Part 1

Fundamentals of
Reward Management
1
Overview
of
Reward
Management

The aim of this chapter is to provide a general introduction to reward management. It

starts by defining reward management and its aims, which leads into a summary of the
views of the main contributors to the development of the reward management concept.
This is followed by descriptions of the processes and activities of reward management
and the chapter concludes with an assessment of the impact that reward management can
make.

REWARD MANAGEMENT DEFINED

Reward management is concerned with the formulation and implementation of strategies

and policies that aim to reward people fairly, equitably and consistently in accordance
with their value to the organization. It deals with the design, implementation and
maintenance of reward processes and practices that are geared to the improvement of
organizational, team and individual performance.

THE AIMS OF REWARD MANAGEMENT

The strategic aim of reward management is to develop and

implement the reward policies, processes and practices required to support the
achievement of the organization’s business goals. The specific aims are to:

❚ create total reward processes that are based on beliefs about

what the

organization values and wants to achieve;❚ reward people for the value they create;❚
align reward practices with both business goals and employee

values; as Duncan Brown1 emphasizes, the ‘alignment of your

reward practices with employee values and needs is every bit as important as alignment
with business goals, and critical to the realisation of the latter’;

❚ reward the right things to convey the right message about what
is important in terms of expected behaviours and outcomes;
❚ facilitate the attraction and retention of the skilled and
competent people the organization needs, thus ‘winning the war
for talent’;❚ help in the process of motivating people and gaining
their commit

ment and engagement;❚ support the development of a

performance culture;❚ develop a positive employment
relationship and psychological

contract.
ACHIEVING THE AIMS

To achieve these aims, reward management must be strategic in the sense that it
addresses longer-term issues relating to how people should be valued for what they do
and what they achieve. Reward strategies and the processes that are required to
implement them have to flow from the business strategy. They have to be integrated with
other human resource management (HRM) strategies, especially those concerning human
resource development – reward management is an integral part of an HRM approach to
managing people.

Effective reward management is based on a well-articulated philos- ophy – a set of

beliefs and guiding principles that are consistent with the values of the organization and
help to enact them. It recognizes that if HRM is about investing in human capital from
which a reasonable return is required, then it is proper to reward people differentially
according to their contribution (ie the return on investment they generate).

Importantly, reward management adopts a ‘total reward’ approach, which emphasizes

the importance of considering all aspects of reward as a coherent whole that is integrated
with other HR initiatives designed to achieve the motivation, commitment and
engagement of employees.

CONTRIBUTORS TO THE CONCEPT OF REWARD

MANAGEMENT
Much of the impetus for the development of the reward
management
concept has come from US writers, especially Lawler with
‘strategic pay’2 and, more recently, ‘Treat people right’,3Schuste r
and Zingheim4 with ‘the new pay’ and Flannery, Hofrichter and
Platten5 with ‘dynamic pay’.
Strategic pay

Lawler emphasized that when developing reward policies it is necessary to think and act
strategically about reward. Reward policies should take account of the organization’s
goals, value and culture and of the challenges of a more competitive global economy.
New pay helps to develop the individual and organizational behaviour that a company
needs if its business goals are to be met. Pay policies and practices must flow from the
overall strategy and they can help to emphasize important objectives such as customer
satisfaction and retention and product or service quality.

In Treat People Right3 Ed Lawler stresses the importance of

creating a ‘virtuous spiral’ in which both employers and employees
win. He identifies a number of principles for achieving this, which

look at the whole HRM agenda from creating the right value proposition on recruitment,
through to quality of leadership. He states that: ‘It is entirely possible to design a reward
system that motivates people to work and satisfies them while at the same time
contributing to organizational effectiveness.’

The new pay

Lawler’s concept of the new pay was developed by Schuster and
Zingheim who described its fundamental principles as follows:
❚ Total compensation programmes should be designed to reward
results and behaviour consistent with the key goals of the
organiza
tion.❚ Pay can be a positive force for organizational change.❚
The major thrust of new pay is in introducing variable (at risk) pay.
❚ The new pay emphasis is on team as well as individual rewards,
with
employees sharing financially in the organization’s success.❚
Pay is an employee relations issue – employees have the right to
determine whether the values, culture and reward systems of
theorganization match their own.
But Lawler6 later emphasized that the ‘new pay’ ideology should be
regarded as a conceptual approach to payment rather than a set of

prescriptions: ‘The new pay is not a set of compensation practices at all, but rather a way
of thinking about reward systems in a complex organisation... The new pay does not
necessarily mean

implementing new reward practices or abandoning traditional ones; it means identifying

pay practices that enhance the organization’s strategic effectiveness.’

Dynamic pay

Flannery, Hofrichter and Platten expounded the concept of ‘dynamic pay’ and suggested
that the nine principles that support a successful pay strategy are:

1Align compensation with the organization’s culture, values and

strategic business goals.
2Link compensation to the other changes.
3Time the compensation programme to best support other change
initiatives.
4Integrate pay with other people processes.
5Democratize the pay process.
6Demystify compensation.
7Measure results.
8Refine. Refine again. Refine some more.
9Be selective. Don’t take to heart everything you hear or read
about pay.

Dynamic pay

Flannery, Hofrichter and Platten expounded the concept of ‘dynamic pay’ and suggested
that the nine principles that support a successful pay strategy are:

1Align compensation with the organization’s culture, values and

strategic business goals.
2Link compensation to the other changes.
3Time the compensation programme to best support other change
initiatives.
4Integrate pay with other people processes.
5Democratize the pay process.
6Demystify compensation.
7Measure results.
8Refine. Refine again. Refine some more.
9Be selective. Don’t take to heart everything you hear or read
about pay.

REWARD MANAGEMENT PROCESSES AND ACTIVITIES

The processes and activities of reward

management are illustrated in Figure
1.1. The components are described
below:

❚ The business/HR strategy. This is the starting-point; all the

reward policies, processes and practices flow from here to achieve the overarching
business goal of improved performance.

❚ The reward strategy. This determines the direction in which reward

management innovations and developments should go to support the business strategy,

how they should be integrated, the priority that should be given to initiatives and the pace
at which they should be implemented.

❚ Grade and pay structure policy. This deals with the policy on the
shape of the grade structure and the elements of pay within that structure, ie:
Base pay: the fixed rate of pay that represents the rate for the job into which pay related
to performance, competence, contribution or service may be consolidated. Policies on
base pay levels will be affected by the factors discussed at the end of this chapter but,
importantly, they will express the intentions of the organization on the degree to which it
wants pay levels to be competitive and therefore the relationship between those pay
levels and market rates (its ‘market stance’).

Contingent pay: pay for individuals that is related to performance,

competence, contribution or service.
Variable pay: pay in the form of bonuses or cash payments that
will be contingent on individual, team or company performance.
❚ Market analysis. The process of identifying rates of pay in the
labour market to inform decisions on levels of pay within the
organization, which will be influenced by its market stance.
❚ Job evaluation.sd The systematic process of establishing the
relative size of jobs and roles within the organization.
❚ Grade structure. The sequence or hierarchy of grades, bands or

levels, which may be divided into job or career families and into which, on the basis of
job evaluation, groups of jobs or roles that are broadly comparable in size are placed.

❚ Pay structure. The ranges of base pay that are attached to grades

or levels in job or career families and the scope for pay progression related to
performance, competence, contribution or service. Base pay levels will be influenced by
equity and market rate considera- tions.

❚ Employee benefits. The provision for employees of pensions,

sick pay, various kinds of perks such as company cars and
entitlement to holidays and other leave.
❚ Non-financial rewards. Rewards that do not involve any direct

payments and often arise from the work itself, for example achievement, autonomy,
recognition, scope to use and develop skills, training, career development opportunities
and high-quality leadership.

❚ Performance management. Processes involving managers,

individuals and teams based on shared understanding, which define performance and
contribution expectations, assess performance against those expectations, provide for
regular constructive feedback and inform agreed plans for performance improvement,
learning and personal development. Performance management will also inform
contingent pay decisions.

❚ Total remuneration. The sum of base pay, contingent pay and

the value of employee benefits.
❚ Total reward. The sum of total remuneration and non-financial
rewards.
❚ Building capability. Building the capability of both the reward
function and line management to understand, work with and
communicate the elements of reward policy and practice and
changes as they occur
THE IMPACT OF REWARD MANAGEMENT

US writers in the 1990s such as those mentioned earlier suggested that what they call
‘compensation policies’ can exert a major influence on organizational cultures, processes
and results. But this notion can be taken too far. The naive belief that devices such as
performance-related pay can by themselves act as ‘levers for change’ has been
responsible for many of the failures in reward innovations over the last decade. The
impact of reward management on performance is not clear cut. Simplistic solutions such
as performance pay working in isolation and ignoring the complexity of motivating
factors won’t work. As Sandra O’Neal7points

out: ‘It is simply no longer possible to create a set of rewards that is universally appealing
to all employees or to address a series of complex business issues through a single set of
solutions.’

Of course, reward policies and practices must respond to change and they can help to
consolidate it. However, their role is to support change not to drive it. And they can play
an important part in managing the psychological contract – the beliefs held by an
employee and an employer of what they expect from one another. Duncan Brown1
suggests that: ‘Pay and formal reward

policies are one of the most tangible symbols of a company’s culture and employment
offering and are inextricably interwoven with them. Therefore they are critical to
demonstrating that the employer is delivering on its side of the employment bargain.’