisation
Disadvantages of Merit Plans-
1. Amount of money given may appear to be inadequate for the performance
put in by the employee
2. These plans may cause a lack of honesty and cooperation between
management and employees.
3. Merit pay plans may create feelings of pay inequity.
Example 15: Compsat Technology Inc provides its employees with merit pay
plans. They pay their employees more money based on their quality of
performance and good attitudes. (Franke 2004, p. 150)
Example 16: British Gas in 1994 increased the merit pay plans from 11% to
75% for the directors who earned more than 200,000 pounds. (Price 2007, p.
479)
Example 17: A survey report by Dowling & Richardson (1997) suggests that
British NHS managers have been satisfied with the use of merit pay schemes and
it has had a positive motivational effect.
Annual Bonus: These are gratuitous payment by the employer that is not
directly earned by the employee. These payments have no entitlement to the
employees pay as a result of contract of employment and cannot be expected in
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return for a specific performance. These payments are done only after going
through the effort presented by the employee on a yearly basis. (Reda, Reifler,
Thatcher 2005)
Advantages of Annual Bonus-
1. The bonuses provided by the organisation can be a positive factor for the
employees to earn more money and would motivate the employees to
strive for it.
2. Employees can enjoy their bonus and feel satisfied with their role of job.
Disadvantages of Annual Bonus-
1. The employees may tend to get uncertain if they would receive their
bonus for the performance of their job.
2. If the company is not doing well enough then the annual bonus that was
promised could be terminated.
Example 18: Plante & Moran are providing their employees with bonuses
relating to their competencies and on the result measures. Performance on
goals, like getting a job done in particular time is used to drive annual
bonuses to their employees (Franke 2004, p. 157)
Example 19: At Nixon Uniform Service & Medical Wear, the employees are
given an opportunity to increase their earnings through various bonus
programs. Some of the bonus programs include MICOMP, PROCOMP, Lead
Trader, Quality Bonus and Safety Bonus. With these bonuses a good
employee can earn between 500 to 10,000 dollars annually. (Franke 2004, p.
158)
Example 20: Marks & Spencer will be distributing an annual bonus pot of 80
million pounds within its employees as the result of excellent performance in
the company’s plan.
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Example 21: British Telecom Staff are benefiting from one of Britain’s
biggest bonus schemes and company has distributed around 22million
pounds among its staff.
Incentive Pay: Incentive pay plans are typically based on pre-established
performance goals. These are good ways of supporting the strategic plans of
the company. Well-executed incentive plans demand effective
communication of those goals and monitoring the progress on a regular basis.
This allows even the employees to keep record of their own performance and
help them to improve their potentials.
Advantages of Incentive Pay-
1. Incentives help employees in keeping the focus to attain certain
performance targets.
2. Incentives are directly related to operating performance. If these
performance qualities are met then the incentives are paid, else it is
not.
Disadvantages of Incentive Pay-
1. Employees may feel that their production standards are not set fairly.
2. Incentive plans may create a sense of competition between the workers. It
may also cause distort between the management and staff.
Example 22: Comforce Health Care of Orange County believes in developing a
large variety of performance based incentive schemes and commission
structures. Their policy is not to provide employees with large sum of money
instead they will provide somebody with the opportunity to earn a large
commission based on achieving certain goals. (Franke 2004, p. 155)
Example 23: Agilysys Inc is following incentive schemes rigorously. They have
high percentage of people having the incentives opportunities. They believe in
attracting people who are more confident to work as they are risk-takers and
drive themselves hard for results. (Franke 2004, p. 155)
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Example 24: General Electrics have offered their employees with cash incentives
ranging about $750 for quitting smoking in 2008. Due to this incentive success, it
plans to go tobacco-free by 2011.
2.2 Non-Financial RewardsNon-financial rewards imply to advantages employee gets in their work
place that can be in the form of Achievement, Recognition, Influence and
personal growth.
Achievement: It can be regarded as a measure put forward by the management
to distinguish employees based on their efficiency.
Example 25: Devon Partnership NHS Trust provides employees with wide
variety of achievement awards as a way to celebrate the staffs hard work.
Example 26: Orkut Buyukkoten, a software engineer at Google had his
achievement when the social networking site that he developed for Google was
named after him.
Recognition: Employers use this approach to let their staff know how well they
have worked or obtained their objectives. Recognition can be attained either by
promotion, job enlargement and different forms of status or appreciation
symbols.
Example 27: Conwy Council has revised its schemes to recognize and reward
employees. They have introduced Customer Service award, Manager of the year
and the winners will be presented with a certificate and a trophy.
Example 28: Dell Computers have recognition programs that are voluntary.
They recognize the Dell employees who actively support their local community.
Dell honors such employees.
Perks/Vouchers: Employers can provide perks to employees based on their
effort and efficiency. A few forms include providing employees with gift
vouchers, arranging a dinner in a well-known restaurant, paid holidays, free air
miles, cafeteria benefits, healthcare, dental benefits etc.
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Example 29: Google employees enjoy the perks such as free meals in their
cafeteria, on-site doctors, dry cleaners and gym facilities. The googlers also get
perks for referring an employee who is planning to leave Google.
Example 30: The cabin crew of BA was stripped off from their travel perks due
to the continued strikes during the Easter weekend.
At the end of the day even saying a simple “Thank You” could make the employee
feel happy and positive about his work.
3. CONCLUSION
According to my view, it is important for the organisation to award
employees with merit issues. For an organisation to be successful and become a
leader in the market, it has to make sure that the employees are satisfied and
motivated to work towards the organisation’s goals. To assure this, the
employees should be treated as an asset for the organisation and one of the
means to achieve this is by ensuring that the employees get awarded and
recognized for their effort and performance. The factors that the management
should consider in order to provide employees with merit issues include the
following.
Individual performance
The company should monitor their employee’s performance based on
sincerity, quick grasp of knowledge, learning ability and other skills.
Education and Experience
Based on individual employees’ qualification and experience level, they
should be given benefits that would possibly motivate them
Individual Potential
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Management should look for people who are dynamic and contribute to
the organisation success. The employees should have the potential to gain
better position in the organisation and remain loyal to the organisation.
Budget of organisation
Every organisation invests heavily for training their staffs to the
organisation’s standards, so that they can increase and maintain their
profitability.
Change Management
When the company is undergoing change management processes, it is
likely that there would be many changes to which employees would
resist. In order to bring the level of resistance down, employees can be
provided with materialistic incentives.
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4. REFERENCES
1. Armstrong, M, Murlis, H & Group, H 2007, Reward Management: a
handbook of remuneration strategy and practice, 5th edition, London ;
Philadelphia : Kogan Page.
2. Berger, LA & Berger, DR 2000, The compensation handbook: a state-of-the-
art guide to compensation strategy, 4th edition, McGraw-Hill, New York.
3. Belchers, JG 1996, How to design and implement a results-oriented variable
pay system, AMACOM, New York.
4. Bohlander, G & Snell, S 2009, Managing Human Resources, South-Western
Pub.
5. Bratton, J & Gold, J 1999,Human Resource Management: Theory and
Practice, 2nd edition, MACMILLAN Press Ltd, London.
6. Franke, LR 2004, HR networking: performance management, Chicago IL,
USA.
7. Levine, DI 1995, Reinventing the workplace: how business and employees
can both win, Brookings Institution, Washington, D.C.
8. Mathis, RL & Jackson, JH 2008, Human Resource Management, 12th edition,
Mason, OH : Thomson/South-western.
9. Price, A 2007, Human Resource Management in a Business Context, 3rd
edition, London: Thomson.
10. Reda, JF, Reifler, S & Thatcher, LG 2005, Compensation committee
handbook, 2nd edition, Hoboken, N.J: Wiley.
11. Shields, J 2007,Managing employee performance and reward: concepts,
practices, strategies, Cambridge [u.a.] : Cambridge Univ. Pr
12. Torrington, D, Hall, L & Taylor, S 2002, Human Resource Management, 5th
edition, Financial Times : Prentice Hall.
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13. Tyson, S & York, A 2000, Essentials of Human Resource Management, 4th
edition, Oxford [u.a.] : Butterworth-Heinemann.
14. Scanlon Plan example, Retrieved on 29th March 2010,
http://www.scanlonfoundation.org/index.php?
option=com_content&view=article&id=95&Itemid=156
15. General Electric to go tobacco-free in 2011: Work sites to be tobacco-free,
Retrieved on 29th March 2010,
http://www.tradingmarkets.com/news/stock-alert/ge_general-electric-
to-go-tobacco-free-in-2011-work-sites-to-be-tobacco-free-823424.html
16. 25 Secret Perks of Google Employees, Retrieved on 30 t h March
2010, http://www.bandwidthblog.com/2007/04/05/25-secret-perks-
of-google-employees/
17. ESOP example, Retrieved on 29th March 2010,
http://www.capitalownership.net/archives/esopindia/msg00003.html
18. Marks & Spencer Annual benefit, Retrieved on 5th April 2010,
http://www.employeebenefits.co.uk/cgi-bin/item.cgi?
id=10363&d=23&h=0&f=0
19. HP Profit Sharing, Retrieved on 31st March 2010,
http://www.allbusiness.com/company-activities-management/financial-
performance/7292084-1.html
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