July 10, 2014

Reward Systems and Organizational Behavior - Review Notes

Reward systems is an important part of the organizational context for organizational behavior.


Luthans discussed why he has included this chapter in the OB book. In the social cognitive theory, the basis or foundation for the textbook, the environment variable forms a triad with the person and the organization. In the organization, the structural design and culture are already covered as important variables. The reward system is the third major organizational variable. Bandura has noted that human behavior cannot be fully understood without considering the regulatory effect influence of rewards.

One way to the importance of organizational rewards as simply as possible is to remember: "YOU GET WHAT YOUR REWARD!"

The rewards are discussed under pay, recognition and benefits topics.

Money as a Reward


Mitchell and Mickel has noted that money is a prime factor in the foundation of commerce, that is, people organize and start business to make money. Then do employees need money to continue working in an organization or not? We are not talking of participation in charity or social welfare organizations. For majority of people, the primary organization that they work for is an organization that provides them money for their living. Only after their primary need is satisfied through certain hours of working, that they choose other organization which do not provide them money, but provide satisfaction to them in other ways.

Money is also associated with four of the important symbolic attributes for which humans strive: achievement and recognition, status and respect, freedom and control, and power.

Despite the visible tendency of many organizational behavior theorists to downgrade the importance of pay as an organizational reward, there is ample evidence that money can be positively reinforcing for most people, and,  if the pay system is designed properly to fit the strategies, can have a positive impact on individual, team, and organizational performance. Money remains a very important motivator.

In order for money to be effective in the organizational reward system, the system must be as objective and fair as possible and be administered contingently on the employee's exhibiting critical performance behaviors. This has been made particularly clear by Kerr, who notes that an effective pay system for rewarding people has to address three considerations. First, the organization must ask itself what outcomes it is seeking. Examples include higher profits, increased sales, and greater market share. Second, the enterprise must be able to measure these results. Third, the organization must tie its rewards to these outcomes.

Traditional Methods of Administering Pay


Traditionally, organization have used two methods of administering pay: base pay and merit pay. These methods were supplemented by some with pay-for-performance plans and 'new pay" programs.

Base pay is paid for various categories or ranks of jobs and it is based on market conditions and the pay policy of the company. Merit pay is tied to some predetermined criteria that judges meritoriousness of people. The annual salary increases are based on merit pay systems only. In a way, merit pay is supposed to be a form of "pay for performance." However, there are problems in linking merit pay that is given throughout the career to performance in a single period. Therefore many organizations have created specific pay-for-performance plans.

Pay for Performance


There are two types basic types of "pay-for-performance" plans: invidividual plans and group incentive plans. Individual incentive plans have been around for many years. There were studied by many and F.W. Taylor who also studied them in the form of piece rate systems developed time study and  standard output based incentive systems. They became part of scientific management system of shop management or process management advocated by him.

Signing bonus is indicated by Luthans as a performance pay method. But it seems to be more a merit pay method than a performance pay method. Stock option plan is also an individual incentive pay.

Potential limitations of individual incentives: Individual incentives are practical only for jobs for which performance can be specified objectively and can be measured easily.

Group Incentives


Team working is being emphasized nowadays  by many companies and group incentives are being used to motivate teams for higher performance. One of the most common forms of group pay is gain sharing plan. In these plans, cost savings due to productivity improvements is shared with the group.

Another common group incentive plan is profit sharing. In a typical plan, some portion of the profit is paid into a profit-sharing pool, and this then distributed to all employees immediately or after retirement.

Employee Stock Ownership Plan (ESOP) is another group incentive plan.

New Pay Techniques


The following approaches were indicated as new techniques by Luthans

1. Commissions beyond sales to customers.
2. Rewarding leadership effectiveness
3. Rewarding new goals.
4. Pay for knowledge workers in teams.
5. Skill pay
6. Competency pay
7. Broadbanding.

Luthans stated in his conclusion that new pay techniques have a role and organizations have to utilize them to be effective in the areas of customer satisfaction, leadershi, satisfied employees, quality, teamwork, knowledge sharing, skill development, new competencies (e.g., technical, cross-cultural, and social), and employee growth without promotions.

Recognition as an Organizational Reward


Genuine social recognition can be given at any time by any body in the organization. Unlike many financial forms of reward, there is no limit to the number of people who can receive recognition reward and also how many times it is given.

Research shows that there are many types of recognition that can lead to enhanced performance and loyalty.  Helping employees in the discharge of their family responsibilities (recognition of their family responsibilities) increases employee loyalty.  Research also shows that employees would like their companies to focus on being fair to employees, caring about them, and exhibiting trust in them.

Some Steps that help in increasing the effectiveness of recognition reward systems and practices

1. Use all available communication channels to make all employees aware of the system or scheme.
2. Educate managers in using recognition reward as a part of the total compensation package.
3. Make recognition part of the performance management process.
4. Have site-specific recognition programs that are covered in company newsletters and websites.
5. Publicize the best practices and achievements of recognized employees so that every one knows some of the things they can do in order to earn recognition.
6. Also make all managers and supervisors know what best managers are doing to use recognition effectively.
7. Continually review the recognition process and procedures to improve them, to introduce new procedures and scrap those which are not delivering results.
8. Solicit ideas from all to know what is working and interesting.


Benefits As Organizational Rewards

Commonly offered benefits are categorized into those that are required by law and those that are offered by companies.

Federal Government-Mandated Benefits: Social security is the most important federal government mandated benefit. Another major benefit is workers' compensation.  The Family and Medical Leave Act of 1993 requires all organizations with 50 or more employees to grant any worker who has been employed there for at least one year an unpaid leave of 12 weeks to take care of personal medical issues or serious illness of family members.  ERISA (Employee Retirement Income Security Act of 1974) is also a benefit.

Companies are offering health insurance, life insurance, and pension benefits. Companies have vacation benefit, sick leave benefit and leave for some contingencies.

New Types of Benefits

Wellness programs, Life cycle benefits,Flexible-Cafeteria style benefit plans are some of the new developments in benefits provided to employees.




Updated 10 July 2014, 4 Dec 2011

July - Management Knowledge Revision




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