Quadrant I
Module 34: Reward Management Learning Outcome
1. Introduction 2. Reward Strategy
3. Aim of Organisation for Reward Management
4. Theoretical Framework 5. ESOPs
6. Non-Monetary Rewards 7. Summary
Module 34: Reward Management
1. Learning outcomes
After completing this module the students will be able to:
Understand different reward types
Design reward strategy
Understand how ESOPs can be effective
Source: https://www.assignmentpoint.com
2. Introduction
Reward Management is an important topic in compensation management. It boosts the psychological factor in humans, reward management plays a vital role because only “pay” or “salary” doesn’t motivate each and every employee as each employee has his/her own needs and desire.
Rewards and incentives are the transactional returns, anemployee is entitled for incentives in the next year as per his/her performance and during the time of appraisal that extra incentive becomes the reward.
Reward is purely based on performance. Reward can be anything depending on the type of organization and nature of work.
For example in a sales/marketing organization the employee is rewarded with an expensive phone such as an i-phone for the best sales person of the year.
In an audit firm when the auditor saves an organization from any kind of future transactional losses in crores, the employee (auditor) is rewarded with an incentive of one lakhs rupees.
Reward management is completely a motivator for the employees.
There are various structures in the organization in terms of compensating, and reward management motivates behavior of the employees hence the overall performance of the organization develops.
3.Reward Strategy
REWARD TYPES
Financial Non Financial
Benefits Autonomy
Performance Pay Recognition
Grade & Pay structure Meaningful work
Reward management is concerned with:
• The formulation and implementation of the reward strategies
• The overall design and maintenance of reward system
• How people should be rewarded financially with the help of job evaluation and market pricing
• Deciding whether recognition should be provided
• Base pay management – designing and managing grade / pay structures
• Contingent pay –managing schemes that reward people according to their merit, contribution or performance.
• The provision of pensions and employee benefits
• Managing &controlling the reward system.
Reward management is about designing, implementation and maintainingthe reward systems that aims to satisfy the need of both the organization and stakeholders.And it operate fairly, equitably and consistently.
It’s not just about pay and employee benefits. It is equally concerned with non-financial rewards such as recognition, learning and development opportunities and increased job responsibility.Reward management is about the design, implementation and maintenance of reward systems that aim to satisfy the needs of both the organization and its stakeholders and to operate fairly, equitably and consistently. It is not just about pay and employee benefits. It is equally concerned with non-financial rewards such as recognition, learning and development opportunities and increased job responsibility.
4. Aim of Organisations for Reward Management
• Reward people according to the value they create
• Define the right behaviours and outcomes
• Support and develop the organization’s culture
• Align reward practices with employee needs
• Promote high performance
• Support the achievement of business goals
• Help to attract and retain high quality people
A reward system consists of the interrelated processes and practices that combine to ensure that reward management is carried out effectively to the benefit of the organization and the employees.
There are two types of returns we may expect: transactional returns, relational returns
Transactional Returns Relational Returns
Base Pay The work itself (job design)
Contingent pay The work experience
Employee benefits Recognition, achievement, growth
Total Non-financial
Remuneration rewards
Total Reward
5.Theoretical Framework
“Incentives improve performance” is conflicting. In some circumstances, as demonstrated by a number of research projects, it works but in others it doesn’t. Typical performance-related pay schemes are unlikely to provide a direct incentive simply because they do not match the demanding requirements. Their main purpose is to recognize the level of contribution and even this is questionable because of the difficulty of making fair and consistent assessments of performance as a basis for pay decisions. Such schemes can demotivate more people than they motivate.
Hence the balance of this demotivation is in favour of some scheme for relating pay to contribution. But the difficulties of doing this should be recognized and every attempt should be made to ensure that pay decisions are fair, consistent and transparent. Involving staff in the development and monitoring of contribution pay schemes can be a great help.
Financial rewards comprise all rewards which have a monetary value and add up to total remuneration:
• Base pay
• Pay contingent on performance, contribution, competency or skill
• Pay related to service
• Financial recognition schemes
• Benefits such as pensions, sick pay and health insurance.
Non-financial rewards are those which focus on the needs people have to varying degrees for
recognition, achievement, responsibility, autonomy, influence and personal growth.Non-financial rewards can be extrinsic such as praise or recognition associated with job challenges, interest and feelings that the work is worthwhile. It can be said that money will motivate some of the people all of the time and, perhaps, all of the people some of the time. But it cannot be relied on to motivate all of the people all of the time. To rely on it as the sole motivator is misguided.
Money has to be reinforced by non-financial rewards, especially those that provide intrinsic motivation. When motivation is achieved by such means it can have a more powerful and longer- lasting effect on people, and financial and non-financial rewards can be mutually reinforcing.
Reward systems should therefore be designed and managed is such a way as provide the best mix of all kinds of motivators according to the needs of the organization and its members.
Pay determination is the process of deciding on the level of pay for jobs or people. Its aims, which frequently conflictare:
• To be externally competitive in order to attract, engage and retain the people required by the organization.
• To be internally equitable in the sense that rates of pay correctly reflect the relativities between jobs.
Market pricing is also a factor in the process of making decisions on pay structures and individual rates of pay and obtaining information on market rates (market rate analysis) -
• Policy decision is required in between the relationship of market rate levels and levels of pay within the organization. This is called the pay stance which is expressed in terms as matching median average rates or paying upper quartile rates.
• Market rate analysis may be associated with formal job evaluation. The latter establishes internal relativities and the grade structure, and market pricing is used to develop the pay structure – the pay ranges attached to grades. Information on market rates may lead to introduction of market supplements for individual jobs or creation of separate pay structures market groups to cater for particular market rate pressures.
• It is referred to as ‘extreme market pricing’ when market rates are the sole means of deciding on internal rates of pay and relativities, then conventional job evaluation is not used. An
organization that adopts this method is said to be ‘market driven’.
• Job evaluation is a systematic and formal process for defining the relative worth or size of jobs within an organization in order to establish internal relativities, carried out through either an analytical or a non-analytical scheme
Base Pay Management: The management of base pay uses the information from market pricing and job evaluation to design and operate grade and pay structures that caters job-based pay and allow scope for pay to progress within the structure through person-based pay.
Grade and pay structures
Grade and pay structures enable the organization to determine where jobs should be placed in a hierarchy, define pay levels and the scope for pay progression and provide the basis upon which relativities can be managed, equal pay achieved and the processes of monitoring and controlling the implementation of pay practices can take place. Grade and pay structures also enable organizations to communicate the career and pay opportunities available to employees.
Grade structures
A grade structure consists of a sequence or hierarchy of grades, bands or levels into which groups of jobs which are broadly comparable in size are placed. There may be a single structure defined by the number of grades or bands it contains, or the structure may be divided into a number of career or job families consisting of groups of jobs where the essential nature and purpose of the work are similar but it is carried out at different levels.
Pay structures
A pay structure consists of pay ranges, brackets or scales attached to each grade, band or level in a grade structure. In some broad-banded structures reference points and pay zones may be placed within the bands and these define the range of pay for jobs allocated to each band.
Pay structures are defined by the number of grades they contain and, especially in narrow- or broad- graded structures, the span or width of the pay ranges attached to each grade. Span is the scope the grade provides for pay progression and is usually measured as the difference between the lowest point in the range and the highest point in the range as a percentage from the lowest point. Thus a range of $20,000 to
$30,000 would have a span of 50 percent.
Total Reward Model
Transactional (tangible)
Pay abase pay
annual bonuses long-term incentives shares
profit sharing
Benefits pensions
health care holidays perks flexibility
Learning and development workplace learning
training
performance management career development progression
Work environment organisation core values
leadership employee voice work-life balance job/work design
Relational (intangible)
Basic Model no. 2:
Step I Discuss process design and implementation with senior management and secure initial endorsement.
Step 2 Communicate information about the process to all organization members.
Step 3 Brief the employee rewards task group.
Step 4 Task group members prepare a philosophy. objectives. operational guidelines and project plans.
Step 5 Brief senior management and obtain endorsement to proceed.
Step 6 Appoint a process manager and an employee rewards panel.
Step 7 Implement the competency-based employee reward process.
6.Employee Stock Option Plans - ESOPs
The best part of ESOP as a compensation strategy is that it offers freedom to link employee reward with individual performance and company’s performance
When cash is scarce and stock is readily available, ESOPs are a popular choice, as seen in case of startups that use ESOPs as their primary tool to reward their strategic and key talent
Employee Stock Options and its variants (Stock grants, stock purchase plans, restricted stock) as an employee reward measure have been used off and on by organizations over the years. We hear and read about the successful use of ESOPs to attract, retain and reward talent by companies like Google, Apple, Facebook and predominantly by Indian companies such as Flipkart, Paytm, Snapdeal, Infosys, L&T and ICICI. Information technology companies pioneered the adoption of stock-based incentive plans in India and continue to lead but companies in other sectors such as manufacturing and consumer goods are also actively using ESOPs as part of their talent management and reward strategy.
The inspiration for an employee to seek participation in an ESOP is the potential to earn wealth many more times the current compensation; and for the employer, it serves the purpose of golden cuffs – keeping the employee in the organization in anticipation of the wealth that ESOPs promise.
What is an ESOP and how does it work?
The market is abuzz with different varieties of stock-based incentives like ESOPs, stock appreciation rights, restricted stock units, stock purchase plan. Stock appreciation rights give employees the monetary equivalent of increase in share price over a specified time. In a scheme of restricted stock units, instead of awarding an option to the employee to buy the shares, the employer awards him shares upfront, subject to certain conditions to be fulfilled over the vesting period before the recipient becomes an outright owner.
Stock purchase plans give the employees an opportunity to buy shares at a discounted price. Restricted stock and stock purchase plans are popular in the US and UK and in India, ESOP and stock appreciation rights still find favour.
An ESOP in its simplest form is a promise to an employee to get a share of the company at a pre- determined price over a specified period of time and typically consists of three stages – grant, vesting and
exercise. Two or more of these stages may take place simultaneously depending on the type of plan. At the grant stage, an employee is provided with an option to receive shares of the company upon satisfying specified performance or other criteria over the vesting period and does not receive actual shares at this stage. If the employee satisfies the prescribed parameters during the vesting period, he/she can exercise the ESOP and opt to receive the shares. On exercise of ESOP, the employee receives shares of the company on payment of a pre-agreed exercise price which is generally discounted to the market price of the shares on the date of exercise. When the shares are sold by the employee at a later date, he/she can make gains on sale of shares.
Why ESOPs find favour – key factors at play
In recent times, the talent market is experiencing increasing levels of employee mobility and competition for talent. As a result, it becomes imperative for organizations to adopt a rewards framework which is able to retain and motivate key talent, focuses on paying employees for their performance, ensures business growth, finds favour with shareholders and is also competitive with market practices.
The best part of ESOP as a compensation strategy is that it offers freedom to link employee reward with individual performance and company performance. Some of the other advantages of an ESOP are its self- funding capability and deductibility of ESOP costs while computing taxable profits of the company.
When cash is scarce and stock is readily available, ESOPs make a lot of sense, thus it is not surprising that startups which are desperate to attract the best talent opt for ESOPs as their primary tool to reward their strategic and key talent.
For employees, where on the one hand ESOP is a tangible monetary reward, on the other the ability to split tax over two stages becomes an added advantage. The ability of ESOP plans to meet the needs of most stakeholders has brought the spotlight back on them. But as ESOPs become the favourite compensation mechanism among companies, companies should also watch out for the increased public sensitivity around offering stock based rewards and the evolving regulation around ESOPs, as non- compliance with regulations is the worst nightmare for any company.
A smart strategy to implement ESOPs
A problem with ESOPs often has been their inability to demonstrate a connection between employee’s own performance and the company’s performance. Often, employees below the executive level cannot see the connection and hence do not value ESOPs. Also, ESOPs do not have an immediate spendable value because of vesting restrictions and therefore may not appeal the larger set of employees. Proper choice of employees and proper communication of the value the ESOP plans uphold is the key to a winning ESOP plan. Thus, the communication strategy should clearly show the employee how the ESOP plan will translate into a tangible benefit over a finite number of years for him.
Pricing of ESOP can act as a deal breaker if not planned strategically. An excessively high exercise price may reduce the perceived gain for the employee and will lose out on its motivational value for the employee. A low exercise price may increase tax cost for the employee and thus render the plan unattractive. An appropriate pricing strategy would also impact cost booked in financial statements and earnings per share which is an important consideration for shareholders besides dilution.
A robust exit strategy is necessary for the success of an ESOP since an employee should be able to encash his/her wealth, while ESOP plans of listed companies provide a seamless exit, in unlisted companies, ESOP exit will work best when funded by company getting listed or through a new investors coming in.
In case these events are stalled for some reason, a good ESOP plan must always provide for an exit which could be by way of company arranging a buy back at the current market value. Well-planned exit from an ESOP ensures employee confidence and trust in the success of the ESOP plan as a reward and retention strategy.
There is no one-size-fits all approach while designing a long term incentive strategy for the company and every company has to keep the needs of its stakeholders in mind while designing the right ESOP strategy.
ESOPs definitely work in favor but need a well thought out feasibility planning and roadmap for successful implementation.
7.Some Non-Monetary Rewards
There are several non-monetary rewards that can also be given to motivate the employees. Rewards like the following go a long way in keeping the employee loyal to the organization:
1. A handwritten thank you note.
2. Inviting their spouse in for a lunch on the company.
3. A reserved parking spot.
4. A vacation day/ leave on special days like birthdays/anniversary 5. Brand-new desk, chair, or other piece of office furniture.
6. Bouquet of flowers.
7. Pay for them to take a hobby class, such as cooking or dancing.
8. Write a note to their family, sharing how important the person’s contribution to the company has been.
9. Keep the break room stocked with their favorite drink or snack.
10. Buy them tickets to a concert, show or other event.
11. Pick up a book or CD for them by their favorite author or artist.
12. Pay for their child to go to camp.
13. Provide them with a formal letter of appreciation for their personal file.
14. Create a “day pass” that they can turn in to take any day off, no questions asked.
15. Find a deal on a couple of three-day cruise tickets and set them up with a short vacation.
16. Allow them to be flexible with their hours.
17. Let them choose one day a week to work from home.
18. Have a birthday cake delivered to the office on their birthday.
19. Get each employee to write something positive about the person on a piece of paper, and give them the box of collected sayings, or frame them for the employee.
20. Start a company “Wall of Fame” and add them to it.
21. Find out what they are passionate about and give them a gift that relates to it.
22. Create and give them an award that they can keep and frame for a job well done.
23. Surprise them with an outdoor catered picnic.
24. Have a mobile car wash come to the business and clean their vehicle.
25. Get them a subscription to their favorite magazine.
26. Pay for a membership in a trade association of their choice.
27. Have a staff appreciation day once a month to provide them with a catered lunch.
28. Give them and their colleagues a catered breakfast.
29. Give them a new, improved job title.
30. Provide them with some one-on-one mentoring.
31. Institute a "playtime," where employees can play games or shoot some baskets.
32. Host an annual award ceremony and give awards to employees for their contributions.
33. Celebrate the anniversary of their joining the company.
34. Allow them to dress casually on Fridays.
35. Create a relaxation room, where the employee (and other people you are rewarding) can go during the day, to read or even play a video game on their break.
8.Summary
In this module we learnt how reward motivates behavior of the employees hence the overall performance of the organization improves. We also understood the two types of rewards i.e. Financial & No-Financial.
A reward system consists of the interrelated processes and practices that combine to ensure that reward management is carried out effectively to the benefit of the organization and the employees.
There are two different categories of rewards namely: transactional rewards, relational rewards. We learnt the basic model of reward management for implementation of reward system in the organization. Some non-monetary rewards were also discussed and the effectiveness of ESOPs were also shared.
