Influence of Reward Practices on Employees’ Performance

Introduction

Human resource development (HRD) provides a strategic roadmap for maximum optimization of the available human resources. It is becoming significantly imperative to understand the operations of human resource management trends in current globalized business environments with competition for best performers. While there is no conventional agreement for the term globalization, in economics, it is used to refer to international integration in commodity and labor markets (Bordo, Taylor & Williamsonl 2003, p.187). This applies to human resource too in the context of accessing best employees. On a global scale, effectiveness of corporations can be critically determined by the kind of human resources development systems that they put in place. The systems starts a check right from the type of people who are recruited into the multinationals and the appraisal methods employed during their tenure through out the entire time with the companies. Management of these varied people has a direct bearing on the performance of the companies they work for. In most cases it is how their appraisals are conducted that determine their usefulness to the firm.

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Appraisals are normally aimed at reviewing the performance and potential of employees, and are sometimes linked to a reward review. They enhance performance of both employers and employees by identifying their strengths and weaknesses (Wood, 2003, p. 356). This enables determination of which areas they are best suitable to improve in. While it is not a legal requirement to introduce appraisal schemes, legislation is in place to accommodate its usage (Welch, D. 2007, p.275). There is no decision of which single method is the best way of performance management or conduct appraisals. Generally however in determining any performance management (PM) system, written records are made to allow the top management to monitor the effectiveness of the PM and a feedback system to employees is put in place. Focus is made on employees work performance and not personal character through the help of job description (Poole, 1990, p. 213).

Professional approach to human resources management does involve several aspects that are addressed differently in various places. Strategic international human resources management is one bit that has picked up through out the world. To some extend, services such as recruitment are outsourced from consulting firms which also multitask (Mayer & Davis, 1999, p 167). The consulting firms like Pricewaterhousecopers, and Deloitte perform are range of duties such as assurance, recruitments, auditing, financial advisory among others business related services. As pertaining human resources management, they perform a variety of tasks like restructuring of entire organizations, recruitment with appraisals being just part of the services offered. They develop and operate integrated global human resources management systems that have resemblance to the smaller scaled domestic systems. Their focus is on organizational effectiveness and employee development that is achieved only by efficient running of the system. The system is neither run vertically nor horizontally but as a mixture of both.

This paper discusses compensation with disassociation between current economic theories and the real actual practices on the ground in business situation. The types and benefits of various reward schemes in relation to their effectiveness in a competitive market situation. The objective is to instill a desire in economists, business practitioners and other stakeholders such as behaviorists to be more concern with both theoretical and empirical research on human resources management together with organizational behavior. Further discussions also points to the degree of effectiveness of the paper.

Compensation policies

In an overview differences in locations of the company branches in and the culture of employees affect compensation rates of the company. Compensation of host country nationals for multinationals that are venturing into a new market is a matter that the human resource managers keenly look at prior to the company’s operations. Organizations think globally and but acts locally in issues of this kind (Dutton 1999, p. 68). The remuneration rates awarded are normally slightly above the prevailing wage rates in the given country. Variations in tax, living standards, and other factors that affect particular employees are all considered in the package that they do take home. This is the reason why most multinationals are the best payers in the job market in any region of the world. They therefore are assumed to attract some of the best employees the market has to offer which consequently help in their operational performance. For several branches within the country, the factors considered are normally the minimum wage which differs in various parts of a country from the big cities to the small counties. The working times in that country which include: annual holidays, the time of the month for pay, paid personal days, times for vacation, the weekly working hours, allowed probation periods. Restrictions on overtime and payments, hiring and termination rules, and regulations covering several practices like medical cover and retirements benefits. Cultural background plays significant roles in determining the remuneration guidelines for employees in different parts of the world and should be considered in fixing compensation rates. In North America, emphasis is made on individualism and high performance, and compensation practices are tuned to encourage along this lines. The Europeans stress on social responsibility and the Japanese tradition is to priorities age and company service as the basic determinants of compensation (Barton & Bishko 1998, p. 67-69). Most expatriate compensation cost between three to five times host-country salaries per annum. This varies depending on the foreign exchange rates favorability. In this category of employees, the country of origin/ culture determines the cost of compensation. People of United States origin command a higher pay relative to those from other parts of the world. In Europe and Asia, people shun conspicuous wealth and Italians value teamwork more than individual initiatives. The pay cheques therefore vary for all the above and may not be the key determinant in whether they retain their positions in the company or not.

Retention of employees goes hand in hand with their turnover and has an effect on the company performance especially in cases where a business trains its employees. High employee turnover rates may imply dissatisfaction with the company in one way or another in addition to being monetarily costly to the company. For instance, there may be inadequate number of experienced employees that are vaster with the job if majority of them have moved to other businesses unless it is the companies policy not to keep employees for long.

Pay-for-Performance reward system

Economists assume that greater effort is required for higher performance hence associated with workers disutility. Reward systems therefore should provide incentives that cater for increasing utility so as to boost productivity. The reward can be in many forms such as implicit promise of a promotion among other things like praises. Economists however, concentrate on monetary rewards as opposed to non monetary ones although they recognize its significance. This is because people prefer to get money equivalents of non monetary incentives.

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Results of six different research studies cited by Lawler (1971, p.158) reveals that in many organisations, pay is far related to performance. This conclusion discredits the common notion that pay systems should be merit based. In their study of two manufacturing companies shown in the table below, Medoff and Abraham (1980, p. 721) too arrived at the conclusion that differences in earnings amongst employees as a result of superior performance is very little.

Table 1. Comparison of salary ratings relative to both performance and frequency distribution for the performance

Performance Rating Salary Premium Relative To Lowest Performance Rating Percent of Sample Receiving
Performance Rating
Company A 4,788 managers Percentage (%) Percentage (%)
Not acceptable
Acceptable
Good
Outstanding
0
1.4
5.3
7.8
0.2
5.3
74.3
20.2
Company B 2,841 managers
Unacceptable
Minimum acceptance
Satisfactory
Good
Superior
Excellent
0
0
0
1.8
3.6
6.2
0
0
1.2
36.6
58.4
3.8

(Source: Medoff and Abraham, 1980, p. 715)

Effective motivator

The question that arises from the above work therefore is whether pay is an effective motivator or not. The benefits associated with performance based pay system are obvious more reasons to why proponents would want firms to introduce reward schemes with enough financial gains to warrant high motivation amongst employees. According to Deci (1972, p. 78), using money as motivational factor reduces the intrinsic gains of employees from the job hence lowering of motivation. Slater (1980, p.127) too asserts that it continuously reduce the quality of output over time. In an article, Incentives Can be Bad for Business, Kohn (1988, p. 93) states that it makes workers to extremely limit risks, narrow their tasks to perform them faster, and deteriorate intrinsic interest resulting into employees viewing themselves as money controlled. Horizontal equity concerns are other negative effects detailed by Hamner (1975, p. 19). For instance, employees of the same job level in an organisation receiving varied benefit may cause equity rifts. Financial rewards are therefore viewed by behaviorists and psychologists as counterproductive. The fundamental concern here should however not be purely on the effectiveness and counter benefits of pay-for-performance but an in depth look at generation of unintended effects in motivation of employees and their importance.

Objective and subjective performance grading

In pay-for-performance systems, objective and subjective measures are used as the basis for performance evaluation. These include salaries based on the number of goods sold. On the subjective front however, measurements of performance are cumbersome due to the nature of collective responsibility in production of the goods or provision of the services. Altering the standards of measure in objective based pay-for-performance is difficult and sometimes contentious because it inevitable alter the terms of employees pay especially if it lowers their income. Employees under this system reduce their productivity on account of the threat posed by high standards and declined bonuses due to unanticipated greater production and hence unsustainable incentives (Medoff & Abraham, 1980, p. 721). Eliminating the incentives completely on the other hand demands variations in piece rates which is cumbersome. It is also impossible to measure the exact objective performance of an employee. While there are pointers that problems associated with objective measurements can be solved through subjective means of evaluation, the latter appraisal systems are ineffective. In deed, in a study by Milkovich and Newman (1987, p. 334), over thirty percent of employees are of the view that their appraisal methods are flawed. Both Lawler (1971, p.171) and Hamner (1975, p.19) argue that pay-for-performance based on subjective appraisals can never be successful in any institution.

Promotion rewards

In any hierarchical structured organization, promotions are accompanied by monetary benefits. According to Medoff and Abraham (1980, p. 727), the differences in earnings between employees of the same level job group vary significantly from those of different job groups. Murphy (1985, p. 18) asserts that higher level executives such as vice presidents of organizations receive higher pay rises on promotion of about nineteen percent on average compared to junior subordinates who receive about three percent. Promotions are due the diverse requirement of skills in different capacities for various jobs and to offer rewards to junior employees who value the kind of prestige that comes with higher ranks.

Promotional rewards verses bonus rewards

Promotion based reward system is less costly and more effective relative to the bonus reward system although the former apparently appear to have more disadvantages than benefits. Most risk-averse individuals prefer tournament relative to linear piece rates and that becomes the basis of all problems associated with promotion. This is because the advantages associated with the promotion depend on the probability of attaining or earning that promotion which is still tied to the surrounding factors of the incumbent superior. For instance, in the event that a younger person has been promoted to the only available possible slot for certain employees, the implication is that they will have to wait much longer to get the same position than if old person having just a few years to retire is promoted to the same position. Workers who do not meet certain standards say academics are also incapable of gaining such benefits meaning there is a limit to the number of people who can get specific rewards which others cannot (Murphy, 1985, p. 19). The workers whom are not eligible for the promotion therefore have no means of being motivated in the form outlined by the organization. Since promotion reward system requires organizational growth to be sustained, it cannot work in established settings that have minimal growth but may be practical in rapidly growing institutions.

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Bonus reward systems that vary depending on organizations’ annual performances do not face the above challenges. For one, the system caters for all employees regardless of their position in the company, abilities and available promotion opportunities. Although promotional rewards are voiced for under the reasoning that it reduces the risk associated with contestants for the bonuses, bonus rewards systems too achieves the same objectives. It is not clear why most firms settle for promotion reward system but that I will to future research. However, it is clear that the system has application limits beyond which bonus rewards or other forms of financial benefits must be implemented. For example, the organizations CEO cannot be promoted to any next level. Incentives or benefits therefore have to be channeled in other forms. Organizations with several multi level positions can utilize promotion rewards effectively as a way of providing incentives but the same cannot work for simple structures institutions.

With no option of bonuses, promotion reward scheme should provide strategies through which junior employees get to attain positions they are best suited to serve in. A major limitation of the system however is that it cannot achieve the best match and at the same time provides optimal effort.

Tournament system of promotion entails promoting the best performer in a specific group to the next level. A major problem associated with this system is that the particular person may not be suitable for the next job he or she is being offered since good performance in one level does not necessarily translates to being the best candidate for the next job. For instance, being the best salesman in a company or the best science researcher in a university does not mean one is a suitable candidate for to be the sales manager or the dean of the faculty of science respectively. The problem is more prominent in technical organizations such engineering firms where the best engineers are lost to management positions with no real purpose for the simple reason of policy instead of letting them do what they do best

Tenure and Up-or-Out promotional reward

In this system, once employees have served for a period of about five to ten years, the best performers are offered life time employments or partnerships as a way of promotion. It is imperative for those whom haven’t met the set standards to leave the firm. The system is applicable in certain sectors or industries but not others. Special characteristics are attached to particular tenure systems leading to variation in effects on production. It is agreeable that the systems are designed to achieve matching purposes and are not necessarily for incentives. In any case, there is difficulty in arguing that desire for tenure provides the motivation for associates in such firms. The system is commonly deployed in industries where creativity and human capital in unstructured environment is of significance in the production process. Evaluation of performance due to the nature of work is extremely cumbersome and non immediate. For example, an intellectual paper may be a breakthrough in a specific area of research or an unproductive shift in professional attention. It however takes about one to two years to discern so. Since the system forces unsuccessful employees to leave the company, the need for a reward system for employees who do not qualify to be promoted is eliminated. On the downside, the lack of any internal career path for these individuals and hence a must quit makes the organizations loose experienced human capital which is still highly productive as more trainees are developed to replace them.

The Up-or-Out promotion system is applicable in institutions in which employee turnover is of significance to provide the necessary match for dynamism in a versatile business environment together with new energy and enthusiasm that is generated by the young. The requisite human capital should also not be institution-specific but general. The large number of applicants and turnover rate broadens the pool from which quality performers can be obtained. The system is never observed in very large multilevel institutions except in the military.

Profit sharing

Workers compensation in profit sharing system of rewards is tied to the organizations’ overall performance. According to the New York Stock exchange, of all the firms using profit sharing systems, seventy percent indicate that that it is successful. The report further discusses that sharing of profits effectively motivates employees making them more productive (Milkovich, 1987.p. 31). Few companies understand the effectiveness of profit sharing schemes in motivation of employees. In large organization, employees contribute the total production of the firm’s products although they get only a fraction of the proceeds. It is however better tying people’s rewards to their performance instead of the overall performance of the organization. Team based rewards for different groups within the firm can also be developed for joint group work production in which individual effort cannot be measured except the groups output. The team based reward systems should be realistic. For example it is illogical to tie the salary of a janitor in a company to the performance of the company’s stocks in the stock exchange. Practitioners of this method argue that serious fundamental changes in corporate culture occur when employees become partial owners of an organization as their view of the company changes. This kind system however is only successful in macroeconomics and if the reward system is individual and not group. A major problem associated with profit sharing is over monitoring of other workers by their fellows. When workers realize that their earnings are directly influenced not only by their performance but also by their colleagues’ performance, they become over vigilant in monitoring the colleagues work activities. This sometimes may create an uncomfortable work environment in which individuals over monitor each other especially if a person choose to monitor others at the expense of working.

Incorrect performance evaluation

One of the surprising unexplained facts is the reluctance by superiors to rank their subordinates work as poor after evaluation. In the aforementioned table of Medoff and Abraham (1980, p. 726), only about two percent company A’s employees were awarded the lowest possible ratings with about ninety five percent being good or outstanding. No one got unacceptable ratings from company B and again the trend continued. While this result may be puzzling to many, it is in agreement with documented evidence of people’s belief that they are more than average performers in their jobs (Meyer, 1975, p.109). The biased perception may be a factor in producing results of the above nature. While informing workers they are in the top bracket of performers induce satisfactions, the vice versa too is too and ranking all employees average makes almost all unhappy. The nature of such forced rankings leads to grudges in the work place. If good performance is heavily rewarded with the mediocre performers receiving peanuts, managers tend to evaluate most workers as poor in a bid to limit the pay outs handed as rewards thereby reducing company expenses. The high reward however is not granted unless appraises too have incentives to perform the cumbersome task of letting subordinates know they are doing a poor or average job.

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The apparent asymmetry that exists between rewards and punishments can be explained by getting to the core of the inaccurate and biased evaluation of performance. As economists know, any remuneration package that pays say $800 and a bonus of $200 incase a quota is achieved is the same as one paying $1000 but penalizes the worker $200 in case the quota is not met. The question for thought here is why compensation systems are structured as the former and not the latter. Another aspect is the reward of winners (higher achievers in the organizations) without identifying explicitly the losers (mediocre performers). Promotion reward system fall under this classification as majority of the workers who rank themselves above their peers or near the top incorrectly keep hoping that they are near the top even if not the best when passed over for promotion.

Motivating managers to perform accurate appraisals is a difficult task that encourages the popularity of biased evaluation criteria. According to Baker (1987, p.67), Managers give more careful thoughts and spend more time in making decisions related to promotions than awarding of bonuses. The reason being that the counter benefits of promoting the wrong person to top level management or any decision making capacity with higher salary to the company outweighs those of misallocating annual bonuses to a few individuals. In general, if the stakes are high, then there is a likelihood of better evaluation by the appraisers than if the stakes are low.

Inaccurate and biased evaluation leads to decline in productivity and effectiveness of the rewards in an organization

Relationship between firm size and CEO pay

Compensation for CEOs is directly proportional to the size of the firm they run. Larger firms for instance employ more qualified CEOs whom demand better higher remunerations for their skills and experience. Their pay raises however are at a decreasing rate (Murphy, 1985, p.39). this structure is defective in nature in that a CEO is at liberty to increase his/her workforce with a view to offering them a higher salary. This is the case even though such an expansion could be at the expense of the company’s shrinking value in the market. The problem above explains some inefficient expenditure of firms in expansion programs that are unwarranted to create large conglomerates.

Another popular method of paying CEOs is by the use of surveys that relate to organizations’ sizes. This though is inherently counterproductive. This is because surveys that only indicate pay levels promote development of compensation strategies which are independent of performance. A solution would be to focus the survey on the CEOs performance within a given time frame instead of deciding how much to pay a CEO of a company worth $100 billion or $200 million. This too has serious challenges: by how much should the salary of a CEO whose company has grown in value by $500million, $2milliom, or $3 billion be raised? Since there is no standard measure for calculating the solution to the above question, a serious challenge is posed. A better understanding of the significance of these surveys and the contribution of the CEOs to performance in needed in determining these pays.

Incentives for top executives

Use of incentives is a common approach in promoting performance in an organization. Incentives based on performance have been found to motivate employees to work hard and consequently increasing overall organization performance. Use of performance based incentives on top management is usually a challenge. From economic theories, incentive pay for top management is expected have a very significant place in executive compensation. According to Jensen and Murphy (1988, p. 84), use of incentive pay on top management in contemporary business environment is significantly different as it would be predicated by economic theories. They argue that although there is a positive correlation between pay to top executives and performance in the organization, the correlation coefficient is tiny. They estimate that on average top executive receive about two cents pay increase for every a thousand dollars change in shareholders wealth. Jensen and Murphy explain that the ratio of two cent for every a thousand dollars increase in value is too small to be consistent with economic theories. Despite is the criticism; it agreed that incentive pay should b e tied to performance. What is not clear from economic theories is the ratio at which the incentives should be given out.

Essentially, compensation should be based on factors that executive have control over. Arguing from this perspective, Holmstorm (1979, p. 71) proposes that compensation for top management should be tied to performance but the performance should not be absolute but measured relative to performance in other organization in the same industry. Although top executive are the main decision makers in an organization, their compensation should not be independent external factors that affects the organization. Basing incentive pay on relative performance seems to be the appropriate approach paying incentives to top executives. This approach, however, may have unfavorable effects. The approach may discourage some top executive from working hard as their compensation is tied to performance in other organizations. To address some of drawbacks, nonmonetary incentives could be used instead. Such incentives include stock ownership. Stock ownership and other stock related compensation may enable a top executive to benefit directly from good performance.

Efficiency in Compensation

Just as in other resources in an organization, efficiency should be considered in human resource management. Competitive model of compensation explain that wages offered by an organization depend on ability of an employee and characteristic on the organization that influence nonmonetary benefits. Using this model, employees with equal qualification should be able to get close if not equal compensation. Krueger and summers (1988, p. 217) explain that violation of this principle implies that some organization offer higher compensation than should be given. This in essence imply that some organization fail to maximize profit. According to Krueger and summers, for an organization to maximize profit by efficient compensation, the firm must be able to reduce cost of wages, improve quality workers that the organization is able to attract, improved productivity and significant increase in worker effort (Krueger & Summers, 1988, p. 217). Efficient wages does not always imply lower wages. High wages can be efficient when it leads to reduction in turnover, lead to improvement on quality of service or when they motivate loyalty and high productivity. For efficient compensation, compensation strategies in an organization should consider the level, functional form and composition dimensions. Level of compensation, which constitutes total value of compensation, influences quality and quantity of workers a firm is able to attract. Functional form of compensation is the component that connects compensation and performance. The component of compensation, on the other defines what is contained in a compensation packages. Component of compensation may include monetary compensation, working environment, fringe benefits, leisure or relationship with other employees.

Conclusion

Human resource management is a very important but sensitive practice. One of the main challenges in human resource management is employee motivation. Low employees’ motivation can greatly affect an organization performance and competitive advantage. To have a highly motivated workforce, rewards are sometimes required. Rewards recognize unique contribution of an individual or a group of individuals is an organization and consequently encourage performance. Reward system in an organization should be managed strategically to ensure consistency between individual employees’ goals and overall goals of the organization. The system must be economically and financially feasible and should consider and address possible negative effects.

References

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