PAYMENT,REWARD AND BENEFIT
What are the differences between incentive, benefit, rewards,
and recognition?
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Incentive: Something which encourages an employee to contribute to benefit the organization.
Benefit: Non wage compensation paid to the employees while some are mandated by law and some
differ from firm to firm.
Rewards: Rewards are monetary or non monetary compensation apart from their salary which is given to
the employees on account of their performance to motivate them.
Recognition: Process of honouring employees for his/her level of service is meant to encourage repeat
actions, through reinforcing the behaviour they would like to see repeated.
Employee Reward and
Recognition Systems
In a competitive business climate, more business owners are looking at
improvements in quality while reducing costs. Meanwhile, a strong economy has
resulted in a tight job market. So while small businesses need to get more from their
employees, their employees are looking for more out of them. Employee reward and
recognition programs are one method of motivating employees to change work
habits and key behaviors to benefit a small business.
REWARD VS. RECOGNITION
Although these terms are often used interchangeably, reward and recognition
systems should be considered separately. Employee reward systems refer to
programs set up by a company to reward performance and motivate employees on
individual and/or group levels. They are normally considered separate from salary
but may be monetary in nature or otherwise have a cost to the company. While
previously considered the domain of large companies, small businesses have also
begun employing them as a tool to lure top employees in a competitive job market
as well as to increase employee performance.
As noted, although employee recognition programs are often combined with reward
programs they retain a different purpose altogether. They are intended to provide a
psychological—rewards a financial—benefit. Although many elements of designing
and maintaining reward and recognition systems are the same, it is useful to keep
this difference in mind, especially for small business owners interested in motivating
staffs while keeping costs low.
DIFFERENTIATING REWARDS FROM MERIT PAY AND THE
PERFORMANCE APPRAISAL
In designing a reward program, a small business owner needs to separate the salary
or merit pay system from the reward system. Financial rewards, especially those
given on a regular basis such as bonuses, profit sharing, etc., should be tied to an
employee's or a group's accomplishments and should be considered "pay at risk" in
order to distance them from salary. By doing so, a manager can avoid a sense of
entitlement on the part of the employee and ensure that the reward emphasizes
excellence or achievement rather than basic competency.
Merit pay increases, then, are not part of an employee reward system. Normally,
they are an increase for inflation with additional percentages separating employees
by competency. They are not particularly motivating since the distinction that is
usually made between a good employee and an average one is relatively small. In
addition, they increase the fixed costs of a company as opposed to variable pay
increases, such as bonuses, which have to be "re-earned" each year. Finally, in
many small businesses teamwork is a crucial element of a successful employee's
job. Merit increases generally review an individual's job performance, without
adequately taking into account the performance within the context of the group or
business.
DESIGNING A REWARD PROGRAM
The keys to developing a reward program are as follows:
Identification of company or group goals that the reward program will support
Identification of the desired employee performance or behaviors that will
reinforce the company's goals
Determination of key measurements of the performance or behavior, based
on the individual or group's previous achievements
Determination of appropriate rewards
Communication of program to employees
In order to reap benefits such as increased productivity, the entrepreneur designing
a reward program must identify company or group goals to be reached and the
behaviors or performance that will contribute to this. While this may seem obvious,
companies frequently make the mistake of rewarding behaviors or achievements
that either fail to further business goals or actually sabotage them. If teamwork is a
business goal, a bonus system rewarding individuals who improve their productivity
by themselves or at the expense of another does not make sense. Likewise, if
quality is an important issue for an entrepreneur, the reward system that he or she
designs should not emphasize rewarding the quantity of work accomplished by a
business unit.
Properly measuring performance ensures the program pays off in terms of business
goals. Since rewards have a real cost in terms of time or money, small business
owners need to confirm that performance has actually improved before rewarding it.
Often this requires measuring something other than financial returns: reduced
defects, happier customers, more rapid deliveries, etc.
When developing a rewards program, an entrepreneur should consider matching
rewards to the end result for the company. Perfect attendance might merit a different
reward than saving the company $10,000 through improved contract negotiation. It
is also important to consider rewarding both individual and group accomplishments
in order to promote both individual initiative and group cooperation and performance.
Lastly, in order for a rewards program to be successful, the specifics need to be
clearly spelled out for every employee. Motivation depends on the individual's ability
to understand what is being asked of her. Once this has been done, reinforce the
original communication with regular meetings or memos promoting the program.
Keep your communications simple but frequent to ensure staff members are kept
abreast of changes to the system.
TYPES OF REWARD PROGRAMS
There are a number of different types of reward programs aimed at both individual
and team performance.
Variable Pay
Variable pay or pay-for-performance is a compensation program in which a portion
of a person's pay is considered "at risk." Variable pay can be tied to the performance
of the company, the results of a business unit, an individual's accomplishments, or
any combination of these. It can take many forms, including bonus programs, stock
options, and one-time awards for significant accomplishments. Some companies
choose to pay their employees less than competitors but attempt to motivate and
reward employees using a variable pay program instead. Good incentive pay
packages provide an optimal challenge, one that stretches employees but remains
in reach. If too much is required to reach the goal, the program will be ignored.
Bonuses
Bonus programs have been used in American business for some time. They usually
reward individual accomplishment and are frequently used in sales organizations to
encourage salespersons to generate additional business or higher profits. They can
also be used, however, to recognize group accomplishments. Indeed, increasing
numbers of businesses have switched from individual bonus programs to one which
reward contributions to corporate performance at group, departmental, or company-
wide levels.
According to some experts, small businesses interested in long-term benefits should
probably consider another type of reward. Bonuses are generally short-term
motivators. By rewarding an employee's performance for the previous year, they
encourage a short-term perspective rather than future-oriented accomplishments. In
addition, these programs need to be carefully structured to ensure they are
rewarding accomplishments above and beyond an individual or group's basic
functions. Otherwise, they run the risk of being perceived of as entitlements or
regular merit pay, rather than a reward for outstanding work. Proponents, however,
contend that bonuses are a perfectly 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
Profit sharing refers to the strategy of creating a pool of monies 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
Previously the territory of upper management and large companies, stock options
have become an increasingly popular method in recent years of rewarding middle
management and other employees in both mature companies and start-ups.
Employee stock-option programs give employees the right to buy a specified
number of a company's shares at a fixed price for a specified period of time (usually
around ten years). They are generally authorized by a company's board of directors
and approved by its shareholders. 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.
Offering additional stock in this manner presents risks for both the company and the
employee. If the option's strike price is higher than the market price of the stock, the
employee's option is worthless. When an employee exercises an option, the
company is required to issue a new share of stock that can be publicly traded. The
company's market capitalization grows by the market price of the share, rather than
the strike price that the employee purchases the stock for. The possibility of
reduction of company earnings (impacting both the company and shareholders)
arises when the company has a greater number of shares outstanding. To keep
ahead of this possibility, earnings must increase at a rate equal to the rate at which
outstanding shares increase. Otherwise, the company must repurchase shares on
the open market to reduce the number of outstanding shares.
One benefit to offering stock options is a company's ability to take a tax deduction
for compensation expense when it issues shares to employees who are exercising
their options. Another benefit to offering options is that while they could be
considered a portion of compensation, current accounting methods do not require
businesses to show options as an expense on their books. This tends to inflate the
value of a company. Companies should think carefully about this as a benefit,
however. If accounting rules were to become more conservative, corporate earnings
could be impacted as a result.
GROUP-BASED REWARD SYSTEMS
As more small businesses use team structures to reach their goals, many
entrepreneurs look for ways to reward cooperation between departments and
individuals. Bonuses, profit sharing, and stock options can all be used to reward
team and group accomplishments. An entrepreneur can choose to reward individual
or group contributions or a combination of the two. Group-based reward systems are
based on a measurement of team performance, with individual rewards received on
the basis of this performance. While these systems encourage individual efforts
toward common business goals, they also tend to reward under-performing
employees along with average and above-average employees. A reward program
which recognizes individual achievements in addition to team performance can
provide extra incentive for employees.
RECOGNITION PROGRAMS
For small business owners and other managers, a recognition program may appear
to be merely extra effort on their part with few tangible returns in terms of employee
performance. While most employees certainly appreciate monetary awards for a job
well done, many people merely seek recognition of their hard work. For an
entrepreneur with more ingenuity than cash available, this presents an opportunity to
motivate employees.
Nor will the entrepreneur be far off the mark. As Patricia Odell reported, writing
for Promo, "Cash is no longer the ultimate motivator." Odell cited data from the
Forum for People Performance Management and Measurement at Northwester
University—which had discovered that non-cash awards tend to be more effective;
the exception was rewarding increasing sales. "The study found," Odell wrote, "that
non-cash awards programs would work better than cash in such cases as
reinforcing organizational values and cultures, improving teamwork, increasing
customer satisfaction and motivating specific behaviors among other programs."
In order to develop an effective recognition program, a small business owner must
be sure to separate the program from the company's system of rewarding
employees. This ensures a focus on recognizing the efforts of employees. To this
end, although the recognition may have a monetary value (such as a luncheon, gift
certificates, or plaques), money itself is not given to recognize performance.
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. 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. A small business owner can ensure this by being specific in what
actions will be recognized and then reinforcing this by communicating exactly what
an employee did to be 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. These latter expressions of thanks, however, are far
more likely to be received positively if the source is a small business owner with
limited financial resources. Employees will look less kindly on owners of thriving
businesses who use such inexpensive items as centerpieces of their reward
programs.
Both reward and recognition programs have their place in small business. Small
business owners should first determine desired employee behaviors, skills, and
accomplishments that will support their business goals. By rewarding and
recognizing outstanding performance, entrepreneurs will have an edge in a
competitive corporate climate.
BIBLIOGRAPHY
Brandi, JoAnna. "9 Ways to Keep Employees Engaged." Entrepreneur. 12 April
2005.
Grimaldi, Lisa. "Study proves recognition pays off." Meetings & Conventions. August
2005.
Henneman, Todd. "Daniels' Scientific Method." Workforce Management. 10 October
2005.
Odell, Patricia. "Live from the Mo Show: Non-Cash Awards More Effective." Promo.
28 September 2005.
Parker, Owen, and Liz Wright. "Pay and Employee Commitment: The Missing
Link." Ivey Business Journal. January 2001.
Rauch, Maggie. "Communications Gap: Majority of businesses give managers little
guidance on recognition." Incentive. September 2005.
Ventrice, Cindy. "Make Their Day! Employee Recognition That Works." Berrett-
Koehler Publishers. April 2003.
The Effects of Employee Recognition, Pay, and Benefits on Job Satisfaction: Cross Country Evidence
Mussie T. Tessema1 , Kathryn J. Ready1 , Abel B. Embaye 2
Employee’s job satisfaction is a well-researched topic across several disciplines including organizational
behavior, HR management, industrial-organizational psychology, and social psychology (Cranny et al.,
1992; Darling, Arn, & Gatlin, 1997; Hoppock, 1935; Ramayah & Nasurdin, 2006; Weiss, 2002). The
widespread interest in job satisfaction can be explained by the fact that it affects most individuals due to
the substantial part of their lives spent at work. Understanding the factors that influence job satisfaction
can potentially lead to improving employee and organizational performance. Job satisfaction has been
defined in a number of ways by various scholars (e.g., Hoppock, 1935, p. 38; Locke, 1976, p. 1300;
Robbins & Judge, 2008, p. 83). The central theme is similar across studies, a positive feeling of one’s job
resulting from an evaluation of its characteristics. Job satisfaction has been studied both as an
independent and a dependent variable. As an independent variable, job satisfaction explains outcomes
such as performance, absenteeism, and turnover (e.g., Podsakoff & Williams, 1986; Cranny et al., 1992;
Hoppock, 1935; Smith, Kendall, & Hulin, 1969; Spector, 1985; Ramayah & Nasurdin, 2006). For example,
job satisfaction leads to reduced turnover. In this study, we examine job satisfaction as a dependent
variable affected by a number of rewards, including pay, benefits, and employee recognition. Previous
studies have demonstrated that employee recognition/rewards lead to higher job satisfaction (e.g.,
Nelson, 2005; Darling et al., 1997; Rathi & Rastogi, 2008). To explain this relationship, we developed the
model depicted in Figure 1 showing the impact of rewards on job satisfaction. We test this relationship
empirically with three samples drawn from the U.S., Malaysia, and Vietnam. In the model, rewards are
comprised of job rewards that include recognition, pay, and benefits packages. It must be noted that,
under the literature review, we stressed more on employee recognition for it has received little
attention in the literature on job satisfaction as compared to pay and benefits.
Reward schemes for employees and management A major part of performance management involves
managing employees and managers, as their performance will have a major effect on the performance
of the organisation as a whole. This article looks at how reward schemes can be used to influence the
behaviour of employees. MEANING OF REWARD SCHEMES A broad definition of reward schemes is
provided by Bratton: ‘Reward system refers to all the monetary, non-monetary and psychological
payments that an organisation provides for its employees in exchange for the work they perform.’
Rewards schemes may include extrinsic and intrinsic rewards. Extrinsic rewards are items such as
financial payments and working conditions that the employee receives as part of the job. Intrinsic
rewards relate to satisfaction that is derived from actually performing the job such as personal
fulfilment, and a sense of contributing something to society. Many people who work for charities, for
example, work for much lower salaries than they might achieve if they worked for commercial
organisations. In doing so, they are exchanging extrinsic rewards for the intrinsic reward of doing
something that they believe is good for society. OBJECTIVES OF A REWARD SCHEME What do
organisations hope to achieve from a reward scheme? The following are among the most important
objectives: 1. To support the goals of the organisation by aligning the goals of employees with these. 2.
To ensure that the organisation is able to recruit and retain sufficient number of employees with the
right skills. 3. To motivate employees. 4. To align the risk preferences of managers and employees with
those of the organisation. 5. To comply with legal regulations. 6. To be ethical. 7. To be affordable and
easy to administer
