Incentives and Rewards for Motivating Employees

What is a reward? 

A reward is an incentive plan to reinforce the desirable behaviour of employees in return for their service to the organisation. Reward Management ensures this by incorporating practices that reward workers, employees, or staff in a fair, consistent, and equitable manner based on their value in the organization. 

Reward Management System

The reward management system is the implementation of policies and strategies that reward every employee in the organisation fairly and constantly. 

Process of Reward Management System 

 

Types Of Rewards in Compensation Management

Rewards for financial performance directly impact an employee’s financial health. They can be categorised as: 

Direct Compensation: This package includes salary, hourly earnings, bonuses, and incentive programs based on performance. These are the most crucial rewards to retain top performers and enhance personal efficiency. 

Indirect Compensation: Indirect compensation encompasses many benefits supplied by the employer and non-financial compensation such as retirement insurance, health insurance, and paid leave. benefits contribute to meeting employee job satisfaction boost employee engagement. 

Types of direct compensation.

1. Understanding the Need: Identify the organization’s specific goals and objectives as well as the employee's needs and their most inspiring rewarding factors. 

• Identify the most crucial skills, behaviours, and outcomes that contribute to organisational success.  
• Consider the different generations and backgrounds within the workforce to tailor rewards effectively. 
• Define Objectives: Clearly outline the objectives of the reward system, such as enhancing performance, boosting morale, or attracting talent. 
• Develop a Total Rewards Strategy: Consider all aspects of compensation and benefits, including salary, bonuses, recognition, and career development opportunities. 
• Establish Clear Criteria: Define how rewards will be distributed and ensure fairness and transparency. 
• Consider Intrinsic and Extrinsic Rewards: Intrinsic rewards focus on personal satisfaction, while extrinsic rewards are tangible, such as bonuses and commissions. 
• Implement a performance management system that tracks employee performance and provides feedback. 
•  Ensure that rewards are delivered promptly and accurately. 
• Provide regular recognition and appreciation for employee contributions. 
• Regularly monitor the effectiveness of the reward strategy and adjust as needed. 
• Collect feedback from employees on their experiences with the reward strategy. 
• Continuously review and evolve the reward strategy to ensure its effectiveness and relevance.      

Monetary Rewards

Monetary rewards are used to recognise and reward employees who have reached certain achievement, performance, or productivity levels. 

Type of monetary reward

Base Pay: Base pay is known as basic salary, and some employers pay it as hourly compensation. Employees compensated on an hourly basis are known as hourly employees or wage owners. Those whose compensation is on the basis of weekly or monthly pay periods are classified as salaried employees.  

• Performance-related pay: - This pay refers to reward systems where payments are linked to an individual’s or team’s performance." Many organisations use different performance pay strategies to retain the best performers.

Individual performance-related pay schemes

Individual performance-related pay schemes involve employees receiving either a bonus or an increase in base pay. By tying rewards to performance targets aligned with organisational objectives, it becomes evident that employees are motivated to achieve those goals. Individual performance-related schemes offer employees greater control over their rewards, as they are not contingent on other team members' efforts or lack thereof. 

However, individual reward schemes may foster a lack of teamwork and create individual pay variations, which can lead to negative feelings and resentment. 

 Group-related performance-related pay schemes

 

A group incentive plan rewards a group of employees who have achieved a goal. This form of incentive is used to increase the productivity of a team in order to achieve a specific goal.
This has resulted in a situation where a larger portion of employees’ pay is tied to performance. The performance-related pay supports group planning, problem-solving, and building a team culture.

 Knowledge contingent pay 

Knowledge-based pay, also known as performance-based pay, is a compensation system where employees receive pay increases or bonuses based on their performance and knowledge acquisition. For instance, in a bank, a banking exam candidate may receive a higher salary after passing all the knowledge-level papers and an even higher salary after passing all their exams. 

 

Commissions 

Commissions are a form of remuneration commonly used for sales representatives. While sales representatives may receive relatively low basic pay, they earn commissions based on a percentage of their sales. The advantages of commission are that they should motivate sales staff to achieve higher sales, as their rewards depend on it, and they mean that a large part of the salesman’s salary becomes variable. If sales are low, the organisation will have to pay less. The disadvantage of commission is that it may lead to dysfunctional behaviour. 

Profit-related pay -

Profit-related pay is a group performance-related pay  scheme where a portion of an employee’s remuneration is tied to the organization’s profits. If the company’s profits exceed a predetermined threshold, a bonus is paid to all members of the scheme. Usually, the bonus is a percentage of the basic pay. It can be paid during the current year, such as quarterly, or deferred until a later date, like the staff’s retirement. Profit-related pay might not be an effective motivator for junior employees, as they may struggle to comprehend the connection between their efforts and the overall profits of the organisation. 

Pension schemes 

Defined benefit pension schemes, once a popular form of reward, involved employees paying a pension to former colleagues based on their final salary and the number of years they served.   

However, defined benefit schemes pose significant risks for organisations, leading many to discontinue them. Defined contribution schemes, on the other hand, offer a different approach. In these schemes, employers contribute a certain percentage of an employee’s salary to a pension ‘pot.’ Employees may also choose to make additional voluntary contributions to this post. The pension pot is then invested, and upon retirement, the employee receives the accumulated funds in their account. In some countries, employees may be required to use the pot to purchase an annuity, which provides a fixed income for the rest of their lives. 

2. Non-Monetary Rewards:

These are non-cash benefits provided to employees in addition to their base salary and performance-related pay.  

Examples of non-monetary rewards.

 

Recognition Programs- Regularly acknowledging achievements will be a factor for boosting motivation, reinforcing positive behaviours, and creating a sense of pride and accomplishment. Employees who feel appreciated are more likely to stay with a company. Hence, this process helps retain top performers and attract key talents. 

Professional Development Opportunities. 

Well-trained employees are more competent and efficient in their roles. Providing development opportunities also fosters a culture of innovation, as employees are encouraged to bring new skills and knowledge to the workplace. 

Benefits of Work-Life Balance: -Introducing flexible working hours / working at home options helps employees manage personal responsibilities, reduce stress, and avoid burnout. This will have a positive impact on reducing absenteeism. Wellness programs like gym memberships, medical seminars or mental health support  programmes further promote overall .A balanced workforce tends to be more engaged, productive, and loyal. When employees feel their personal lives are respected, they’re more likely to contribute positively to the company's success. 

 

These benefits are used to motivate and retain employees by offering extra incentives. 

A key advantage is the flexibility it allows in designing a personalised reward scheme for each employee, which can be tailored to individual preferences. 

The combination of non-monetary and monetary incentives ensures employees’ happiness and financial security. A balanced approach fosters enthusiastic, committed, and productive employees. 

 

Establishing the level of benefits 

While establishing benefits, organisations should focus on competitiveness and internal equity. 

 If the pay is competitive, it’ll be challenging to attract and retain the right number of skilled employees. On the other hand, if the pay is excessive, it’ll strain the organization’s finances. In those scenarios, organisations should adjust their salary scale according to competitive market and profitability.

Another factor that the company should focus on is Internal equity. This refers to the pay differentials within the organisation itself. Employees become demotivated if they perceive the remuneration system as unfair and believe that others are being paid more generously. To overcome this issue, job evaluation techniques should be implemented. Based on that, the appropriate rewards for that position should be determined. 

The role of appraisal in reward systems 

Many performance-related reward schemes rely on employee performance. Therefore, employee performance must be assessed. This typically occurs during the appraisal process. Staff are regularly assessed, for instance, at the same time as mid-year and end-of-year. During the appraisal, targets are set for the upcoming period, and rewards are agreed upon if the targets are met. 

Conclusion 

 A well-designed reward system balances monetary and non-monetary incentives. This approach significantly accelerates performance by boosting motivation and engagement. Managing employee performance and reward concepts, practices, and strategies requires adaptability and a keen understanding of workforce needs 

The key to success lies in aligning rewards with performance, ensuring employees see a direct connection between their efforts and recognition. A comprehensive reward management system can enhance your performance and reward strategies. Ultimately, a better reward management system has the ability to drive your organisation to new heights of success. 

 

References  

Gupta, N. and Shaw, J.D. (2014) ‘Employee compensation: The neglected area of HRM research’, Human Resource Management Review, 24(1), pp.1-4.https://doi.org/10.1016/j.hrmr.2013.08.007