Introduction
Business grows stronger when the employees are respected, motivated, and adequately rewarded for their work. In this regard, reward packages serve as a valuable instrument of talent engagement and retention (Cotton, 2021a). Home International has utilized the COVID-19 pandemic to its advantage and achieved growth as the clients have decided to invest more in their homes. However, despite this success, the company had encountered certain warning signs, such as a higher turnover rate among the younger factory workers. Therefore, it might be necessary to revisit the current rewards and performance management policies to consolidate the recent achievements. This presentation provides key stakeholders with evaluations, assessments, and explanations on which reward approaches and packages exist and how they can be developed and implemented in Home International. In addition, the presentation explores the subject of performance management and the role of line management in creating a fair and satisfying organization-wide reward system.
Evaluation of Two Principles of Reward
In general, corporate reward systems are built on two central principles — extrinsic and intrinsic. Extrinsic-based rewards are relatively easy to understand since they are tangible. According to Cotton (2021a), the term reward usually covers financial provisions made to employees in the form of cash payments and other financial benefits, such as pensions and paid leave. In addition, an extrinsic manifestation of reward may include non-financial employee benefits — certificates of achievements, team days, or holiday vouchers (Cotton and Gifford, 2015, p. 18). Overall, in the extrinsic approach, the employer rewards and motivates staff members through tangible financial and non-financial material incentives.
In contrast, the intrinsic reward principle represents a spiritual, psychological approach to increasing employee motivation. Intrinsic rewards are intangible, as they create a positive workplace climate by fostering feelings of fulfillment, pride, and importance (Indeed, 2021). For example, the senses of competence, personal progress, and respect from the employer and fellow staff members can be classified as intrinsic rewards. Regardless of the intrinsic reward source, it motivates the employees and assures them that their work is meaningful.
Overall, it is advisable to combine both principles in order to get the optimal outcome. It is unlikely that employees will be committed to the tasks and loyal to the company if extrinsic rewards are too low. However, excessive tangible rewards may “crowd out” intrinsic motivation to perform the job well (Cotton and Gifford, 2015, p. 17). Therefore, any organization should tailor its reward package to the business objectives and industry. For instance, Home International aims to cut costs, increase profits, and reduce turnover rates. As such, the company might benefit from prioritizing intrinsic rewards in order to boost job satisfaction and motivation without spending too much on financial incentives.
Importance of Organizational Culture and Performance Management
Reward principles within the organization heavily depend on organizational culture and performance management. Most importantly, organizational culture shapes every process in the company, including performance management. Consequently, if the organizational culture does not promote clarity and fairness, the performance management might become distorted by biases. Such an outcome would be especially detrimental to the accountability branch of performance management — the linkage between employee performance, rewards, and career progressions (CIPD, 2020). Therefore, an organization should establish fair and transparent performance criteria while holding all employees accountable.
Organizational culture and performance management flaws would be particularly harmful in companies with performance-related pay (PRP). Biased and unfair organizational culture would lack the necessary objectivity and consistency in reward distribution. According to Cotton (2022), such a situation has a serious potential for unlawful discrimination. Furthermore, disregarding organizational culture and performance management may lead to an opposite effect of employee demotivation. For example, performance-based extrinsic reward packages may incentivize unhealthy competition between coworkers and create excessive risks for the company (Cotton, 2022). Therefore, company leadership should realize that improvements in organizational culture and performance management are necessary for selecting a correct reward principle and creating a fair system.
Implementation of New Reward Policy Initiatives and Practices
The existing business practice offers clear guidelines for launching or reforming the reward policies. Home International should utilize this algorithm before making the changes since mistakes can easily result in demotivation. Firstly, it is necessary to link new policies to the organization’s business goals — new benefits must facilitate their achievement and promote the needed employee behaviors (Cotton, 2021b). Secondly, new reward practices must be evaluated for consistency with the company’s organizational culture. In addition, it is sensible to research the views of the current and future employees (Cotton, 2021b). Lastly, an organization must ensure that line managers can explain the new benefits to subordinates. Otherwise, the company would be unable even to communicate the reward to the employees.
Overall, the reward implementation process starts on the top level of the organizational structure. However, this notion does not mean that imposing new practices on the employees is a correct course of action. Instead, Home International should research the employee views on desired rewards, especially the views of the younger factory workers who show higher turnover rates. The business objective of cutting the costs and improving profitability points towards the focus on intrinsic rewards. Nevertheless, the leadership cannot be entirely sure until the employee perspective is reviewed.
Impact of People and Organizational Performance on Approach to Reward
People and organizational performance can impact Home International’s approach to reward both positively and negatively. The positive influence is tied to the mutual benefit of reward distribution on employer-employee relationships. The employees’ well-being and moral satisfaction would be increased in exchange for enhanced motivation to achieve organizational goals (Cotton, 2021b). As a result, improved people and organizational performance would lead to maintaining the selected reward approach, depending on whether extrinsic or intrinsic measures appeared to be effective.
On the contrary, Home International’s poor people and organizational performance may produce negative influence in the shape of instability, lowered employee engagement, and employee dissatisfaction. In particular, the company might discontinue certain rewards as a form of punishment or start disregarding employee opinion in decision-making on reward and benefits policies. This situation would be especially harmful to intrinsic approaches, as the company would be unable to evoke the motivational feelings of pride and recognition in the employees. Overall, this complex interdependence explains why any changes in the reward system must be done carefully, even if a strong temptation to punish underperforming employees exists.
Comparison of Performance-Related Pay and Intrinsic Rewards
Home International can use the example of IKEA, a Swedish-based global furniture retailer, in order to explore the use of performance-related pay and intrinsic reward approaches. While the difference in scale between Home International and IKEA is significant, both companies operate in the same industry. As such, it is possible to learn from IKEA’s case on how a company combines performance-related pay and intangible rewards with effectiveness.
Performance-related pay is a typical form of extrinsic motivation in which the monetary benefits are directly linked to an individual’s or organizational performance. IKEA U.S. had a particularly successful 2021 business year, increasing total sales by 25% compared to 2020 (Dishman, 2021). As a result, IKEA’s leadership decided to reward the U.S. branch workers by making an organization-wide performance-based payout totaling $76 million (Dishman, 2021). Home International performed well last year; therefore, the company could allocate one-time performance-based bonuses to reward the people behind the success.
Intrinsic rewards are intangible — they operate on the psychological level by boosting employee motivation through feelings of esteem, progress, and competence. In this regard, IKEA demonstrates trust in employees’ professional abilities by granting them autonomy and freedom of choice (Ziyad Alzghool, 2021). In particular, IKEA provides workplace flexibility via work from home, job sharing, and shift swapping (Ziyad Alzghool, 2021). Home International could use such non-financial rewards in order to improve employee intrinsic motivation through genuine respect and appreciation.
Assessment of Extrinsic and Intrinsic Rewards Benefits and Drawback on Performance
Both extrinsic and intrinsic rewards have their benefits and drawbacks, which have to be considered in the creation of a reward package. Extrinsic rewards have the benefit of tangibility — one can easily understand and enjoy increased wages, payouts in cash, or holiday vouchers. The clean pay approach, when the employer provides the employees with cash for purchasing the benefits of choice, is particularly easy for communication, understanding, and administration (Cotton, 2021b). However, extrinsic rewards may potentially “crowd out”, eliminate intrinsic motivations, making the employees indifferent to everything but tangible rewards (Cotton and Gifford, 2015). In addition, extrinsic rewards may demotivate the employees if distributed unfairly or require too much spending for implementation.
In contrast, the intangibility of intrinsic rewards makes them a solid choice when the company does not have sufficient resources for extrinsic incentives. In some cases, such as career beginning or strong affinity with the organization’s mission, individuals may prioritize intrinsic elements to the financial component of the reward package (Cotton, 2021b). However, intrinsic rewards are significantly more difficult for universal implementation since people may have different values and motivation drivers. Lastly, the effect of intrinsic rewards is prone to quick loss if not sustained constantly.
Assessment of Performance Review Meetings and 360 Degree Feedback Effectiveness
Performance review meetings and 360-degree feedback sessions can serve as effective approaches to performance management if the necessary conditions are met. Performance-related meetings should be a regular, continuous two-way process (Gifford, 2020). Therefore, a line manager must possess the competencies of asking good questions, active listening, and giving constructive feedback. 360-degree feedback method, based on performance reviews from multiple sources, such as peers, senior colleagues, or customers, requires fairness and trustworthiness (Gifford, 2020). Any form of bias severely undermines the effectiveness of the 360-degree feedback.
In this regard, people practice professionals within Home International will play a crucial role in ensuring justice and fairness of the reward system. According to Gamba Quilliam (2020), the involvement of people professionals enhances the people management aspect of the line manager’s role. As such, people practice professionals can train Home International’s line managers on how to correctly and fairly evaluate the performance of their subordinates. Consequently, this information can be used for making informed decisions regarding reward distribution.
People Practice Professionals Role in Supporting Reward Judgments
As stated before, people practice professionals’ participation is crucial for supporting reward judgments in the organization. One can claim that people practice professionals are a cornerstone of building responsible business practices, as they lead and support line managers (Gamba Quilliam, 2020). According to CIPD (2020), these specialists are perfectly placed for taking a key role in introducing fair policies, including transparency and fairness in reward judgments. In particular, people practice professionals can inform line managers about the organization’s values. These specialists can further explain that any reward judgments must be made on merit and train line managers in performance evaluation and management. Overall, people practice professionals have the capacity and responsibility of providing line managers with the instruments necessary for fair reward distribution.
Line Managers: Making Reward Judgments Based on the Organizational Approaches
In a solid organization, rewards should be distributed according to a strategy rather than spontaneous decisions. A strategic reward is systematic, as it is based on a long-term approach to balancing and supporting both organization’s and employees’ needs (Cotton, 2021c). As such, an organization can realistically implement company-wide approaches to reward, which the line managers will follow in reward judgments. For instance, an organization may introduce performance-pay benefits and develop clear, achievable criteria for earning them. Under this extrinsic organizational approach to reward, line managers will compare employee performance against these criteria and make fair reward judgments. An intrinsic approach to reward would require the involvement of people practice professionals who will educate line managers on enhancing intrinsic motivation in subordinates. Overall, the ultimate goal lies in linking line managers’ reward judgments to the organizational approach.
Reward Approaches of the Future: A Briefing Paper
The shape of reward approaches is gradually changing, which requires attention from employers and people practice professionals. The traditional understanding of reward as a predominantly financial motivation instrument is being replaced with a more complex concept. Nowadays, employees are also attracted and retained by voluntary benefits, flexible working arrangements, support from line managers, and opportunities for career development (CIPD, 2015). Therefore, the modern reward approach should be total, focused on ensuring both the employees’ financial well-being and psychological satisfaction. An organization must assess contemporary industrial trends, utilize relevant benchmarking data, and carefully examine legal requirements in order to create an effective total reward package. Job evaluation, pay structure, and formulation of clear, achievable criteria of eligibility for reward are mandatory for implementing an effective, motivational, and fair package.
Assessment of Industrial Trends and Sector Profiles
Home International is a furniture manufacturer and online retailer with a total of 175 employees in the UK. Given this information, Home International falls into the retail industry’s small and medium-sized enterprises (SMEs) category since the company sells its products directly to clients. Therefore, this section will focus on assessing the current trends linked to reward packages in the retail industry. In particular, it is important to create the sector profile in the departments, vital for the employee reward system — pay structures, job evaluation, and reward fairness.
Pay structures assist with aligning reward strategies with the desired shape of the organization and bringing order, clarity, and fairness to financial rewards distribution. In general, pay structure can be defined as a collection of wage grades or bands that link related jobs in a hierarchy (CIPD, 2019). According to CIPD (2019), 63% of organizations in the retail industry use pay structures; however, only 46% of surveyed SMEs create them. Since Home International is relatively big by the SME standards, the use of pay structures in shaping the reward package would be advisable for achieving clarity and fairness in employee wages.
Job evaluation can be defined as a method of determining the worth and appropriate pay grades of particular jobs within an organization. Cotton (2021d) described two main types of job evaluation — analytical schemes, which break jobs down into core components, and non-analytical schemes, where jobs are viewed as a whole. In regard to the retail sector, 95% of surveyed UK organizations considered knowledge and skills required and job complexity the key factors in determining pay grades for a job (CIPD, 2019). In addition, knowledge and skills required for the job was the main factor in job evaluation for 93% of SMEs (CIPD, 2019). Therefore, Home International should consider allocating extra resources to reward skilled and knowledgeable factory workers to prevent potential turnover.
Finally, the concept of fairness in pay processes and reward distribution is featured less in the retail sector and SMEs. In particular, only 55% of surveyed employers in retail communicated fairness in pay processes and outcomes with the employees (CIPD, 2019, p.46). The matter of fairness in pay processes and outcomes was also communicated in 57% of surveyed SMEs as opposed to 65% of large and very large companies (CIPD, 2019). Given this trend, Home International can turn fairness in reward distribution into an instrument of employee retention.
Use of Unemployment and Payroll Data for Developing Insight into Reward Benchmarking
Unemployment and payroll data is useful for developing insight into reward benchmarking. For instance, unemployment rates analysis allows clarifying the situation with workforce supply and demand in the labor market (Davies, 2021). Consequently, if unemployment is low and demand for the workforce is high, an organization should put extra effort into employee retention through rewards. Otherwise, staff members may turn to competitors who offer better packages, since many vacancies are available.
Payroll data provides a valuable insight into pay grades for various job positions. As such, an organization can conduct an analysis in order to develop pay policies (Cotton, 2021c). In addition, a comparison of the organization’s payroll data against the competition may explain the reason behind the growing employee turnover rates. Overall, organizations should gather as much benchmarking data as possible since this measure helps avoid basic mistakes in pay policies.
Reward Package for Home International
In the light of the current industry trends in the retail and SME sector, Home International should be moving towards implementing a total reward approach. Cotton (2021c) defined total reward as coverage of all aspects of work valued by people, including such elements as fairness and flexibility, in addition to the pay and extrinsic benefits. Therefore, the new reward package that would potentially solve factory worker turnover issues should incorporate both extrinsic and intrinsic motivation.
In general, any reward package consists of base pay and benefits, which may vary depending on the job within the organization. The new Home International reward package includes four elements: base pay, extrinsic financial benefits, extrinsic non-financial benefits, and intrinsic benefits. In addition, the benefits may be awarded both individually and collectively in order to prevent possible side effects such as jealousy and dissatisfaction among the employees.
The development of the package begins with job evaluation and gathering benchmarking data on the market rates relevant to the jobs in Home International. The company currently employs two main types of staff members — office workers aged 48-68 years and factory workers in the 18-32 age range. Their jobs will be evaluated with an analytical scheme, which will assess the following factors: knowledge and skills, decision-making, impact on the company, working environment, communication, and financial responsibility. Each job within the two main types would be assigned a grade that would determine the preliminary pay grade size.
In the next step, it is necessary to set pay grades according to the benchmarking payroll data for specific positions. For instance, factory workers in the United Kingdom earn £9.94 per hour on average (Indeed, 2022). According to Indeed (2022), Orangebox, a similarly-sized SME furniture manufacturer for office workplaces, pays factory workers £10.79 on average. Therefore, Home International’s reward package should aim to pay factory workers more than the average wage, at least on par with competitors. Office workers’ salaries vary significantly depending on position, so every office job in Home International should be graded separately. However, the rule remains the same — base pay must be at least slightly higher than average.
Finally, Home International’s new reward package should include flexible extrinsic and intrinsic benefits. In regard to extrinsic benefits, the company could implement flexible benefits, giving the staff freedom to vary the package. For instance, factory workers and office employees may be offered a choice between gym membership, eye care vouchers, holiday vouchers, or payout in cash. An intrinsic element may be enhanced via an e-card system, which would allow employees to commend their coworkers for a good job. Overall, such a reward package combines a decent base wage, extrinsic benefits, and a method of intrinsic motivation.
Legal Requirements That Might Impact Reward Practice
Since Home International employs 175 people in the United Kingdom, the organization must ensure that its reward packages do not violate any country’s legal requirements. In particular, it is necessary to abide by legal requirements on National Minimum Wage and National Living Wage (Cotton, 2021a). Firstly, all UK-based employers must pay wages at least on National Minimum Wage level to employees who reached school leaving age (GOV.UK, n.d-a.). For example, every Home International employee aged between 18 and 20 must be paid a minimum wage of £6.56 per hour (GOV.UK, n.d.-a). The employees aged 23 and over must get at least National Living Wage, which is currently at £8.91 per hour (GOV.UK, n.d.-a). It is important to remember that minimum hourly pay rates increase on April 1 every year (GOV.UK, n.d.-a). Overall, any fixed pay reward in Home International must be equal to the minimum wage in the UK at least. However, paying the employees a minimum wage would likely demotivate them since the lowest wages possible can hardly be called rewarding.
In regard to working hours, Home International management should remember that UK legislation sets a maximum number of working hours per week. It is illegal to make the employees work more than 48 hours a week on average (GOV.UK, n.d.-b). In theory, Home International’s factory workers and office employees may voluntarily opt out of the 48-hour working week (GOV.UK, n.d.-b). However, UK-based employers cannot insist on opting out or sack the employees who refused to do so. As such, it would be illegal to force the employees to work over 48 hours per week and then selectively “reward” some of them by slightly reducing working hours. Overall, Home International may safely use any reward practices that lower the number of working hours per week.
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