In order to improve organizational performance, companies often use strategic compensation. The goal is attained only when the compensation systems focus on the performance of the entire organization, rather than focusing on individual performance, something traditional compensation systems used to emphasize (Heneman, 2002).
However, the rewards and incentives offered by the human resources (HR) need to be in alignment with the employees’ needs and beliefs. Other than choosing a relevant type of reward and incentive, the HR must also focus on the proper execution of such rewards to make them effective. Some examples of rewards include flexible time, work-life balance policies, learning opportunities, and various types of monetary rewards.
Flexible work time is an excellent reward policy because it helps employees improve their work-life balance. However, the effectiveness of formal policies will depend mainly on the frontline supervisors because proper implementation is necessary. If the supervisors have a negative concept about work-family policies that allow flextime to employees and because they believe it will inhibit productivity and production, they will not be supportive to the employee needs (Batt & Valcour, 2003).
For effective implementation of flextime policies, it is important to find a balance between the employees’ needs and the employer’s needs. Employees who have understanding supervisors open to negotiations and informal arrangements showed an increased amount of job satisfaction and the company experienced lower turnover rates (as cited in Batt & Valcour, 2003). However, family-work policies that allow flexible time scheduling work only when the employees account for any policy abuse that resulted in a loss for the company (Batt & Valcour, 2003).
Frey and Goette (1999) decided to research the effects of monetary rewards on volunteer work because it became a large sector of the industry. Even though the work is not paid and the research concerning volunteer behavior and rewards cannot be translated or practiced in private sectors accurately because of different contexts, it is possible to notice some resemblance between volunteers and full-time employees when studying their behavior when promised monetary rewards. The aim of the study by Frey and Goette (1999) was to show that offering rewards would undermine the intrinsic motivation of volunteers, and the researchers proved that when offered direct money rewards, volunteers started working less.
Although it is evident that monetary rewards may influence the intrinsic motivation by undermining the values of voluntary work, research also suggests that it is not possible to implement the same monetary reward policies in the public and private sectors because each group of employees has different perceptions and beliefs about monetary compensation (Crewson, 1997). While some types of monetary rewards were associated with control over assets, other types of rewards were considered offensive or out of reach for lower-ranking employees, so the question of the long-term benefits of rewards in the workplace needs to be addressed.
Furthermore, various incentives, such as higher pay, opportunities for learning, and job security were associated with lower turnover rates and higher productivity (Batt & Valcour, 2003). On the other hand, monetary rewards often did not impact the productivity or improve employee turnover, but research does show that employees promised monetary rewards were not as productive or successful as employees who were not promised rewards (Kohn, 1993). That statement is especially true for tasks that required more cognitive skills and creativity in problem-solving.
Kohn (1993) addressed the rising trend of using incentives to increase productivity at work and commented on the theories and practical research on using incentives at work. According to Kohn (1993) research shows that rewards in form of extrinsic motivators cannot permanently change human behavior. They are temporarily capable of changing behavioral patterns, but long-term changes are usually not experienced because the underlying causes of human behavior remain the same.
Another interesting point is the lack of changes in the quality of production while less than 60 percent of the studies conducted on rewards and their effect on employees showed that monetary rewards do slightly increase production quantity (Kohn, 1993). Overall, Kohn (1993) concludes that the reasoning of monetary rewards is flawed. It is expected that more money will improve employee performance because cutting an employee’s pay in half undermines performance.
Finally, it is important to remember that rewards may ruin personal relationships between members of the same team. A team can begin arguing and working as a group of individuals competing with each other rather than collaborating with each other toward a common goal (Kohn, 1993). While team monetary rewards could resolve that potential issue (Heneman, 2002), it can also create issues between different teams and lead to less risk-taking, poor judgment, or encouraging sabotage between teams.
There are several possibilities when it comes to planning compensation strategies, and the major determinants of the policies can include the organization’s size, industry sector, and the HR department’s goals. For example, the HR cannot reward employees based on the quantity of their production if they want to improve product quality. Instead of encouraging competition, they need to focus on a better incentive policy and provide the same rights and penalties to all employees.
When it comes to different sectors, it is apparent that the public and private sector show certain differences. While organizations in private sectors can work out some type of monetary compensation, companies in the public sector need to make sure their mission and motives are transparent because only employee commitment resulted in reduced turnover rates and less absenteeism (Crewson, 1997).
In terms of monetary rewards, profit sharing or stock options are not an effective reward in larger organizations because employees do not feel empowered to influence plan payouts, but smaller incentives on individual or small group levels, such as sale commissions, proved to be a strong motivator because the employees believed in their control over earnings (Heneman, 2002).
Finally, while reward strategies worked well in a stable economy within traditional business settings, current developments in business require more flexibility and creativity from the HR department. There are two important points that need to be addressed to avoid creating a generic reward program that will not create long-term results.
First, a diversification of types of rewards is required to improve employee satisfaction and workplace engagement. For example, while monetary rewards may be respected by employees, learning opportunities can be a stronger motivational force for employees primarily interested in personal growth (Heneman, 2002). In addition, the priorities of the new demographics in the 21th century are focused around different goals. While financial stability is still an important priority, learning opportunities are more valued as rewards than financial rewards, so they can also be used as long-term compensation strategies (Heneman, 2002).
Second, execution needs to be addressed in addition to planning. For effective execution, the HR department needs to address the business circumstances that are currently dominant in the market. For example, integrating reward strategies within organizational learning systems can enable the organization to fulfill the needs of newer generations and reduce employee turnover (Heneman, 2002). Because of recent developments and recessions, it is possible to notice that job security is a valuable reward, so placing emphasis on security rather than extrinsic motivators is an excellent long-term reward strategy.
With those two points, the HR will have addressed the organizational readiness and system readiness, but for effective implementation of policies, employee readiness also needs to be tested to make sure the systems can be integrated with their beliefs, values, goals, and personality traits. The role of the HR department is to educate the frontline supervisors about enforcing reward system policies and making compensation decision, and the employees should be informed about the components of the reward system (Heneman, 2002).
It is possible to notice that several incentives can improve employee productivity and reduce turnover rates. However, it is also possible to notice that higher employee retention rates and improved job satisfaction were mainly found in companies that focused on various incentives and policies besides monetary rewards. For example, flexible scheduling was an effective policy for reducing work-family tensions as long as employees were held responsible for abusing the policies.
However, monetary rewards can often be ineffective because employees seem to appreciate long-term security over temporary cash windfalls. In most cases, employees are not comfortable with monetary reward policies if they do not feel they are in control of their earnings. For example, employees react better to monetary rewards that depend on their sales rather than company stock options. Overall, policies that improve the employees’ work-life balance, provide financial security, and offer learning opportunities are more effective in motivating employees and reducing turnover rates than monetary rewards.
References
Batt, R., & Valcour, P. M. (2003). Human resources practices as predictors of work‐family outcomes and employee turnover. Industrial Relations: A Journal of Economy and Society, 42(2), 189-220.
Crewson, P. E. (1997). Public-service motivation: Building empirical evidence of incidence and effect. Journal of Public Administration Research and Theory, 7(4), 499-518.
Frey, B. S., & Goette, L. (1999). Does pay motivate volunteers? Retrieved from http://www.iew.uzh.ch/wp/iewwp007.pdf
Heneman, R. L. (2002). Strategic reward management: Design, implementation, and evaluation. Charlotte, NC: Information Age Pub Incorporated.
Kohn, A. (1993). Why incentive plans cannot work. Harvard business review, 71(5), 54-71.
