Strategic Aspects of Reward and Variable Pay Including Incentives - Essay Example

?HRM: Summary on Employee Rewards Strategic Aspects of Reward and Variable Pay Including Incentives The hash economic times experienced in different countries around the world is making cost conscious organizations to review how they remunerate their employees. The harsh economic situation is making it difficult for most organizations to motivate their employees while at the same time control cost as low as possible (Armstrong and Murlis 2007, p. 24). This is because, controlling cost might require paying employees poorly, which has the effect of demoralizing employees. As such, most progressive organizations today are looking for alternative pay methods that ensure cost control, while at the same time motivate employees to increase their effort. Variable pay has emerged as the most appropriate pay that ensures cost control while at the same time keeps employees motivated. Variable pay is a reward method, which involves paying employees beyond their base pay for demonstrating exceptional performance. In variable pay, may involve giving incentives that may be in monetary in nonmonetary terms, based on output, experience, and skills. Armstrong and Murlis (2007, p. 33) argue that the way an organization pay its employees tells much about the goals of an organization and its priorities. As such, companies that intend to be successful must make their workers become part of the organization. In this regard, progressive companies are increasingly adopting variable pay as a means of motivating their employees to continue working hard. Research has demonstrated that variable pay motivates workers. The motivational effect created by rewards makes them increase their effort, thereby resulting in increased performance. It is believed that variable pay makes employees develop the belief that good performance results in higher pay. This motivates them to increase their effort in order to get a salary increment or bonus pay. Based on the proved motivational effect that variable pay has on employees, human resource managers are increasingly adopting this variable pay method to as means of motivating employees to increase their performance. In addition, most human resource managers favor variable pay since it rewards employees in a manner that they see task fair (Armstrong and Murlis 2007, p. 41). In addition, variable pay is favored over base pay since it helps in identifying and eliminating poor performance by encouraging employees to increase their effort. This is because variable pay makes people believe that good performance results in better pay. Despite the proven evidence of the motivational effect of variable pay, some human resource and compensation have criticized the variable pay method, claiming that it is not practical. At the same time, critics of variable pay method argue that pay for performance is an antiquated method that is not suitable for use in the modern world (Armstrong and Murlis 2007, p. 39). They argue that other better pay methods have emerged in that motivates employees to increase their performance. Some of these new pay methods include pay for knowledge, knowledge-based pay, and several other incentive programs. The other controversy associated with pay for performance pertains to the belief that variable pay for performance does not create an incentive as alleged. Job Evaluation and Pay Structures Awarding a fair salary that commensurate with the nature and type of job is one of the key responsibilities of human resource managers. In fact, every job has different demand, including skills, experience, and level of education. As such, in order to award a fair salary for each category of job, the human resource managers must carry out a job evaluation. Job evaluation pertains to the procedural process used to ascertain the value, complexity, and monetary worth of a given job relative to others. Carrying a job evaluation enables human resource manager to determine the pay package that suit a given position in the workplace (Armstrong and Baron1995, p. 11). The most common job evaluation methods that most human resource managers use include ranking, factor comparison, point method, and classification. Of the four job evaluation methods, raking is arguably the simplest and the most commonly used job evaluation technique. This job evaluation technique involves ranking jobs based on a given factor, such as skills, education, or complexity of the jobs in question (Armstrong and Baron1995, p. 13). Once ranking has been done, compensations are then awarded on each job based on their rakings. In this regard, the job that ranks highest is awarded a high pay package, while the one that ranks low is awarded the lowest pay package. The second job evaluation technique is the point method. This method is more complex than the ranking method. Just as its name implies, point method involves assigning points to a given compensation features based on responsibility, work conditions, skills involved (Armstrong and Baron1995, p. 21). This is followed by assessing the availability of each of these characteristics in a job after which points are assigned accordingly. The highest pay package is assigned to jobs with the highest points. Factor comparison, on the other hand, involves the evaluation of job based on skills, complexity, education level required and work conditions, but do not involve assigning points, as is done in point method. Last, is the classification method, which involves categorization of jobs with the same value into the same group (Armstrong and Baron1995, p. 23). The grades are then assigned compensation based on the characteristics and demands of each grade. Pay Structure Pay structure refers to the techniques that a company uses to administer its pay packages. This may be internal equity method or market pricing method. Internal equity method involves the use of a grid to ensure that each job is compensated by taking into consideration the jobs below and above the hierarchy. Market pricing, on the other hand involves pay package is awarded based on the prevailing rates in the market (Armstrong and Baron1995, p. 45). Salary Progression Salary progression is one way of rewarding employees for demonstrating excellent performance, skills, and seniority in an organization. Most organizations around the world use salary progression as a means of rewarding employees for demonstrating exceptional performance. For instance, it is common to find some organizations award new recruits a little salary. However, the salary is increased based on the performance, skills, or the seniority of the employee (Armstrong and Baron1995, p. 59). An example of salary progression is the seniority-based progression, which involves awarding an employee a salary increment every year of his service. This salary progression is normally awarded based on the assumption that competence of an employee increases with experience Market Rate and Benefits Maintaining a motivated staff is one of the most effective ways of increasing the performance of employees in an organization. However, one of the best strategies that organizations use to motivate their employee is through provision of rewards and benefits. This may be extrinsic rewards, such as bonuses, salary rise, promotion, gifts and other tangible rewards or intrinsic rewards, including recognition, empowerment, trust, information, and relationships. Heneman (2002, p. 11) noted that most employees are motivated to work hard when offered reward for good performance. For instance, evidence has showed that most employees are motivated when they are awarded salary increments. Others are motivated when their employer promotes them from a lower level cadre to a higher-level position. The same applies to the provision of intrinsic rewards, such as employee empowerment, which may involve involving employees in decision making process, praising them whenever they perform well, building relationships with them, as well as earning their trust. As much as the rewards are given as a compensation for the employee effort, it must be done in line with the labor market rate. In fact, the market rate is one of the external factors that human resource managers must take into consideration when coming up with a reward system. According to the dual labor market theory, the reward system is determined according to the type of labor market, which may be primary or secondary. The theory holds that, in a primary labor market, jobs are characterized by good working conditions, high remuneration packages, job security, and career development (Heneman 2002, p. 15). In addition, employees in this sector are highly skilled and productive. In the secondary labor market, on the other hand, jobs are characterized by low remuneration packages, lack of job security, poor working conditions, and high turnover. Therefore, in setting reward for employees, human resource managers must take into consideration the position that the organization is in the industry where it operates, as well as the labor market from which an employee is hired. For example, if an organization happens to lead in a given industry, then the reward for its employees should reflect this by awarding a higher reward and benefits than those awarded by its competitors in the same industry. According to the wage hypothesis theory, offering a pay package, which is above the market wage, is important since it motivates employees to work hard (Heneman 2002, p. 18). In addition, it increases employee commitment in the organization, thereby resulting in high retention. At the same time, if an organization hires its employees from the secondary market, it is important that their reward be different from those hired from the primary market. This is based on the Equity Theory, which posits that people seek fairness both external an internal (Heneman 2002, p. 19). The theory holds that employees are only motivated when they believe that the rewards and pay system is equitable, otherwise they become demoralized. Pension is one of the employee benefits, which in most cases awarded to an employee upon retirement. Pensions are important for an employee since it enables an employee to have some money to use even after retiring from service. Pensions are of different types, including contribution and defined benefit plans. Pensions provided by the employer are referred to us employer pensions and is provided for the benefit of workers (Heneman 2002, p. 16). References Armstrong, M., & Baron, A 1995, The job evaluation handbook. CIPD Publishing, London, UK. Armstrong, M., & Murlis, H 2007, Reward management: A handbook of remuneration strategy and practice. Kogan Page Publishers, New York, NY. Heneman, R. L 2002, Strategic reward management: Design, implementation, and evaluation. IAP, Oxford, UK. Read More