How to... Reward Employees

With employment levels and job vacancies spiraling, income tax revenues set to surpass the 2017 record of €20 billion, salaries rising by up to 15-20 per cent for specialist posts in sectors like information technology, accounting, finance, science and engineering and the bankers up in arms to have the Government imposed pay ceiling lifted, the subject of employee reward is back in the headlines. Directly related thereto is the role of employee reward in the battle to attract, retain and motivate staff. According to talent specialists Morgan McKinley, this battle is forcing employers to revisit their reward structures for the purpose of remaining competitive.

Reward is Important

It’s estimated that rewards at work comprise up to 75 per cent of an organisation’s total costs. Hence, employers need to carefully align these rewards with their objectives. Given the array of elements to be found in the modern reward package, it is essential that one selects the best mix of base to variable pay, fixed to flexible benefits and financial to non-financial rewards. Finding this mix means that employers must be tuned in to the various ways that reward influences people and the threats and opportunities associated with decisions relating to reward and recognition at work.

Reward systems are an integral part of the human resource management and reward process. In fact, they are one of the most vital and controversial issues in the world of work. An acceptable and effective payment system, facilitating the requisite level of productivity and providing fair and reliable rates of pay, is considered essential to harmony and efficiency in the workplace.  If the system is to be successful, it must be designed to suit all the circumstances of the organisation in which it is to apply, including the aspirations of employees. It must also be monitored and controlled to ensure that it’s delivering on its key objectives: to attract, motivate and retain staff, whilst remaining cost-effective. The bottom line is that these systems have a sizeable impact – for good or ill – on the industrial relations atmosphere and on the effective running of an organisation. That is, reward plays an important part in employee engagement, whilst different components of the package must meet different objectives, given that they may well impact in different ways. From the employer’s perspective, the bottom line is that if you’re wasting money via an ill-judged reward system, you need to do something about it, otherwise the liquidator or receiver will!

Why Reward?

The main reasons for rewarding employees are to attract, retain and motivate them. However, according to the Chartered Institute of Personnel and Development’s (CIPD) research, the prevailing wisdom about which parts of the reward package are best suited to recruitment, retention and motivation has changed. That is, recent research indicates that employees are attracted, retained and motivated by an array of financial and non-financial rewards. Furthermore, the Institute found, these change over time, in line with personal circumstances. For example, in some scenarios an employee may not be unduly influenced by the financial components of the package. On joining the world of work, one may be more interested in the training and development opportunities. A lot of talented people now think that a great place to work is one that makes them more ‘portable’, enhancing the prospect that they can take the skills they acquire to other places, as they advance their careers and increase their rewards.

Reward Options

Hence, it’s hardly surprising that when it comes to the installation and maintenance of a payment system, ‘best practice’ recommends the involvement of a sample of staff (or staff representatives) from the outset. This input can yield valuable information on the operation of the existing and/or proposed system, allowing management to sound out employee opinion, which may ultimately save time, trouble and money. This early input also gives those most affected by the new system – the staff – the opportunity to understand the revisions and the reasons for them, making them more likely to accept and work them well. The most commonly used scheme types are:

• Time or Flat Rates of Payment
• Individual Payment By Results
• Group Payment By Results
• Measured Daywork
• Plant and Enterprise-Wide Schemes
• Profit Sharing-Share Ownership-Gainsharing
• Merit Rating

Whilst the merits and demerits of these options are well documented, clearly the selected system or mix thereof has the best chance of success when carefully selected and shaped to meet the specific needs of the organisation and work group(s) to whom it applies. The same logic applies to perks. At the start of this century, the Public Sector Benchmarking Body (P.S.B.B.) found an array of perks in Irish workplaces, most commonly in the form of pensions, health and life insurance, cars, parking, extra holidays, subsidised canteens, club membership, creche facilities etc. Furthermore, as with employee share schemes, the Government has made the payment of a tax-free annual non-cash bonus (up to €500 per employee) attractive for both employers and employees. These perks are on top of the four most common forms of pay structure:

(a) the traditional graded salary scale structure, with a 40-50% difference between the maximum and minimum points on the scale;

(b) the ’spot-rate’ structure, based on the market rate for the specific job, without progression through a pay range (i.e. commonly found in the services sector);

(c) salary or pay ’curves’, with progression based on (often a mix) of factors such as competencies or performance; and

(d) ’broadbanding’, which has wide pay ranges, with up to 150% between the maximum and minimum scale points.

Of course, as pay normally comprises the bulk of the reward costs, its treatment demands special consideration. For example, given the limited motivational effect of a flat or base rate payment system, the majority of private sector employers in Ireland pay some form of variable pay on top of basic salary. The most popular form links pay to individual performance. According to the European Foundation’s recent research, the most popular form of variable pay in Ireland is where it is linked to individual performance and appraised by management. Thereafter, profit sharing schemes, followed by ‘pay linked to group performance’ are most commonly found, with employee share ownership schemes at the bottom of the popularity ranking.

Notably, the Foundation also found that employers favour such variable reward schemes as they are seen as a powerful tool for increasing employee motivation, whilst allowing for the linkage of reward to organisational performance. That is, such schemes have the capacity to convert the remuneration system from an indiscriminate machine to a more finely tuned mechanism, with the potential to change cultures in the direction of all-important commercial, quality and performance considerations. From the employees’ perspective, they are also welcome, as a means to boost income and get real recognition for their work. The incidence and extent of variable pay systems in use reflects the fact that paying a standard time or flat rate simply doesn’t enable improved performance or better work. That is, the prospect of higher pay for more effective work clearly does have some incentive value. Hence, many such variable pay schemes prevail on the assumption that performance will improve.

The ‘Best’ System

Of course, each payment system has its own characteristics, advantages and disadvantages, making it more likely to succeed in some circumstances than in others. Furthermore, most organisations are dynamic and in the face of constant change they need evolving payment systems. Hence, the implementation of a particular system or perk is not a once and for all event, but the start of a continuous process. That is, the effective day-to-day control of pay and reward systems, together with their periodic review in the light of changing conditions, are crucial considerations and central to a system’s success.

In this regard, the industrial relations dimensions associated with the introduction or revision of a payment system are of paramount importance. Without acceptance from and commitment to the new system by employees, the system is doomed to failure. This acceptance by employees will be more readily obtained if their representatives are involved at all stages, from inception through introduction to monitoring of the system. Hence, it is commonly adjudged that the ‘best’ payment system is one:

• Which has been carefully selected for the organisation and the specific work groups therein.
• Has the commitment of all levels and sections of management and employees.
• Has staff input to the selection, installation and maintenance thereof.

Hence, employers that need to remain competitive in the labour market take time to find out what attracts, retains and inspires employees and to explore how best they can meet these objectives in a manner that is in line with the requirements of the business. To meet these objectives or challenges, the reward professional needs to have a skill-set comprised of change management and communication competencies. An organisation’s reward policies reflect its values, so it’s important that an appropriate communications strategy is used to explain what staff behaviours are being rewarded, together with the ‘how’ and the ‘why’ of the system. The reward professional also requires a capacity to source and use evidence-based research findings. For example, this entails addressing the realities that reward can have a positive impact in the short-term but a limited impact in sustaining change in the longer term, whilst internal equity is actually a more significant demotivator than absolute pay levels.

The Key Decisions

Hence, an effective employee reward system entails careful consideration of factors such as:

• The Pay Structures – building a fit that values jobs and ensuring that they relate to one another appropriately within the organisation to ensure internal equity and vis-a-vis the external labour market.
• The Pay Levels - there are various approaches to setting pay levels or ranges (e.g. job evaluation). Market rates are commonly used by employers, having determined where one wishes to pitch the in-house rate(s) vis-à-vis occupational, sectoral and geographical comparators. Organisations like the Irish Business and Employers Confederation (I.B.E.C.) provide an extensive array of appropriately classified pay and perk datasets, enabling employers to position themselves in line with their preference (e.g. at the median or upper or lower quartile).
• The Pay Awards - when setting the size of the overall pay budget for the periodic pay increase (or decrease), key considerations include the going rate, the ability to pay, inflation, market rate changes for the specific sector and/or occupational category, legal developments (e.g. a new Employment Regulation Order, minimum wage movement), government pay policy and employer organisation guidelines (e.g. from I.B.E.C., the Chartered Institute of Personnel and Development).
• The Pay Progression – key considerations here are rewarding performance and the acquisition/possession of competencies/skill-sets, with a system for progressing employees along salary scales and bands (e.g. via increments and broadbanding).
• The Variable Pay and Perks – the most common forms of variable pay are cash bonuses and incentives, whilst flexible benefit schemes (also known as 'cafeteria benefits' or 'flex plans') are frequently deployed, allowing employees to vary their pay and benefits package to satisfy their unique requirements.

The bottom line is that a good employee reward system provides employees with three things: a fair return for their efforts; motivation to maintain and improve their performance and clarity as to what behaviours and outcomes are valued by the employer. The unspoken ‘quid quo pro’ is that it enables the employer to attract, retain and motivate employees, thus enhancing the prospect of the organisation’s harmony, effectiveness and longevity.