What kind of reward system exists in the organization

The staff may receive a low basic pay, but will then receive commission, based on a percentage of the amount of their sales. If sales are low, the organisation will have to pay less. The disadvantage of commission is that it may lead to dysfunctional behaviour. Typically the bonus will be a percentage of the basic pay.

The bonus may be paid during the year in question; for example, quarterly, or it may be deferred until some later date, such as the retirement of the staff.

It may also encourage loyalty in cases where staff may lose their bonus if leaving the organisation means that they lose the right to it. The obvious disadvantage with profit-related pay is that it does not match the primary objective of commercial organisations, which is to maximise the wealth of the shareholders.

Managers may be motivated to increase profits by taking short-term actions that will harm the business in the long run, for example, or destroy wealth by investing in projects that increase the profits of the organisation, but produce a return that is below the cost of capital of the organisation. Profit-related pay might not be a motivator for junior employees, who may fail to see the link between their effort and the overall profits of the organisation.

Stock option plans have become very popular since the s, when greater emphasis started to be given to shareholder value. Under stock option plans, staff receive the right to buy shares in their company at a certain date in the future, at a price agreed today. For example, Alpha Co is listed on the stock exchange of Homeland. These options have no intrinsic value at the granting date. Stock option plans are most appropriate for the senior management of organisations as they are the people who have the most influence over its share price.

The rational for using stock option plans is that they align the objectives of the directors with the objectives of shareholders. If the share price rises, the senior management benefit because their options increase in value. Thus senior managers will start to think like investors. The big weakness of stock option plans is that share prices may depend on external factors as much as on the performance of the directors. During the bull markets of the s and s, many companies share prices rose simply because the market rose.

Another weakness is risk misalignment. Share options reward managers if the share price goes up. What shareholders really want is the performance of their company to be better than the market.

One solution to this is to use an indexed exercise price, where the price at which the director can buy the shares is equal to the current market price, plus the increase in the stock market index between the date that the options are issued, and the exercise date. This means that the share option reflects the controllability principle more closely, as directors would not be rewarded for rises in the stock market in general.

Defined benefit pension schemes used to be a popular form of reward. Under such schemes, the employee pays a pension to former employees based on their final salary, and the number of years that the employee worked for the organisation.

Defined benefit schemes leave organisations with an uncertain, often large liability, and for this reason, many organisations have now discontinued such schemes. The pension pot is then invested, and the employee receives whatever is in their account on retirement.

In some countries, employees may be required to use what is in the pot to buy an annuity, which pays them a fixed income for the rest of their lives. Many countries offer tax incentives for such pension schemes, such as allowing employees to reduce their taxable income by the value of contributions made to the schemes.

Benefits in kind or indirect pay are paid to employees in addition to their base salary and performance-related pay. Benefits in kind include items such as health insurance and meal vouchers. They are usually provided to more junior staff in order to provide additional incentives at a lower cost.

They are often used as a form of recognition, so the employee of the month for example will be given a benefit rather than a cash payment. The advantage of benefits in kind is that greater flexibility can be given in designing a reward scheme for an individual. The advantage of this is that employees will select the benefits that they value most. Benefits from which the employees can choose typically include such items as health insurance, holiday vouchers, company cars or sports vouchers.

Cafeteria schemes may be difficult to administer. Staff may also find them complex to understand, as they will have to select a number of benefits that have a value that is within the agreed limit.

How much should employees be paid? Two factors need to be taken into account here. First, competitiveness, and second internal equity. As already mentioned above, unless the level of pay is competitive, it will be difficult to recruit and retain the right number of skilled employees. If it is too much, the cost to the organisation will be too high.

Here the organisation will compare its pay levels with competitors. Such information may be available from job adverts in newspapers or on the Internet, or from recruitment consultants. Internal equity relates to the pay differentials within the organisation itself. Job evaluation techniques are used that try to determine the value of a specific job to the organisation. Based on this, the level of rewards for that particular position will be determined. Finally, the selection of an occupation by an individual, as well as the decision to join a particular organization within that occupation, are influenced by the rewards that are thought to be available in the occupation or organization.

To prove this, simply look at the classified section of your local newspaper and notice how many jobs highlight beginning salaries. Unfortunately, cases can easily be cited where reward systems have been distorted to punish good performance or inhibit creativity. Consider, for example, the Greyhound Bus Company driver who was suspended for 10 days without pay for breaking a company rule against using a CB radio on his bus.

The bus driver had used the radio to alert police that his bus, with 32 passengers on board, was being hijacked by an armed man. The police arrested the hijacker, and the bus driver was suspended for breaking company rules. Such incidents hardly encourage employees to focus their efforts on responsible performance.

A common reality in many contemporary work organizations is the inequity that exists in the distribution of available rewards. One often sees little correlation between those who perform well and those who receive the greatest rewards. Each works approximately 40 hours per week, and both are important for organizational performance. Is it really possible that the president is 1, times more important than the secretary, as the salary differential suggests?

How do organizations decide on the distribution of available rewards? At least four mechanisms can be identified. In more cases than we choose to admit, rewards go to those with the greatest power either market power or personal power. In many of the corporations whose presidents earn eight-figure incomes, we find that these same people are either major shareholders in the company or have certain abilities, connections, or status that the company wants. Indeed, a threat of resignation from an important or high-performing executive often leads to increased rewards.

A second possible basis for reward distribution is equality. Here, all individuals within one job classification would receive the same, or at least similar, rewards.

The most common example here can be found among unionized workers, where pay rates are established and standardized with little or no reference to actual performance level. Instead of ability or performance, these systems usually recognize seniority as the key factor in pay raises or promotions. The basis for the social welfare reward system in this country is need. In large part, the greater the need, the greater the level of support. It is not uncommon to see situations in business firms where need is taken into account in layoff situations—where an employee is not laid off because she is the sole support of a family.

A fourth mechanism used by organizations in allocating rewards is distributive justice. Under this approach, employees receive at least a portion of their rewards as a function of their level of contribution to the organization. The greater the contribution such as performance , the greater the reward.

This mechanism is most prominent in merit-based incentive programs, where pay and bonuses are determined by performance levels. The variety of rewards that employees can receive in exchange for their contributions of time and effort can be classified as either extrinsic or intrinsic rewards.

Extrinsic rewards are external to the work itself. They are administered externally—that is, by someone else usually management. Examples of extrinsic rewards include wages and salary, fringe benefits, promotions, and recognition and praise from others. On the other hand, intrinsic rewards represent those rewards that are related directly to performing the job.

Examples of intrinsic rewards include feelings of task accomplishment, autonomy, and personal growth and development that come from the job. In the literature on employee motivation, there is considerable controversy concerning the possible interrelationship of these two kinds of reward. Upcoming SlideShare. Like this presentation? Why not share! Embed Size px. Start on. Show related SlideShares at end. WordPress Shortcode. Next SlideShares. Download Now Download to read offline and view in fullscreen.

Download Now Download Download to read offline. Human Resource management. Shaheen kousar Follow. Reward system. Theories of Motivation. Maximum sum subarray. What to Upload to SlideShare. To bookmark a post, just click.

When we talk about rewards, we essentially classify the multiple ways to appreciate your employees better. Unlike popular perceptions, you can reward employees without breaking the bank. Monetary rewards are not the whole reward system but only a tiny part of it. Nowadays, even small businesses can afford to recognize their workforce through affordable gift cards. The past two decades have seen a constant rise in companies investing in an employee reward system.

Because it works. When people feel valued, they:. Altogether, having a reward and recognition program is beneficial not only for the workforce but also for the company. Source: Unsplash. Intrinsic rewards are the rewards that are non-tangible but yet results in higher levels of job satisfaction. Some examples are- an impressive job title, career growth, personal achievements, praises, etc. Extrinsic rewards are tangible rewards that employees receive upon doing good work.

It includes bonuses, raises, gifts, etc. Intrinsic rewards make employees feel valued in a company. Similarly, extrinsic rewards focus on improving employees' performance through appreciation. It's necessary to find a balance between extrinsic performance and intrinsic motivation. Financial rewards work by positively contributing to the overall employees' financial wellbeing.