Introduction
The problem of how to motivate employees is becoming an increasingly important issue in any company’s management agenda. Reward management is one of the most popular strategies used to boost employees’ performance and create a friendly work environment. In order to develop an effective reward strategy, a deep understanding of employees’ expectations, objectives, and motivations is required (Lee & Paschke, 2016). The purpose of this paper is to explore the principles of reward management, the value of extrinsic and intrinsic rewards, and the impact that an effective reward management strategy can have on increasing employee performance.
Reward Management Principles
Reward management encompasses strategies, processes, and policies required to ensure that employees’ efforts and contributions to the organization are recognized and rewarded. A successful reward management strategy is aimed to satisfy the needs of both employees as well as the company’s management and create a job environment that provides for the just, fair, and ethical treatment of employees (Armstrong, 2010). The reward management philosophy is based on the principles of investing in human capital from which a reasonable return is required and rewarding people in accordance with their contribution.
Rewards serve many purposes, including reducing employee turnover, motivating employees to achieve high levels of performance, increasing job loyalty, promoting and reinforcing desired behavior, attracting new employees, improving the company’s image, etc. When employees are concerned, reward management objectives include increasing job satisfaction and people’s willingness to work in the company, as well as creating a friendly and balanced work environment (Antoni et al., 2017). The key to an effective reward management strategy is to find the right balance between the company’s and employees’ objectives and expectations.
A successful reward management strategy encompasses psychological, motivational, and strategic elements. Psychological elements include the attitudes, perceptions, and values that predispose individuals towards the desired behavior at the workplace; motivational elements explore what drives people to perform certain tasks and achieve their long-term and short-term goals. Strategical elements are aimed to align the organization’s goals with each employee’s objectives (Shields et al., 2015). Understanding what drives people to work, what goals they strive to achieve, and what they need to achieve them allows managers to develop a reward strategy that adequately addresses employees’ needs and expectations.
Rewards represent anything that an employee might value and that an employer is willing to offer in exchange for their contribution. Researchers generally distinguish between two types of rewards: financial, or extrinsic rewards, and non-financial, or intrinsic rewards. Extrinsic rewards encompass all material rewards, such as cash bonuses and raise, while intrinsic rewards deal with employees’ values, motivation, recognition, appraisal, etc. Most successful reward strategies incorporate both extrinsic and intrinsic rewards.
Financial and Non-Financial Rewards
Extrinsic, or financial rewards are all material rewards that employees receive from employers and include a variety of direct and indirect forms of remuneration. Direct financial rewards are basic pay, the increase of the basic pay, and incentives that are based on the result of employees’ performance. With basic pay being the most important component of the reward system, incentives are based on the evaluation of the contribution of an individual or a group for achieving the company’s goals (Martono et al., 2018).
Indirect financial rewards include a variety of benefits that employees receive as compensation: protection benefits, free time benefits, compensation for the cost of transportation, food, recreation, parking, business trips, children and elderly care, education, etc.
Researchers are divided on the issue of the value of extrinsic rewards. In the study conducted by Garlick, two thousand full-time employees were asked to range potential rewards from most preferred to least preferred. The list featured both material and non-financial rewards, such as appraisal, trust, recognition, and professional growth. Three out of four employees chose cash bonuses as their most preferred reward, with nine out of ten people including financial rewards in their top three list (Salah, 2016). The results proved that money is the main factor in fulfilling employees’ expectations regarding working conditions. People who earn more are perceived as more powerful and successful, and money is often regarded as a measure of career success.
However, other studies showed that there is less relationship between monetary rewards and the level of job satisfaction. Although most employees welcome cash rewards, they are not regarded as the most motivating factor in increasing job performance (Gungor, 2011). Based on a 2002 survey, rewards range as follows: “a learning activity, flexible working hours, verbal praise, increased authority, autonomy, time with their manager, time off from work, public praise” (Dosenovic, 2016, p. 111). It can be concluded that the presence of money is a strong motivator, however, is it not the only thing that motivates, with intrinsic rewards being regarded as just as important.
Non-financial, or intrinsic rewards include all types of rewards that are aimed to motivate employees on a non-financial basis. Non-financial recognition does not necessarily mean that the recognition provided has no financial value; it simply means that whatever is given, it is not only money (Agbenyegah, 2019). They include flexible working hours, verbal praise, trust, responsibility, recognition, autonomy, appreciation, challenges, positive attitude, sense of achievement, and professional growth. Positive feedback from the company’s management creates a bond between managers and employees, while the recognition of employees’ performance boosts their self-esteem (Damij et al., 2015). While extrinsic rewards focus on employees’ performance to achieve a certain outcome, non-financial rewards make employees feel better.
Herzberg’s Two-Factor Theory
Reward management objectives are often viewed in the context of Frederick Herzberg’s two-factor theory designed in 1959. It recognizes two factors that define employees’ level of performance and attitude toward their job: motivation and hygiene factors. Motivation factors are intrinsic factors that increase employee job satisfaction levels, while hygiene factors are those that prevent dissatisfaction (Yusoff et al., 2013).
The theory argues that meeting employees’ lower-level needs does not motivate them to work harder but only prevents them from being dissatisfied. In order to motivate people, their higher-level needs need to be addressed.
Further developments of this theory showed that people at higher income jobs tend to put more value on motivation and intrinsic job factors, while at low-income jobs, monetary rewards are more valued. The overall job satisfaction level is related to an employee’s background, age, and education, and the importance of various types of rewards varied among different occupational groups of people (Tessema et al., 2013). When applying this theory to the development of modern reward management systems, the balance between intrinsic and extrinsic rewards needs to be observed.
Conclusion
A successful reward management system is aimed to address both the needs of employees and the company’s management. They include achieving a high level of employees’ performance and job satisfaction, increasing job loyalty, and creating a friendly working environment. In order to achieve these goals, the company’s management needs to create a well-balanced system of financial and non-financial rewards based on the understanding of employees’ expectations, objectives, and motivations.
References
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