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Compensation and Reward Management

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The compensation and rewards as received by employee is proportional to the effort exerted by them.

Besides, several other internal and external factors determine the financial as well as non-financial compensation for them.

Within compensation and reward scenario there are few levels denotes the role and status of employees.

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Basically, these levels are based on the parameters of skill, knowledge, capabilities and qualifications of human resources.

Within present HR scenario, different organisations are much devoting their personnel efforts to manage and maintain their compensation and reward system.

Learn about:-

1. Objectives of Compensation and Reward Management 2. Classification of Compensation and Reward Management 3. Determinants 4. Evolving Strategy

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5. Different Levels for Payments 6. Approaches 7. Important and Worthwhile Trends 8. Strategy and Design Issues 9. Emerging Compensation and Reward System in an Organisation.


Compensation and Reward Management: Objectives, Classification, Levels, Approaches, Strategy and Reward System

Compensation and Reward Management – Top 11 Objectives

The basic objectives of appropriate and sound compensation and reward system in any organisation are given here:

1. It aims to develop skills and personality of employees by which they can earn better and attractive compensation;

2. It aims to pay fair and justify remuneration on the basis of their efforts, skills and competencies;

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3. To obtain able and efficient employees and retain high performing employees;

4. It aims to improve the quality of services as rendered by employees;

5. To communicate the employees for their worthwhile and needful role in organisation;

6. It aims to increase the level of efficiency and productivity of employees on the basis of motivational grounds;

7. It aims to develop and enhance cooperation and collaboration among employees;

8. It aims to motivate employees towards higher work performance;

9. It aims to make better employer employee relations;

10. It aims to provide employees social recognition and status;

11. It aims to reinforce desirable and applicable employee behaviour.


Compensation and Reward Management – 2 Major Areas: Financial and Non-Financial Methods

Broadly, there are two major areas of compensation and rewards as given here:

1. Financial Methods:

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Financial compensation and rewards can be classified into two broad categories i.e.,:

i. Direct, and

ii. Indirect.

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i. Direct Methods:

The direct compensation methods refer to monetary payment to employee on the basis of their tenure of job and its negotiations with employers. The financial payment to employees may be in the form of wages, salaries, allowances, commission, monetary incentives, bonus, overtime payments and profit sharing.

ii. Indirect Methods:

Within the indirect methods, the employees do not receive actual cash or financial payment, rather, they receive the tangible value of the reward which are based on financial grounds, but they provide indirect benefits and opportunities to employees. These rewards are received by employees on the basis of completion of their particular tenure of work.

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In other words, if the employees have completed a specified or contact period, then after the maturity period they may be entitled to get the insurance, pension, provident fund and traveling benefits etc.

2. Non-Financial Methods:

The non-financial components in the compensation package is also an important aspect. The methods are integrated with some motivational viewpoints by which the mental and social needs can be satisfied. The methods constitute some intrinsic rewards based on human nature, praise, morale, recognition, motives and informal interactions. The methods are develop the human and psychological recognition that employees get when they feel that others have recognised their skills and contribution.

The methods are proper service conditions, job enlargement, promotions, rights and responsibilities, opportunities for advancement, recognition, health and maternity leave, gratuity and medical leave etc. The non-financial methods have some preferential benefits to the employees.

These are as given here:

i. These may be fulfilled the self actualisation needs of employees;

ii. Employees can get better opportunities for personal and career advancement;

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iii. Organisations are making better efforts to retain employees;

iv. They create and provide informal relations with employees;

v. They create and develop praise and recognition of employees;

vi. They create and develop the morale and enthusiasm among employees;

vii. They may develop the feelings of reliability and loyalty among employees;

viii. They may be able to recognise the individual and group work performance.


Compensation and Reward Management – 2 Major Determinants: Internal and External Determinants

The compensation and rewards as received by employee is proportional to the effort exerted by them. Besides, several other internal and external factors determine the financial as well as non-financial compensation for them.

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Broadly, there are two major determinant factors as given here:

1. Internal Determinants:

The internal determinants are as given here:

i. Nature of Work – If the work is so hard, complicated and having some risk factors, incentive level may be high as compared to others.

ii. Compensation Policy – The policy of compensation determine the organisation’s ability to employees. Within the policy framework the systems, methods compensation may be determined. Every organisation must have policy that make the relationship with the job and skills levels.

iii. Employee’s Relative Worth – As per the notions of merit and performance of employee, the compensation and reward level may be determined. Mostly, there are several cases to make a worthwhile link of employee pay to their performance.

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iv. Promotional Policy – The level and composition and rewards are also determine by the promotional policies. The experience employee may get their promotion to a new job with new task and then they may be recognised with new pay scale and incentive systems etc.

v. Technical Knowledge – In any organisation, the employees who have the technical skill and knowledgeable experience can provide a high level of compensation and rewards. As such, the technical knowledge of employees are an important aspects in this regard.

vi. Employer’s Ability to Pay – An employer’s ability to pay employee and provide them benefits are also an important determinant of pay levels. It is based and influenced by some factors as profitability, budgetary situation, financial position and competition faced by employers etc.

2. External Determinants:

The external determinants are as given here:

i. Area Wage Rates:

The wages, salary and other incentive levels are influenced by the prevailing rates as offered by other organisation. It must be noted that an organisation ensure that the pay levels do not rise to high or drop too low in comparison with other organisation operating in the same area or region. The employers may analyse market movement of wages and salaries and decide to hike the salary of its employees based on market opinions.

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ii. Economic Conditions:

The economic condition of any organisation, denoted the capacity to pay. It is a consequence of better profitability and relative productivity of the organisation may determine the demand of skilled workforce, operational system, new technology, better and more remunerative level as well as more work facilities to employees.

iii. Scope of Products’ Market:

The scope and potentialities of the product of organisation are also a focus point to make a determinant aspect towards remuneration plan and its procedures. The products market may create and develop the profitability and wide range of earning level of the organisation. It duly effects to the determinants of pay levels.

iv. Government’s Laws and Policies:

Different government laws and policies also effects the level and structure of remuneration and compensation by providing guidelines. Few legislations like Minimum Wages Act 1948 & Payment of Wages Act 1936 that determine minimum wage rates for certain categories of employees. Different allowances and fringe benefits are also affect by the legislation.

v. Competition:

The competitive environment within the enterprises and industries also affect the level and pattern of pay rates. The compensation may create the remuneration level with at par and develops the strengthen part in determining the pay scales.

vi. Role of Employees’ Organisation:

The role of employees’ organisation effect the level and structure of payment. The negotiations with employees’ unions tend to establish the wage patterns for a specified region.

vii. Labour Market Conditions:

The forces of demand and supply for qualified people within an area influence wage and salary rates. When demand for human resources is high and supply is limited, wages and salaries are higher in order to attract and retain qualified employees. Employees with skills that are rare and valuable are in a strong bargaining position and command high compensation.


Compensation and Reward Management – Strategy and Key Issues

Organizations need to have a clearly defined strategy for business as well as for compensating talent. These two decisions in turn should be linked. In the search for competitive advantage for the business, it is ultimately the employees who help to deliver on this advantage. Hence mechanisms for rewarding employees should support the business strategy.

This alignment notion is based on the contingency approach, which specifies that when variations occur in the strategy of an organization, these should be accompanied by variations in the human resources strategies including the compensation strategy in order to influence and shape performance appropriately. Decisions such as whether to lead the industry or lag the industry when compensating talent are also linked to the business strategy as well as the value propositions it can offer as an employer.

In order to cope with turbulent business environments, organizations try to decipher challenges such as changing customer needs, competitors’ actions, changing labour market conditions, changing laws and globalization. Their compensation elements and strategies should support the organization in navigating the business environment and dealing with the challenges mentioned as well as prepare it for the future.

Schneider Electric India Pvt. Ltd realized the value of creating awareness about the reward programmes as they found that lower manager engagement and a lack of transparency could lead to undervaluing the benefits of such programmes. An online collaborative platform called SPICE was established to connect employees with the rewards team to address queries.

Training was conducted for managers to highlight the linkage of performance management, rewards and development to enable decision making around rewards for employees. This engagement exercise was conducted in three phases. The first phase created awareness about the key benefits and differentiating factors offered by the organization as part of the Know Your Rewards Programme.

In the second phase, information sharing was carried out under the title Enable, and the last phase of Empower generated understanding of how the employees used information to make informed decisions regarding their compensation.

Several factors and key issues are considered while aligning the compensation system with the business strategy in order to reward talent:

1. Culture and shared values are naturally included while the manager is deciding what criteria will be considered during the appraisal process. These values may include ethical behaviour, innovation, collaborative behaviour, and transparent communication, openness to change, learning orientation and commitment, amongst others.

Aligning performance behaviours with culture and shared values is helpful when assessing efforts and outcomes during the performance evaluation process. Further, the organization culture also highlights how the organization should create its compensation strategy. In the case of an organization with a culture of employee orientation, it may provide a friendly work environment and work-life balance opportunities.

2. The organizational strategy should be taken into account while developing a performance appraisal system. Clear and widely communicated organizational strategies help the talent pool to align their efforts in the direction of the desired outcomes thus creating synergistic collaboration possible.

The appraisal process when linked to the business strategy and outcomes enables the assessment of how successful the executive has been in moving forward with the articulated business strategy for that year. Midyear reviews allow for the company to reassess the performance behaviours of the talent pool and alter them if required.

3. Due to the increased emphasis over the years on contribution to the bottom line, increase in profit, return on capital, growth in earnings and market share, executive compensation has become increasingly tied to business performance and outcomes. Flexibility to pay more to talent that achieves targets can be created by the use of incentive plans, as part of variable pay.

4. Goals that are measurable and possess criterion validity enable the creation of an effective and progressive performance appraisal mech­anism. Creating goals that reflect financial as well as non-financial measures gives rise to comprehensive performance evaluation measures. The mix of quantitative and qualitative measures should reflect the focus of desired behaviours. Incentive plans linked to achieving specific targets should be supported by clear quantitative measures whereas qualitative measures though subjective can provide useful information about the context of performance.

5. Compensation and reward strategies should be linked to the business objectives, but should also be compliant with the regulatory framework in which the business operates. These strategies should be a good fit with the culture of the organization and its internal environment in terms of justness, fairness and transparency.

6. Additionally, the compensation strategy should also be competitive with reference to the external environment comprising the competi­tors. Benchmarking practices, conducting compensation surveys enable an organization to assess their compensation strategy for key talent in comparison to its competitor. While compensating employees, organi­zations pay attention to factors that provide them with a competitive advantage and make them the employer of choice.

7. Compensation and reward strategies are also influenced by how work is designed internally and whether compensation and reward schemes should be based on individual and/or team performance, on experience and/or continuous learning, on improved skills, on changes in cost of living, on personal needs (housing, transportation, health services), and/ or on each business unit’s performance.

A major challenge in rewarding talent is to design the next generation reward systems to better satisfy individual needs and preferences. This can be done by offering more choice to the employees. While younger employees may prefer more cash in hand on order to build assets or help finance their education, older employees may look for health and pension benefits.

Similarly, families with dual-career couples may prefer flexible work schedules to look after their children, child care facilities, or insurance and health benefits to look after ageing parents. Organizations believe that allowing their talent pool to choose their own reward or benefit elements adds value and is also a great way to retain employees since competitors may find it diffi­cult to replicate such flexible systems. It is, however, extremely critical for organizations to counsel and communicate the pros and cons of each benefit so that employees make wise choices leading to an increase in the system’s effectiveness.

8. The team that designs the compensation and reward system is generally reflective of the organizational culture and can be representative of all concerned stakeholders or then could be inclusive of external experts too. Managing the performance of talent and compensating talent appropriately requires the inputs of several stakeholders. However, this decision may also be influenced by the organizational culture and management style.

These factors help to evolve the compensating and rewarding patterns and strategy of an organization. While one organization may have an explicitly stated strategy and policy to reward talent, another may have an unstructured approach to it. In order to attract, engage and retain talent however, a clearly articulated reward strategy is beneficial.


Compensation and Reward Management – Different Levels for Payments Based on Work Performance by Employees

Within compensation and reward scenario there are few levels denotes the role and status of employees. Basically, these levels are based on the parameters of skill, knowledge, capabilities and qualifications of human resources.

According to the different nature of job and skills and capacity to be required, the basic level of remuneration can be determine. Generally the levels for payments are merit based pay, skill based pay, variable pay and competency pay are used in organisation.

Different Levels for Payments Based on Work Performance by Employees:

Within dynamic phenomenon of compensation scenario, there are four major levels to be followed by employers that are based on different levels of employees’ work performance.

Level # 1. Merit Based Pay:

i. Based on employees’ job appraisal

ii. The merit is a determinant factors in compensation process

iii. The best performing employee gets the highest merit pay.

Level # 2. Skill Based Pay:

i. Those employees who possess more knowledge and skills are more valuable to the concern and therefore should be rewarded accordingly

ii. The compensation of employees are based on job skills, capacity and knowledge

iii. As employees acquires more skills as well as to learn and gain additional skills then they can get more pay

iv. It is important for organisations to provide opportunities and career orientation facilities

v. It develop the ways and means to motivate employees.

Level # 3. Variable Pay:

i. In order to control over the labour cost and maintain a high level of performance, it is being used

ii. It is noted that rewards provided for good performance during a previous employment period are not added to the base pay or initial pay at the new job scenario

iii. Employees or high performers can get various fringe benefits and incentives

iv. A certain level of pay standard is fixed. If employee’s performance exceeds the standard, variable rewards lead to more increase in pay. But if performance is below standard, an employee’s reward get reduced. It leads to financial insecurity among employees and likely affects employees morale

v. It may be a supplement to merit and competency based pay design.

Level # 4. Competency Based Pay:

i. The employees are paid on the basis of their skills, knowledge, motives and attitudes etc.

ii. More emphasise is given to the job contents and job performance.

iii. The proficiency level may also be determined for making an overall competency bases.


Compensation and Reward Management – 3 Major Approaches: Bargaining Approach, Traditional Approach and Contemporary Compensation Approach

Over the years, the viewpoints and approaches have undergone tremendous changes.

There are three major approaches as given here:

1. Bargaining Approach:

For a long, within the HR scenario, whatever the employees required to get some consideration or wages that were the mutual rate towards the compensation structure. The capitalist and workers have been mutually determine the considerable amount between them. So it was the long back approach which determine the compensation based on bargaining capacity of workers with their employees.

2. Traditional Approach:

This approach compensates employees through job based pay system. It is based on the analytical study as well as job evaluation of a particularly job and its design. It is determine the relative worth and technological factors concerning of jobs or a specified job.

3. Contemporary Compensation Approach:

This approach has more emphasise on skill, efficiencies and competencies which are worthwhile aspect to determine the compensation and rewards. Today, within HR scenario, there is need to promote and accommodate most skilled and knowledgeable employees. The employees can influence their compensation through their efficient performance.


Compensation and Reward Management – Important and Worthwhile Trends, as Arising out of Developmental Stages

Within present HR scenario, different organisations are much devoting their personnel efforts to manage and maintain their compensation and reward system.

Some of the important and worthwhile trends, as arising out of developmental stages are studying here:

1. Mandatory Benefits:

During these days several organisations are much emphasise to provide the mandatory benefits to their employees. In most of the cases the employers are legally bind to make for these benefits. The provident fund, gratuity, health plans, maternity benefits and medical leaves are the examples of mandatory benefits.

2. Maintain Compensation System:

It is a consent and existing reward system to make pay package and policies to maintain the present state of signifying components. It aims to maintain present HR market share with available talented persons. The organisations provide the work reward to expertise personnels for a long tenure. They are intend to preserve the present state of competencies and skills of employees.

3. Incentive Systems:

Within compensation plans, the incentive systems plays a key role to motivate the employees for achieving a goal oriented aspects. Incentives have the potential to dynamism the work performance with better achievements of results. The incentives may be profit sharing, bonus and different fringe benefits that are most suitable systems to follow different organisations.

4. Team Based Pay and Rewards:

Organisation are increasingly follow the self-managed team or work teams to managed and organised the compensation plans. Basically, the group of persons or a specified team aims to determine individual and group performance. Team objective are specified and rewards to each team member are linked to team performance. Thus, each team member gets a reward if the team achieve its target.

Some of the concern use team rewards to provide basic pay to individual, though they possess different levels and status in the team. In order to design a better team based reward system, it is needful to determine to compensate basic pay for each individual performance.

5. Competency Pay System:

A competency pay system is one in which employees are paid on the basis of their skills, knowledge, attitudes, competencies etc., that they bring to the job. It is required to identify the competencies for various jobs and then assign a value to various competencies.

Broadly there are few major steps in designing this system are as to identify competencies relevant to carrying out a particular task to identify the proficiency level for each competencies, to determine a relationship between competencies and variations in employees’ performance. The proficiency level through employees’ competencies may be assessed through job simulation, job specified performance and behavioural rating scales etc.

As such, the compensation and reward management is an important and decisional process which involves the design, formulation and evaluation of compensation system. For fair and justified remuneration to improve the efficiency and productivity of employees, it is needful to motivate them towards higher work performance.


Compensation and Reward Management – Strategy and Design Issues

Attractive and effective compensation and reward mechanisms serve to motivate and engage talent, thereby drawing out desirable behaviours from them. Effective reward systems enable the recruitment, motivation, engagement and retention of key talent for organizational objectives. This is more so since people generally link their financial security with the compensation they receive. In a way, compensation and reward mecha­nisms also contribute to maintaining the economic and social well-being that an employee enjoys.

While designing effective compensation and reward mechanisms, organi­zations draw upon their business strategy, culture and human resource strategies. These reward mechanisms include all the monetary, non-mone­tary payments and benefits an organization provides to its employees in exchange for the work they perform.

Apart from the basic pay provided by employers, benefits are also offered to attract talent. The cost of benefits has been climbing very sharply and so employers are very careful about designing effective benefit plans that are superior to their competitors but are closely linked and aligned with the organizational objectives.

Employees on the other hand, make significant investments of time and effort, both physical and mental. They are also affected at the psychological level by workplace happenings. Employers need to recognize these efforts and time of the employees as investment in the organization and design compensation and reward mechanisms accordingly.

Needs of the talent workforce may differ significantly and with a diverse workforce, crafting well-designed compensation and reward strategies and executing them could make all the difference in attracting and retaining talent in a competitive industry.

However, in the race to attract and acquire talent, organizations may do well to consider the affordability of their compensation and reward decisions. Labour costs across organizations are rising and sometimes may account for more than half of the total costs. In organizations offering specialized services, these costs may be higher due to scarce availability of knowledge and skills.

This leads the organizations to take a long and hard look at what they are paying for. Traditional compen­sation and reward systems need to be replaced today to respond to the needs of the next generation of employees. This calls for sensitivity to their needs and flexibility, all in turn linked to the achievement of the organization’s objectives.


Compensation and Reward Management – Emerging Compensation and Reward System in an Organisation

Reward systems are often a significant cost factor in organisations. Indeed, the pay system alone represents about 40 percent of an organisation’s operating cost. Pay systems involve direct pay and benefit costs, as well as the costs associated with managing and operating the system.

Some of the emerging compensation and reward systems in an organisation are discussed below:

1. Gain Sharing:

Gain sharing plans are designed organisation-wide to reward employees for improvements in organisational productivity. Gain sharing differs from profit sharing in atleast three ways. First, under gain sharing, rewards are based on a productivity measure rather than profits. The goal is to link pay to performance outcomes that employees can control.

Second, gain sharing plans usually distribute any bonus payments with greater frequency (e.g., monthly or quarterly versus annually). Third, gain sharing plans distribute payment during the current payment rather than deferring them as profit sharing plans often do.

Lawler (1971, 1990) has summarised some of the common results that have been found in research studies of gain sharing plans:

i. Co-ordination, teamwork, and sharing of knowledge are enhanced at lower levels.

ii. Social needs are recognised via participation and reinforcing group behaviour.

iii. Attention is focused on cost savings, not just quantity of production.

iv. Acceptance of change due to technology, market and new methods is greater because higher efficiency leads to bonuses.

v. Attitudinal change occurs among workers, and they demand more efficient management, better planning, and good performance from their co-workers.

vi. Employees try to reduce overtime – to work smarter.

vii. Employees produce ideas as well as effort.

viii.When unions are present, more flexible administration of non- management relations occur.

ix. When unions support the plan, they are strengthened because better work situations and higher pay result.

x. Unorganised locations tend to remain non-union.

There are, however, certain limitations of gain sharing plans. Perhaps the most important is differentially attracting and retaining the best performers. As gain sharing plans do not pay more for better performance, they do not necessarily motivate them to stay. Unlike profit sharing it pays bonus even when the organisation is not earning profits. Moreover, gain sharing plans do not fit in with every situation.

2. Stock Options:

Stock options are similar in many ways to profit sharing plans. The basis for payouts is organisational performance in the stock market.

Important goals of the plan are:

(a) To motivate employees to act in the best interest of the organisation as a whole,

(b) To enhance employee identification with the organisation, and

(c) To have labour costs vary with the organisational performance.

Stock options have long been a common programme for executives, but some organisations, like Pepsi-Cola and Hewlett-Packard, grant them to all employees. There is evidence that this approach is becoming more widespread.

The stock option is the most popular long-term incentive. A stock option is the right to purchase a specific number of shares of company stock at a specific price during a period of time. The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted.

The employee’s gain is equal to the market value of the stock at the time it is exercised, less the grant price. The assumption is that the price of the stock will go up, rather than go down or stay the same. Several trends have increased the attractiveness of stock options as a long-term executive incentive and retention tool.

3. Employee Ownership:

A number of plans exist that help get some or all of the ownership of a company into the hands of employees. These include stock option plans, stock purchase plans, and employee stock ownership plans (ESOPs). In small organisations in which participative management is practiced it has a good chance of increasing organisational performance.

In a large organisation with little employee ownership, it may positively effect the structure by creating integration across the total organisation if, of course, all employees are included in the ownership plan. Ownership can have a more positive impact on attraction and retention than does profit sharing.

The usefulness of employee ownership, however, is likely to be highly situational. For instance, in the case of small organisations they might make profit sharing and gain sharing unnecessary, and if combined with an appropriate approach to employee involvement, they can contribute substantially to employee motivation. In a large organisation they may contribute to the integration of the organisation and to a positive culture.

4. Competence-Related Pay:

Competence-related pay may be defined as a method of rewarding people wholly or partly by reference to the level of competence they demonstrate in carrying out their roles. This definition has two important points – (i) pay is related to competence, and (ii) people may be rewarded with reference to their level of competence.

Competence-related pay is not about the acquisition of competence. It is about the effective use of competence to generate added value. Competence-related pay works through the processes of competence analysis of individual competences and levels of competence.

5. Skill-Based Pay:

Skill-based pay links pay to the level of skills used in the job and, sometimes, the acquisition and application of additional skills by the person carrying out the job. The term is sometimes used interchangeably with competence- related pay. But skill-based pay is usually concerned with the skills used by manual workers, including fitters, fabricators, and operators.

In competence-related pay schemes, the behaviours and attributes an individual has to use to perform a role effectively are assessed in addition to pure skills. Skill- based pay may in many ways seem to be a good idea, but its potential costs as well as its benefits need to be evaluated rigourously before its introduction.

Initially they may provide strong motivation for individuals to increase their skills. But they may out-live their usefulness and hence need to be revised or even replaced if they are no longer cost effective.

6. Team-Based Rewards:

Team-based rewards are payments or other forms of non-financial rewards provided to members of a formally established team which are linked to the performance of that team. Team based rewards are shared amongst the members of teams in accordance with a scheme or ad hoc basis for exceptional achievements.

Rewards for individuals may also be influenced by assessments of their contribution to team results. To develop and manage team rewards it is necessary to understand the nature of teams and how they function. Team-based rewards are not always easy to design or manage.

7. Profit Sharing:

Profit sharing is better known, older and more widely practiced than gain sharing. Profit sharing is associated with participative management theories. Profit sharing is a group-based organisation plan.

The fundamental objectives of profit sharing are:

(a) To encourage employees to identify themselves more closely with the company by developing a common concern for its progress;

(b) To stimulate a greater interest among employees in the affairs of the company as a whole; and

(c) To encourage better co-operation between management and employees.

The logic behind profit sharing seems to be two-fold. First, it is seen as a way to encourage employees to think more like owners or at least be concerned with the success of the organisation as a whole. Individual oriented plans often place little emphasis on these broader goals. Second, it permits labour costs to vary with the organisation’s ability to pay.

Some companies have effectively used their profit sharing plans as vehicles for educating employees about the financial performance of the business. The most important advantage of profit sharing is that it makes labour costs of an organisation variable and adjust them to the organisation’s ability to pay. Most Japanese firms have used this approach to adjusting labour costs for decades.

8. Merit Pay:

Merit pay is the most widely used approach for paying performance. Merit pay systems typically give salary increases to individuals based on their supervisor’s appraisal of their performance. The purpose of merit pay is to improve motivation and to retain the best performers by establishing a clear performance reward relationship.

Considerable evidence suggests that most organisations’ performance appraisal is not done well and as a result, good measures of individual performance do not exist.

9. Variable Pay systems:

Variable pay is employee compensation that varies with the organisation’s business performance. The classic type of variable pay is sales commission in which the sales representative receives an award for each sale. Variable pay is counter-cyclical. It is more costly to the organisation that is performing well; yet the organisation that is performing well is better able to afford the expense.

It is less costly when the business is not doing well and is less able to afford variable pay. If the organisation performs well, then the employee will earn more income. The most effective variable pay systems have been those that have established business team or business unit performance targets.


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