FACULTY OF BUSINESS MANAGEMENT

PERFORMANCE MANAGEMENT
TOPIC- 6
REWARDING PERFORMANCE
Learning Objectives
 To understand the concept of rewards and how to make them effective
 To distinguish between traditional and contingent pay plans and know how each of these
rewards systems relates to the performance management system.
 To understand that pay is only one of many tools that can be used to motivate
employees.
 To understand the different methods of CP
 To know the principles of how to design an organization's pay structure, including how to
conduct of a job evaluation.
 To understand the advantages of the broad-banding approach to designing a pay
structure.

REWARDS

Programs, practices, elements and dimensions that collectively define an organization's strategy
to attract, motivate and retain employees.

HOW TO MAKE REWARD SYSTEM EFFECTIVE

 Define and measure performance first, and then allocate rewards.

 Use only rewards that are available. If the organization does not have financial rewards
available, then employee expectations should be adjusted accordingly, and the focus
should be on non-financial rewards.
 Make sure all employees are eligible.
 Make rewards visible. Rewards should be visible to those who receive them. However,
rewards should also be visible to others, together with information on what needs to
happen for an employee to receive the reward in the future. This recommendation applies
to both financial and non-financial rewards. Non-financial rewards in particular are usually
more effective if they are made public. An exception to the visibility recommendation is
that some individuals may prefer a non-visible reward allocation to avoid being singled out
for attention or to prevent disrupting group harmony.
 Make rewards contingent. Rewards should be tied to performance directly and
exclusively.
 Make rewards timely. Rewards should be given soon after the result or behavior being
rewarded.

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TRADITIONAL AND CONTINGENT PAY PLANS
 A traditional approach in implementing reward systems is to reward employees for the
positions they fill as indicated by their job descriptions and not necessarily based on how
they do their work. In such traditional pay systems, one's job determines direct pay and
indirectly determines benefits and incentives received.

 Contingent pay (CP), also called pay for performance, means that individuals are
rewarded based on how well they perform on the job. Thus, employees receive
increases in pay based wholly or partly on job performance. These increases can either
be added to an employee's base salary or be a one-time bonus. When increases are
not added to an employee's base salary, as in the case of one-time bonuses, they are
called variable pay.

REASONS FOR INTRODUCING CONTINGENCY PAY PLANS (CP plans)

 CP Plans enhance employee motivation to accomplish goals that match organizational
needs

 Linking performance management with contingency pay plan ensures that performance
management and improvement are taken more seriously

 Organisations communicate what behaviours and results will be rewarded and this has a
direct impact on the organization success

 CP plans serve as a good tool to recruit top talent thus increasing the productivity

 Sorting effect: Top performers are likely to be attracted to and remain within
organizations that implement CP plans

 CP plans project a good corporate image as the system of rewards is considered as fair
and based on clearly communicated expectations and standards

LINK BETWEEN CONTINGENCY PAY PLANS AND MOTIVATION

Contingent pay plans can help improve employee motivation and performance through the
following concepts:
 Expectancy – Employees see a clear link between their efforts and the resulting
performance
 Instrumentality - Employees see a clear link between their performance level and the
rewards received
 Valence – Employees value the rewards available

All the three conditions must be present for contingent pay plans to have an impact on
employee motivation.

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Motivation = Expectancy x Instrumentality x Valence

TYPES OF CONTINGENCY PAY PLANS

 INDIVIDUAL REWARDS/INCENTIVES

1. Piece-Rate Systems - are ones that pay a specified amount for each unit of
production. The constant rate permits an accurate determination of labor costs.
Some organizations begin piece-rate pay after a worker achieves a stipulated
production base. A differential piece-rate pays two rates: one rate is received for
less-than-standard output, and a higher rate is paid for above-standard output. A
difficulty with this, as well as other piece-rate plans, is setting a standard that is
equitable for both the employee and the employer.

2. Sales Compensation And Incentive- The compensation paid to employees

involved with sales and marketing is partly or entirely tied to sales performance.
Sales incentives are perhaps the most widely used individual incentive. (appropriate
in car dealership)

Measuring Sales Performance - Successfully using variable sales compensation

requires establishing clear performance criteria and measures. Although many
companies only use an individual’s sales revenue compared to established quotas
as the primary measure, performance would be much better if these organizations
used a variety of criteria. Generally, no more than three sales performance
measures should be used in a sales compensation plan.
Sales Compensation Plans - are of many types, but are generally based on the
degree to which total compensation includes some variable pay tied to sales
performance.
Salary Only - The salary-only approach is useful when serving and retaining existing
accounts is being emphasized more than generating new sales and accounts.
Straight Commission - An individual incentive system widely used in sales jobs is
the commission which is compensation computed as a percentage of sales in units
or dollars. Commissions are given to workers in three common ways: straight
commission, salary-plus-commission, and bonuses. In the straight commission
system, a sales representative receives a percentage of the value of the sales
made, but receives no compensation if no sales are made. Sales representatives
must make sales to earn pay. This may create difficulties for the sales
representative if there is a long lead time before purchasing decisions are made.
Some employers use a draw system in which the sales representative can draw
advance payments against future commissions.

Salary Plus Commission or Bonuses - The most frequently used form of sales
compensation is the salary plus commission, which combines the stability of a
salary with the performance aspect of a commission. Some sales organizations

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 combine both individual and group sales bonus programs. This approach
encourages cooperation and teamwork for the sales persons to work together.
3. Bonuses - Individual employees may receive additional compensation payments
in the form of a bonus, which is a one-time payment that does not become part of
the employee’s base. Generally bonuses are less costly to the employer than
other pay increases because they do not become part of employees’ base wages
upon which future percentage increases are figured. This form of incentive, which
is growing in popularity, is most widely used at the executive level. Bonuses can
also be used to reward employees for contributing new ideas, developing skills, or
obtaining professional certifications.
4. Special Incentive Programs -- range from one-time contests for meeting
performance targets to rewards for performance over time. They primarily focus on
rewarding high-performing individuals, rather than groups or the entire
organization.

Awards -- such as cash, merchandise, gift certificates, and travel are the most
frequently used incentive rewards. While cash is still highly valued by many
employees, one study revealed that employees receiving the non-cash incentives
significantly outperformed those receiving only cash.
Recognition Awards -- are used to honor individual employees for their
performance or service. “Employee of the month” and “employee of the year”
awards are an example. It is important that recognition awards be given to
recognize specific efforts and activities targeted by the organization as desirable.
Service Awards -- are another common type of reward given to employees. They
are generally determined by length of service with performance playing little or no
role.

 GROUP INCENTIVES: It is a team based pay plans that reward all members
equally on the basis of group output, cost savings, or quality improvements.
Gainsharing – is the sharing with employees of greater-than-expected gains in
profits and/or productivity. Gainsharing attempts to increase “discretionary efforts,”
that is, the difference between the maximum amount of effort a person can exert
and the minimum amount of effort necessary to keep from being fired. To begin a
gainsharing program, management must identify the ways in which increased
productivity, quality, and financial performance can occur and decide that some of
the gains should be shared with employees. (Appropriate in retail industry). The
rewards can be distributed in several ways:

 A flat amount for all employees

 Same percentage of base salary for all employees
 Percentage of the gains by category of employees
 A percentage based on individual performance against measures.

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  ORGANIZATIONAL INCENTIVES. An organizational incentive system
compensates all employees in the company for overall performance and
productivity during a predetermined time period. Organizational plans are based on
the assumption that overall efficiency depends on teamwork that accompanies
plant-wide cooperation. Common organization incentive systems include profit
sharing, skills based pay.

Profit Sharing - programs distribute a portion of an organization's profits to

employees. The major objectives of profit-sharing plans are to improve productivity,
recruit or retain employees, improve product/service quality, and improve
employee morale. Typically, the percentage of the profits distributed to employees
is agreed on well in advance of distribution. In some profit-sharing plans,
employees receive portions of the profits at the end of the year while in other plans
the profits are deferred and made available to employees on retirement or on their
leaving the organization. (Law firms)

Skill-based Pay. Employees are paid based on whether they acquire new
knowledge and skills that are beneficial to the organization. (Knowledge based
industry – software development).
Employee Stock Ownership Plans (ESOPs) – A form of profit sharing is the
employee stock ownership plan (ESOP) whereby employees gain shares of
ownership in their respective organizations. They are intended to increase
employee commitment, loyalty, and effort.

BASIS OF SELECTING CONTINGENCY PAY PLANS

 Organisational Culture

Is the organization fundamentally built around individual performance?

Is teamwork norm of the organization?
Is the organization highlights on high-level performers are seen as role models or
Is that high level performers are viewed as threat to upper management?
Is the company is happy with current culture or wants to create new type of culture?
Organisational culture can be of two types: traditional and involvement culture. While
implementing reward system, a careful consideration needs to be done with specific
regard to organizational culture.

Strategic Direction Of The Organisation

In addition to the organization's culture, an important consideration in selecting a CP
plan is the organization's strategic direction. Strategy is not only a key element in
designing the performance management system; it is also a key element in designing a
CP plan. Table below shows a selected list of strategic objectives and CP plans that are
most conducive to achieving the objective.

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 Strategic Business Objective CP Plan

Employee development Skill-based pay

Customer service Competency-based pay, Gain sharing

Productivity: Individual Piece rate

Sales commissions
Gain sharing

Productivity: Group Gain sharing

Group incentives

Teamwork Team sales commissions

Gain sharing
Competency-based pay

Overall profit Executive pay

Profit or stock sharing

Bonuses
Profit sharing

PAY STRUCTURES
An organization's pay structure classifies jobs into categories based on their relative worth.
Specifically a pay structure designing will involve answering these questions:
 How does the organization come up with the idea to create salary bands for each of five
categories?
 How wide should these bands be?
 How many bands should be included in the system?
Information to answer each of these questions is provided by what is called a job evaluation.

Job Evaluation
Job evaluation is a process of data collection through which an organization can understand the
worth of the various jobs and, as a result, can create a pay structure. Job evaluation includes a
consideration of what skills, knowledge, and abilities are required for each job, how valuable the
job is for the organization, and how much pay other organizations allocate to these jobs. There
are several job evaluation methods available, but the most popular are ranking, classification,
and point.

Ranking method

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It is the fastest and simplest to implement. It consists of two steps.
First, a job description is created for each job. A job description results from a job analysis and
summarizes the job duties, needed knowledge, skills, and abilities (KSAs), and working
conditions for each job. Second, job descriptions are compared to each other in terms of how
valuable each job is for the organization. As a result of these comparisons, jobs are ranked from
most to least valuable. The most valuable job will be given the highest pay, followed by the
second most valuable job, and so forth.
The ranking method requires little time, and minimal effort is needed in administering it. On the
other hand, it has some drawbacks.
First, the criteria for ranking may not be understood clearly. That is, evaluators may not share
the same views regarding which criteria should be used to rank the various positions in terms of
relative worth to the organization.
Second, the distance between each rank is not necessarily equal. That is, the distance between
the job ranked number 1 and the job ranked number 2 may not be the same as the distance
between the number 2 job and the number 3 job. These unequal distances may not be reflected
in the resulting differences in pay between the jobs.

Classification method.

First, a series of classes or job families are created. Each job class, sometimes referred to as a
"grade," has a unique label and includes a sufficiently detailed description of the work performed
so that it will be easy to classify all individual jobs within one class.
Second, each individual job is placed within a job class. The end result is a set of classes, each
including several jobs. Jobs falling in different classes are considered differently and also are
compensated differently. The classification method has several advantages, including the fact
that jobs can be quickly slotted into the structure. In addition, classification levels are readily
accepted by employees because they seem to be valid.

Point method

It is the most time-consuming of the three, but it is the one that provides the most accurate
results in terms of the pay scale for each job compared to all other jobs in the organization.
Steps: First, identifying compensable factors. Compensable factors are characteristics of jobs
that add value to the organization and for which the organization is willing to pay. For example,
an organization may decide that there are four factors that are important: skills, experience
required, responsibility, and working conditions. Specifically, the more the skills, experience
required, and responsibility, and the worse the working conditions, the more the job is worth to
the organization.

Second, factors are scaled. For example, a five-point scale may be used for each factor ranging
from 1 (i.e., very little is needed for this position) to 5

Job Evaluation Form

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Position: Instructor

Compensable Factors
Compensable Factors Degree Weight Points

Skills 1 35 35

Experience required 2 15 30

Responsibility 1 40 40

2 10 20

Working conditions T125

o
Broad Banding t
a categories,
In recent years, many organizations have chosen to reduce job classes into fewer
usually about five. Each of these broader pay categories is called a band. l
Broad banding has become increasingly popular worldwide. The major reasons broad banding
is implemented is that :
 It provides more flexibility in rewarding people.
 The need to reflect changes in organizational structure
 To provide a better base for rewarding growth in competence
 To devolve more responsibility for pay decisions to managers
 To provide a better basis for rewarding career progression.

Organizations cannot afford to lose their most competent workers, and having a pay structure
based on broad banding allows for salary increases for individuals based on merit that do not
require a change in job classification or even job title.
In addition, organizations are becoming flatter and less hierarchical, and broad banding reflects
these organizational changes.

Discussion questions:

1. Distinguish between traditional and contingent pay plans. Discuss how contingent
pay plans can help improve employee motivation and performance.

2. Design a contingent pay plan, taking into account key variables such as the
organisation’s culture and strategic business objectives.

3. Discuss in detail the various types of contingency pay plans

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