Chapter 9

Strategic reward management

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 Objectives
• identify the four main elements of a total reward approach
• namely, intrinsic rewards and extrinsic rewards of a
developmental, social and financial nature
• take an informed and balanced position on debates
regarding the relative influence of intrinsic rewards and
extrinsic rewards, particularly financial incentives
• understand the strategic considerations, challenges and
choices involved in employee reward management

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 Introduction

• ‘A reward may be anything tangible ... or intangible ...

that an organisation offers to its employees in
exchange for their potential or actual work contribution
... to which employees as individuals attach a positive
value as a satisfier of certain self-defined needs’.
– p. 392 of the textbook

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 Total reward management
• Extrinsic
• associated with, but external to the job
• Financial rewards
• base pay
• benefits
• performance-related
• Development rewards
• Social rewards
• Intrinsic
• from the content of the job itself

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 Elements of total reward

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 Strategic reward management

• Internal or horizontal fit

• External or vertical fit

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 Aligning rewards with business
strategy
• One size does not fit all.
• Provide all legally mandated employee entitlements.
• Tailored to the particular strategy of each organisation
and, where appropriate, to the specific strategies of
distinct business units within the organisation.

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 Reward philosophy and strategy

• Succinctly define the broad role that reward practices

are to have in assisting the organisation to be
successful and sustainable.
• A set of guiding principles as to how associated
practices will be applied to support the organisation’s
aims.

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 Reward system design

Entails three key steps:

1. preparing a statement of reward philosophy and
strategy
2. determining total reward mix
3. targeting pay levels, ensuring strategic fit or
alignment.

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 Reward communication

• Clear communication of reward system philosophy and

details will increase employee acceptance.

• What is the appropriate balance between disclosure

and secrecy?

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13

Reward transparency – for and

against
The case for The case against
• Encourages reward satisfaction by • Violates individual privacy
helping employees understand how
• Fosters jealousies and
their pay is determined
dissatisfaction over minor pay
• Clarifies link between work differences
contribution and reward outcomes
• Distracts from performance
• Supports work climate of trust and
• Engenders a cycle of ‘catch up’
openness
claims
• Clarifies the link between
organisational and strategic goals
and how employees are rewarded

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 Base pay

Three main categories of monetary reward plans are:

1. base pay plans
2. benefits plans
3. performance-related pay and rewards plans.

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 Base pay: nature and importance

Base pay is the foundational or fixed component of

employee remuneration and can be made up of:
1. job-based base pay
2. skill-based base pay
3. competency-based base pay.

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 Options for base pay

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 Job-based base pay
• Payment according to the ‘size’ of the job or position held.
• Remains the dominant mode of remuneration in most
developed countries.
• Traditional job-based pay structures:
• pay scales (or spines)
• narrow grades.

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 Valuing jobs
• Market surveys
• Job evaluation
• points factor approach
• weaknesses?
• Pay equity

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 PAY EQUITY

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 Person-based pay systems

• Skill-based base pay

• Broad grades
• Broadbanding

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 Skill sets and broad grades

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 Competency-based base pay
• Rewarding deeply embedded abilities or competencies
such as leadership, achievement, persistence,
composure and problems solving.
• Focuses on personal attributes that are seen to be the
most important and reliable drivers of high individual
performance.
• Defining feature is system of competency assessment
and broadbanded structure.
• Broadbanding.

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 Aligning base pay with
organisational strategy

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 Benefits plans
• Mandatory benefits:
• provision for employee economic security
• superannuation.
• Voluntary benefits:
• enhance an organisation’s ability to attract and
retain high-value employees and enable it to offer
employees a more appealing ‘value proposition’
• includes such benefits as discount company loans,
company cars, gym membership, self-education,
computers, mobile phones.

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 Fixed versus flexible benefits plans

• Standard content: the composition being determined by

legal requirement and employer choice.
• Flexible content: employees having a degree of choice.

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 Performance-related rewards

• ‘Performance-related rewards (or incentives) are rewards

given in recognition of past performance (individually or
collectively) and in order to reinforce and enhance future
performance.’
– p. 426 of the textbook
• Aligning business practices with business strategy

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28

Performance Incentives – For

and against
The case for
• Agency theory, reinforcement
theory, expectancy theory and goal-
setting theory all emphasise the
centrality of employee cognitive
processes to understanding and
managing the relationship between
rewards and task motivation
• Performance-related rewards
operationalise the equity norm of
distributive justice
The case against
• Incentives undermine intrinsic
interest in the job
• Rewards motivate people to pursue
one thing above all else
• Rewards punish
• Rewards rupture cooperative work
relationships
• Rewards ignore underlying reasons
for work problems
• Rewards discourage risk-taking

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29

Types of performance pay

• Individual performance-related rewards.

• Performance-related pay based on the
measured results of large or small work
groups.
• Collective performance-related rewards based
on results achieved by the organisation as a
whole.

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 Individual performance-related
reward plans
• Merit pay
• Individual recognition awards
• discretionary bonus.
• Individual results-based incentives

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 Collective short-term incentive
plans
There are four plan types:
1. profit-sharing
2. gain-sharing
3. goal-sharing
4. team incentives.

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 Organisation-wide long-term
incentive plans
• Reward employees for improvements over time in the
employing business’ sharemarket performance.
• Potential rewards are:
• share price appreciation
• annual dividend earnings
• special bonus share issues
• special taxation concessions or exemptions.

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 Organisation-wide long-term
incentive plans (cont.)
• Share bonus plans
• Share purchase plans
• Share option plans

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 Executive incentive plans

• Increasing linkage of executive pay to performance.

• Short-term incentives:
• generally of one year and linked to goals in
organisational financial performance
• instrumentality and reinforcement
• susceptible to manipulation.

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 Executive incentive plans (cont.)

• Long-term incentives:
• generally for three or five years and in the form of
company equity rather than cash
• main types are restricted share plans, option plans,
performance shares and share appreciation rights.
• Issues of justice and ethics.

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 MANAGING EXPATRIATE PAY

• Expatriate rewards must be sufficient to attract

suitably qualified and capable individuals to the role,
and also to retain and motivate the individual or
individuals selected for the role for the full duration of
the placement.

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 MANAGING EXPATRIATE
PAY (cont.)
• Elements of expatriate pay:
• base pay
• foreign service premiums
• allowances
• benefits
• performance incentives.

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 MANAGING EXPATRIATE
PAY (cont.)
• Approaches to expatriate reward management:
• balance sheet approach
• going rate approach

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 Summary
• Aim is to maximise contribution of human resources to
organisational effectiveness and success.
• Special emphasis on the notions of total reward
management and strategic reward alignment.
• Three main elements of total remuneration.
• Reward management of employees, executives and
expatriates.
• Challenging and complex, but also allows HR
professionals to demonstrate their worth.

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