The Reward System Offered By Companies

Executive Summary

This article discusses the various types of reward systems, their applications, advantages and disadvantages. The reward system offered by the companies to the employees is considered to be the best way of motivating and gaining employee loyalty. It also helps the company its goals and objectives as employees are the engine driving force for a company. In This article, different types of reward systems are discussed. These reward systems are applicable to both individual and groups. The rewards are primarily based on the performance of the employees on achieving the set targets.

The types of reward systems discussed are

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• Variable Pay
• Bonuses
• Profit Sharing
• Stock Options
• Group Based Reward Systems

These reward systems are practised by majority of upcoming, small to multinational national companies.

This article explains each type of reward systems along with the examples and their applications.

There are always advantages and disadvantages of any kind of system. Though the reward systems mostly exhibit the advantages of offering the reward system, however the disadvantages should not be ruled out.

It is management’s responsibility to determine which type of reward system best suits the company’s objective remains in the budget.

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There is no doubt that companies manage the reward system within the organisation to attract and retain the human resources the organisation needs to achieve its objectives.

Before discussing about the rewards system, its implementation, advantages and disadvantages, it is important to understand why companies have policies of reward system and how it reflects on the corporate culture and its objectives.

“The meshing together of believes, business principles, styles of operating, ingrained behaviours and attitudes, and work climate define a company’s corporate culture” (Thompson, P415).

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A healthy corporate culture can only be maintained if a company has a best practice of offering a better work environment for employees. This best practice includes offering rewards and recognitions to the employees. This reward and recognition best practice falls under the category of motivational and leadership styles of a company.

The reward and recognition has its roots long back with the existence of human being. Reward and recognition are not only implemented in the companies, it may also be seen in our daily life. This reward system starts from the early childhood stages of a human. “Do this and get this” concept has always been helpful in attaining the objectives.

Employee reward system is a way adopted by companies to reward for performance and motivate employees individually or in a group. The rewards systems are not related to the salary. However, it may be monetary. The primary objective for this program is to lure top employees and increase their performance.

There are keys to develop a reward program and companies need to follow.

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• Company needs to identify the goals that reward program will help.
• Need to determine the desired standard of employee performance that will reinforce the goals.
• Finding out the key performance indicators, measurement of performance based on employee achievement individually or in a group.
• Determining the right reward program to recognise the provided efforts of the employees.
• Lastly, the company needs to clearly communicate the reward program with the employees

Reward systems contain two elements. Firstly the mutual cooperation between employee and the employer is a must ingredient of the employment relationship if anything is to be made as is achieved through the concept of financial gain for the worker. Second, tension and conflicts are engendered through the logic that makes buying of labour power the reward to one group the cost to the other. (Human Resources Management, P-239, John Bratton, Jeffrey Gold)

There are three objectives for a company to have reward management.

• To attract and retain the valuable employees
• Increase the employee performance and commitment
• Ensuring the compliance with the laws and regulations.

Though the company has the objectives to be achieved, these objectives are needed to be achieved within a certain budget set for the rewards. The set rewards should be competitive enough to attract the membership of the organisation. The reward system should be designed in order to continuously improve the productivity and control cost.

TYPES OF REWARD PROGRAMS

There are different reward programs for both individual and group performance.

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Variable Pay

It is also known as pay-for performance. It is a compensation program where a portion of employee’s pay is considered “at risk”. Variable pay can be attributed to the overall company’s performance, the overall result of a particular business unit, individual achievement, or combination of either case. It may take forms like, including bonus programs, stock options and awards for particular achievements. Many companies prefer to pay less in actual base salary but offer a huge reward program instead.

Bonuses

This program is very common all around the world. It practice is common in sales organisations, rewarding the individuals on his/her sales achievement. It not only motivates the individual but brings in more talent to the company rewarding the company in two ways. Indeed, increasing numbers of businesses have switched from individual bonus programs to one which rewards contributions to corporate performance at group, departmental, or company-wide levels. Few analyst found the bonuses as a short way of motivation. By rewarding an employee’s performance for the previous year, say critics, they encourage a short-term perspective rather than future-oriented accomplishments. These programs need to be carefully administered to ensure that the rewards do not go beyond individual’s basic responsibilities.

Profit Sharing

It is the strategy of offering the employee to take an agreed percentage of company’s profit. It is normally equal to the percentage of the worker’s salary and is disbursed at the end of the year when the company closes its accounts and runs the figures for the profit. It may be paid in terms of cash, or can be exhibited as an employee retirement plan. A benefit for a company offering this type of reward is that it can keep fixed costs low. The idea behind profit-sharing is to reward employees for their contributions to a company’s achieved profit goal.

“It encourages employees to stay put because it is usually structured to reward employees who stay with the company; most profit-sharing programs require an employee to be vested in the program over a number of years before receiving any monies. Unfortunately, since it is awarded to all employees, it tends to dilute individual contributions”. (Jack Stack)

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Stock Options

In recent years stock option has become very popular in many mid size to multinational companies. This reward program is designed for rewarding middle management and other employees. This reward program allows the employee to buy a specified number of companies share at a fixed price for a specified time period. The number of options a company can offer are normally equal to a percentage of company’s outstanding shares.

This program is a long term motivator and helps increasing the employee loyalty rate. After an employee becomes fully vested, the employee then can buy number of shares from the company at strike price. After sometime, the employee can either retain it or sell it in the open market.

By offering the stock option the company takes benefit in taking tax deduction for compensation expense when it issues shares to the employee. The other benefit of offering this reward is that this option can be considered a portion of compensation hence does not require to be showed as an expense in the books.

Group based reward system

As more small businesses use team structures to reach their goals, many entrepreneurs look for ways to reward cooperation between departments and individuals. Bonuses, profit sharing, and stock options can all be used to reward team and group accomplishments. An entrepreneur can choose to reward individual or group contributions or a combination of the two. Group-based reward systems are based on a measurement of team performance, with individual rewards received on the basis of this performance. While these systems encourage individual efforts toward common business goals, they also tend to reward underperforming employees along with average and above-average employees. A reward program which recognizes individual achievements in addition to team performance can provide extra incentive for employees.

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ADVANTAGES

Motivate employees:

Rewarding employees is not only the best way of keeping the loyalty in the employees but also is a best way to motivate. It is a way of appreciating the employees for all their hard work, efforts that they put towards the company. What matters is that you were able to motivate your employees to contribute more for the company and for his own growth.

Boost performance:

Rewards programs are the performance boosters. It results a better output per hour of work making your business more cost-effective. It increases your sales without hiring more people.

Provide sense of content:

Good incentive programs provide sense content among employees. Since they know that what they do for the company is rewarded back, they enjoy work and they look forward to performing well every day, not to mention the significant contributions they provide for the company.

Provide sense of worth:

Employee reward programs provide sense of worth among employees because they know that what they do is right. Once the employees achieve the set target and become eligible the incentive, the employee knows that he/she can do more than their usual output. This gives them a good reason to appreciate themselves and their work.

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Open communication among employees:

Since some employee incentive programs involve teamwork, they can also provide a way for employees to communicate well to each other. Employee incentive programs can eliminate the lack of communication among employees and can facilitate open communication.

Increase the profit of the company:

This is the primary reason why companies have employee incentive programs. It is the result of having employees with the right motivation, boosted performance, sense of content and worth, and better communication among themselves.

DISADVANTAGES

The only disadvantages that i can think of is that by offering the rewards to the employees for each achievement may spoil the behaviour of the employees and may only take interest in work for the sake of rewards. Like we have discussed that rewards are additional to salary and sometimes these rewards may be higher than the actual salary.

The reward program to the individual is no doubt a motivation to the employee but may result in inciting jealousy among others.

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The other disadvantage is that if offering stocks is the option then it may become little risky for the company and the employees. If the stock strike price is higher than the market price of the stock, the employee option is worthless.

EXAMPLES

British Petroleum

“At BP reward is much more than just your salary. BP offers its employees a competitive reward package that includes salary, allowances, bonuses, share plans and health and retirement provisions as well as other benefits.

The salaries are designed to attract and retain the highest quality employees to help us maintain our success as a business and to encourage employees to continually develop their skills and enhance their contribution.

Your salary will be reviewed annually, usually in early spring, to ensure that it remains competitive. This is done by comparing it with current levels of pay in the market and your peers.

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In addition to your salary, allowances may be paid in recognition of particular aspects of your job, such as unsocial working hours, location or increased responsibility.” (British Petroleum).

Retrieved on Nov-09-09 from http://www.bp.com/sectiongenericarticle.do?categoryId=9009666&contentId=2017892

TESCO

Tesco employees are to share in more than £25m of vouchers and savings – as well as an extra day’s holiday – this Christmas.

About 268,000 workers at the supermarket giant’s stores, distribution centres and head offices will receive up to £96 each of discounts on Tesco products.

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All staff members will also receive a day’s paid leave – called a Personal Day – as Tesco thanks them for their help during the busy festive period.

Louise Pocock, UK benefits manager at Tesco, said: “Following our aim to make Tesco a great place to work, we always strive to increase and enhance benefits offered to all members of staff.

“We are very aware that this Christmas and next year will be one of the tightest times for finances, and for this reason, Tesco is committed to offering savings and discounts to staff throughout the year.”

Retrieved on Nov-09-09 from http://www.tesco.com/

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REFERENCES:

Stack, Jack. “The Problem with Profit Sharing.” Inc. November 1996.

http://www.enotes.com/small-business-encyclopedia/employee-reward-recognition-systems

http://books.google.ca/books?id=EZ1CLRm3FnQC&pg=PA240&lpg=PA240&dq=types+of+reward+systems&source=bl&ots=e912XicC7p&sig=gPAfILS6YypFxp3ToyuhvHab7vU&hl=en&ei=Sh_3SpuXOZ3i8AbSyrXzCQ&sa=X&oi=book_result&ct=result&resnum=7&ved=0CCMQ6AEwBg#v=onepage&q=types%20of%20reward%20systems&f=false

Human Resources Management: Theory of Practice author John Bratton & Jeffery Gold

http://www.bp.com/sectiongenericarticle.do?categoryId=9009666&contentId=2017892

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http://www.personneltoday.com/articles/2008/12/09/48668/tesco-employees-share-25m-in-vouchers-and-savings.htm

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