Everything you need to know about employee rewards. The reward system of an organization is a tool of recognizing talent.

Reward system includes ‘group incentive plan’ which means giving bonuses to workers in a team. The group incentive schemes are designed to promote teamwork, encourage synergy, and making the team work effectively.

The perfor­mance and output of the team as a whole determine the rewards to be given to the team.

The prime aim of employee rewards in India is to help attaining organizational, strategic, and short-term objectives. Attainment of these objectives helps to ensure the availability of skilled, competent, committed, and self-motivated people.


Objectively-designed employee reward systems focus on the improvement of individual employees. It further facilitates in developing a team.

Learn about:- 1. Introduction, Meaning and Basis of Employee Rewards 2. Aims of Employee Rewards in India 3. Purposes 4. Elements 5. Types 6. Structure and Design 7. Strategy 8. Schemes 9. Total Rewards 10. Key Issues 11. Trends.

Employee Rewards: Meaning, Basis, Aims, Purpose, Types, Elements, Schemes, Issues and Trends


  1. Introduction, Meaning and Basis of Employee Rewards
  2. Aims of Employee Rewards
  3. Purpose of Employee Rewards
  4. Types of Employee Rewards
  5. Elements of Employee Rewards
  6. Structure and Design of Employee Rewards
  7. Strategy of Employee Rewards
  8. Employee Reward Schemes
  9. Total Employee Rewards
  10. Key Issues of Employee Rewards
  11. Trends in Employee Reward Management

Employee Rewards – Introduction, Meaning and Basis

In the context of compensation, the term ‘reward’ is generally applied at the managerial levels. Reward systems and their role in organizations have been studied from many perspectives and by multiple disciplines. Economists, sociologists, and psychologists, in particular, have contributed to the growing literature on reward system. Reward systems, like compensation system, have a wide-ranging impact on organizations, and their impact is greatly affected by their design and by the organizational context in which they operate.


Thus, to understand reward systems in organizations, it is necessary to focus on the characteristics of both the organizations and the pay system. Often, new lines of businesses require a different approach, and therefore, a different reward system. Simply put, the old reward system in the new business sphere is often not good enough, and indeed, can lead to failure. On the other hand, developing a new reward system for one part of an organization can cause problems in other parts because of comparisons made between different parts.

Reward management is about the development, implementation, maintenance, communication, and evaluation of reward processes. A substantial literature review focuses on the relationship between reward systems and the degree to which participative management is practised in the organization. If an organization encourages participative management, it needs to change all its systems, including its rewards system. It stands established that effective participative management demands a different approach to pay for performance.

It is also seen that the correct approach is to pay bonuses based on group-wise or plant-wise perfor­mance. The argument for this essentially rests on the point that traditional pay plan supports individual excellence at the cost of team performance. However, modern approach emphasizes working in teams and using collective wisdom. Team performance needs to be rewarded for success of participative management.

Reward system practices are changing as they keep pace with participative management. For example, gain sharing has become increasingly popular in the last two decades, and skill-based pay plans have replaced job-based plans in many manufacturing organizations practicing participative management.


Reward system influences the attraction and retention of employees. Organizations that given the most rewards are seen to be successful and attract and retain the most people. These obvi­ously occur because high reward levels lead to high satisfaction, which, in turn, leads to lower turnover and create more job applicants. The best performers of an organization are generally prone to leave the organization for better prospects and rewards.

The reward system of an organization is a tool of recognizing talent. Reward system includes ‘group incentive plan’ which means giving bonuses to workers in a team. The group incentive schemes are designed to promote teamwork, encourage synergy, and making the team work effectively. The perfor­mance and output of the team as a whole determine the rewards to be given to the team.

Of course, if the continuance commitment of any per­former is more, he is unlikely to leave. To prevent or reduce possibility of attrition, a reward system must work on a par with those received by individuals performing similar jobs at a similar level in the same or other organizations. The emphasis here is on external comparisons because turnover refers to leaving an organization for a better position at some other organization. Reward systems have been demonstrated to motivate performance.

However, the extent of motivation depends on the situation and how it is perceived. One vital matter must be considered. Rewarding and motivating employees may be a cause of demotivation to others. Rewards should be given based on an objective evaluation of performances. One way to accomplish this is to reward everyone at a level that is above the reward levels in other organizations.


The connection between performance and rewards must be visible. A climate of trust and credibility enhances the visibility in an organization.

Marchetti (1999) observed compensation and reward to have a major impact on the motivation and performance of the salespeople, and opined that while rewriting the pay plan for the sales force, manage­ment must bear in mind four principles—know your goals, stick to the basics, get from involved line managers, and communicate the facts to the sales force.

Psychological Basis of Rewards:

Expectancy refers to the subjective probability of an outcome. Expectancy theory provides the basis of reward system. When a student feels that through devotion and by working hard there is a good chance (high subjective outcome) of getting the top position, and an offer of attractive salary package in the placement interview, he works hard. The psychological basis of rewards is the ‘expectancy theory’.


Expectancy explains the subjective probability of efforts resulting in the out­come (the first level outcome). Instrumentality is a related concept. When the first level outcome is seen as leading to a second level outcome, the instrumentality is said to be high. A production manager may feel that strenuous efforts on his part may lead to higher production (high expectancy), and that higher production beyond scheduled target will result in getting a reward (high instrumentality).

Work motivation is a result of high expectancy, high instrumentality, and high attraction and magnetism of the second level outcome (a reward). If any one of the three factors is zero, the resulting motivation is zero. Valence is term related to motivation and reward system. Valence means the strength of an individual’s preference of a particular outcome.

Employee Rewards – Aims of Employee Rewards in India

The aims of employee rewards in India vary widely from one organization to the other. The presence of business priorities is the main reason for the variation.

Keeping in view the organizational require­ments, the overall aims of employee rewards are as follows:


1. Contributing to added value

2. Contributing to competitive advantage

3. Managing compensation and reward

4. Integrating individual employees’ aims with the compensation and reward systems in the organization


5. Optimizing employee costs.

The prime aim of employee rewards in India is to help attaining organizational, strategic, and short- term objectives. Attainment of these objectives helps to ensure the availability of skilled, competent, committed, and self-motivated people. Objectively-designed employee reward systems focus on the improvement of individual employees. It further facilitates in developing a team.

As a result of the process, organizational performance improves, and organizations are better-equipped in value creation, thus achieving a competitive advantage. Added value is the difference between the incomes arising out of sales (organizational output) and the amount spent on materials and other inputs. Of all the resources that utilize other resources, only the human resources can make certain sustainable value additions because of its inimitable character.

People at various hierarchical levels, create visions and values, translate them into missions, set goals and objectives, develop strategies, and plan action plans. All these actions add value to organizations.

Efforts to enhance added value, through effectively designed employee reward system, benefit the orga­nization by way of promoting a culture of mutual trust, openness, collaborative efforts and teamwork, and in turn, high performance.

It stands established that innovation, quality, and cost effectiveness are the three pillars and essen­tial prerequisites of added value from employees. As organizational citizens, people can construct the pillars and ensure added value through their performances. People need something in return for their contribution. Organizational reward strategies are linked with performance results and integrated with overall goals and objectives through effective performance management systems.


Effective employee rewards motivate people and keep them satisfied, which ultimately improves performances. It is not always true to view rewards as the only way to reinforce performance improvement though many organizations consider so. There are many examples of corporate failures despite the higher level of employee rewards. While deciding on a reward, generally the industry average is considered.

Consider the following example. Bata India was offering high rewards to motivate employee. The rewards were much higher than the industry average. However, the company failed to improve its performance, and was ultimately forced to scale down its manufacturing facilities and start outsourcing to ensure cost efficiency.

Employee Rewards – Purpose of Employee Rewards in Organizations

Reward systems serve several purposes in organizations. Effective reward systems help an organization be more competitive, retain key employees, and reduce turnover. Reward systems also can enhance employee motivation and reinforce the image of an organization among key stakeholders or future employees. Reward system is developed to make performance more effective. Reward is based on performance which is outcome of efforts and environmental factors.

People are the most important resource for organizational competitiveness, and keeping them on the job is a key task for any manager. Competition to attract and keep the best employees is intense. For people looking for a career opportunity, that’s great news, but as a manager of an organization needing to keep the best and brightest, it is a challenge.

It may be even harder in the nonprofit and public sectors where flexibility in providing financial rewards may be more limited than in a commercial context. Retaining employees saves money on retraining costs, improves the consistency of services, and allows for relationships to develop between clients and the organization.

In addition, proper rewards systems can reduce absences. Absences cause innumerable headaches for managers. Instructors who don’t show up, too few staff members at busy times, and the lack of a cleanup crew can all increase workplace stress. Absences not only affect the manager but also fellow employees who need to pick up the slack and clients who feel the brunt of too few employees on site.


Understanding who, what, and when to reward can improve employees’ performance. However, the improper use of rewards can have a debilitating effect on employee performance. Managers need to understand their employees’ perceptions of the importance and fairness of the reward and then clearly communicate what needs to be done to receive the reward.

Effective use of rewards can encourage employees to gain the skills that are necessary to help them and the organization grow. This can also increase their desire to continue being part of the organization. For example, an organization can pay and provide time off for employees who want to take advanced courses in an area that is valuable for the organization. Some organizations may even provide time off or support to help employees advance their own personal goals or skill sets.

Ideally, an organization wants employees who not only show up to work but are excited about being there as well. This passion for work has been referred to as affective commitment. Although research is somewhat preliminary, there is some indication that affective commitment can be strengthened by rewards that enhance employee perceptions of being supported and having control of the work situation.

Finally, reward systems can also help with recruiting efforts. Just as happy customers may be the best advertisement for a particular product, happy employees are often a great tool for recruiting new employees and making the organization a workplace of choice. Think about the kind of job you want.

Often you will easily be able to identify an organization that stands above the others as a great place to work. As a consequence of this, the organization can attract the best and brightest, creating a virtuous circle whereby it becomes an even more attractive workplace. Hopefully you can see that establishing the right reward structure for an organization is critical to its success. The following sections delve into the details of various reward structures.

Similarly the purpose of reward is to provide positive reinforcement and motivate them for achieving outstanding performance. People work for achieving several needs. They want not only money but also recognition, return and self satisfaction. The purpose of reward is to motivate them. The motivation differs from time to time depending upon situation, interests and tastes.


Reward is to attempt to motivate job performance through selective distribution. Valued employees are retained if they are properly rewarded. The organization continues to develop through reward motivation.

Employee Rewards – 7 Important Types: Extrinsic Rewards, Intrinsic Rewards, Monetary Rewards, Non-Monetary Rewards, Performance-Based Rewards and a Few Others

Understanding how each employee perceives and values different rewards is an essential part of management. Managers need to grasp an understanding of extrinsic and intrinsic rewards.

Type # 1. Extrinsic Rewards:

Extrinsic rewards are external rewards tied to certain employee behaviours, skills, time, or roles in an organization. How employees perceive these rewards relevant to their performance and the rewards given to others will ultimately determine the effectiveness of the rewards.

Managers also need to understand how much value each employee places on specific extrinsic rewards. For example, a well-paid but overworked employee may value additional vacation time or a reduced workload more than a few extra dollars. Money, praise, awards, and incentive prizes such as tickets to a concert or a game are all examples of extrinsic motivators.

Whatever motivator the manager chooses, the employee must see the reward as a motivator for it to be effective. For example, if the extrinsic reward is tickets to the opera, an employee who hates the opera likely would not be motivated by the tickets. On the other hand, if the employee is a football fan and the extrinsic reward is tickets to a major game, the motivator might be more effective.

Type # 2. Intrinsic Rewards:

It is simpler to explain what intrinsic rewards are by discussing what they are not. Intrinsic rewards do not have an obvious external incentive; that is, people are not acting to get a tangible reward, be it time off or money. Instead, they act because it feels good or provides some form of internal satisfaction.


Intrinsic rewards are often more highly valued and more effective over time, yet using them is a difficult managerial task. Intrinsic rewards derive from employees feeling good about the job they have done, the effort they have put forward, or the role they played in a team project.

Intrinsic rewards in the workplace come from the job itself, so to provide intrinsic reinforcement; a manager should enrich the job. Job enrichment involves improving work processes and environments so they are more satisfying for employees, such as eliminating dysfunctional elements or enlarging jobs (increasing the duties and responsibilities of a job).

Developing an effective reward system can be a difficult task. The following sections provide some guidance on the basics of an effective reward system. These sections focus almost exclusively on extrinsic rewards, but intrinsic rewards should also be considered when developing each employee’s job.

Extrinsic rewards include all rewards that have a monetary value such as base pay, pay contingent on performance, contribution, competency or skills. Pay related to service, financial recognition schemes and benefit such as pensions, sick pay and health insurance.

They are the core elements in total rewards. While intrinsic rewards are good; at least when they provide intrinsic motivation- that is motivation by work itself. A good reward system should satisfy intrinsic and extrinsic needs for employee and if extrinsic reward can support for their employee’ life, intrinsic rewards will satisfy for their employee’s psychological needs.

Type # 3. Monetary Rewards:

Monetary rewards are most commonly given in the form of pay increases, bonuses, or increases in benefits, such as pension or health care premiums. Such rewards can be divided into two categories: direct and indirect compensation. Both contribute to the financial betterment of an employee.


Direct compensation is relatively straightforward and consists of increases in hourly pay, increases in hours (for non-salaried employees), increases in salary, merit pay based on performance, seniority pay based on time with an organization, and bonuses based on the achievement of individual, group, or organizational objectives.

Type # 4. Non-Monetary Rewards:

Non-monetary rewards cost the organization but do not directly improve the employee’s financial position. Supplying employees with the best tools possible to do their job is an example, such as providing a new high-end laptop or having an excellent training facility. A good office location, choice of furnishings, or special parking place can all be nonmonetary rewards.

Employees may not know the full details of pay and other monetary benefits of coworkers, but nonmonetary rewards are often visible and can create perceptions of inequity in an organization. In some cases, this may be the intent of managers who want employees to strive to achieve the stereotypical corner office, but often it may also unintentionally encourage feelings of inequity.

That inequity may have positive implications for an organization if employees strive to increase performance, or it can result in turnover and reduced performance. As with any reward, nonmonetary rewards need to be carefully thought out before being implemented.

Type # 5. Performance-Based Rewards:

One of the most difficult challenges for managers is to decide what to base rewards on. A common distinction is performance- based versus membership-based rewards. As the name implies, performance-based rewards are tied to the ability of an individual, team, group, or organization to meet some previously agreed- upon standard of performance. Performance rewards are based on an evaluation of contribution and awards are allocated based on that evaluation.

Type # 6. Membership-Based Rewards:

Membership-based rewards are allocated solely for being part of a group within an organization. These rewards commonly include annual cost-of-living increases to a base salary or support for an equity policy. For example, if a park and recreation department was looking to encourage staff to have master’s degrees or obtain certification, they might offer pay incentives for having either or both.

Membership-based rewards are also often tied to length of time with an organization. For instance, after a certain length of service with an organization, employees may receive a certain percentage increase to their pay or be eligible for additional benefits. In a unionized environment, many of these rewards are spelled out in a labour agreement.

To illustrate the difference between the two structures, let’s look at annual raises. A performance-based structure means that each employee’s performance is evaluated and raises are based on performance, with the highest performers getting the most money.

A membership-based structure means that all employees receive the same raise regardless of performance. Membership structures can be de-motivating to high performers because they get the same rewards despite working harder.

Type # 7. Non-Traditional Rewards:

As more and more managers understand the importance of individualizing reward systems, the use of nontraditional rewards will continue to grow. Time is often a key constraint, and for many people work is a major time commitment.

Ways in which employees can individualize their work schedule are becoming increasingly important rewards. Four methods of individualization are reduced work weeks, staggered daily schedules, flextime, and working from home.

(a) Reduced Workweek:

A reduced workweek often sees employees working a 4-day week instead of 5 days. In return for that extra day, employees work longer on their 4 days in the office. For example, in a 40-hour workweek from Monday through Friday, employees would work 8-hour days, but the reduced workweek would see hours increase to 10 hours a day for 4 days.

The benefits to the employees are longer blocks of time to take care of their personal lives, less frequent and often less busy commutes, and ultimately more useful time for themselves. The organization has no additional expenses and evidence suggests that absenteeism and time lost for personal reasons decreases.

However, there are also downsides for both employees and the organization. Parents, for example, may find it difficult to find child care that is open late or early enough to accommodate the longer work schedule. The longer work day may also be a constraint to people who are involved in weekly evening activities, be it coaching a team or attending an art class.

Some jobs may also not lend themselves to longer days. A lifeguard or sport instructor may be considerably less effective in those last 2 hours, which can lead to decreased performance and in some cases safety risks. Also, the hours and timing of work may affect service to clients.

Even if an organization maintains its regular schedule, clients expecting to reach a particular person during traditional business hours may find the new schedule frustrating. Finally, reduced workweeks seem to be most effective when employees themselves are involved in creating the schedule. Understand that employees participating in reduced workweeks need to be scheduled so that the entire organization is not gone on Friday.

(b) Staggered Daily Schedule:

An alternative to a reduced workweek may be a staggered daily schedule. Employees still work their designated weekly hours but can allocate those hours in different ways. For example, one employee may want to come in late and leave later to accommodate dropping off children.

Someone else may prefer being in the office an hour earlier and leaving an hour earlier. These schedules may even be adapted weekly or monthly to accommodate changing employee needs. This idea meets employees’ individual needs but can often be difficult to manage. Again, a staggered daily schedule may not be appropriate in all settings and must consider not only employee needs but also organizational requirements and client desires.

(c) Flextime:

Flextime allows some employee freedom while still meeting client and organizational needs. Employees are expected to be in the office during a certain time frame, usually ranging from 4 to 6 hours, such as 9:30 a.m. to 3:30 p.m. Flextime emphasizes productivity and allows the employee some leeway in that flexibility zone (before 9:30 a.m. and after 3:30 p.m.).

Flextime also allows a staff person more control over their hours. For example, a special events coordinator works 5 hours over the weekend. The following week, the coordinator comes in an hour later than usual each day.

(d) Working from Home:

As technology has advanced, the option of working at home for some or all of the workday is becoming increasingly possible. A high-speed Internet connection and a laptop computer connected to the workplace network provide many people with everything they need to do their job.

Obviously this arrangement is more suited to some positions than others. Working for some or all of the workweek at home can offer fewer workplace distractions, allow employees time to concentrate on projects that are important to the organization, and make more effective use of the day by eliminating the need to commute as well as the usual time killers present in most offices.

However, working from home is not for everyone. The distractions of the home require discipline, and for those who consistently work at home the blurred distinction between home and office can be unsettling. Additionally, monitoring employees at home is nearly impossible.

Evaluation needs to be performance based and work-at-home schemes do not work for organizations that want to monitor how employees spend their time. Allowing employees to work at home part of the time, however, may be an excellent compromise for both employees and the organization.

Employee Rewards – Elements: Additions to Basic Pay, Bonus, Incentives, Commissions, Service-Related Pay, Competence-Related Pay and a Few Others

The base or basic pay is the level of pay, the fixed salary or wage, which constitutes the rate for the job. The basic pay acts as a datum for determining additional payments related to performance, competence, or skills. It may also govern pension entitlement and life insurance. Base pay may be expressed as an annual, weekly, or hourly rate. It may be adjustable to reflect increase in the cost of living or market rates by the organization unilaterally, or by agreement with a trade union.

i. Additions to basic pay – Additional financial rewards are provided and are related to performance, skill, competence, or experience. Special allowances may also be paid. The main types of additional pay are individual performance-related pay, bonus, incentives, commissions, etc.

ii. Individual performance-related pay – Increases in basic pay or cash bonuses are determined by performance assessment and ratings. Some organizations use the term merit pay.

iii. Bonus – It refers to rewards for successful performance, which are paid as cash and is related to the results obtained by individuals, teams, or the organization. Bonuses are linked to productivity for the whole organization.

iv. Incentives – These payments are linked with the achievement of previously set targets. Incentives are designed to motivate people to achieve higher levels of performance. The targets are usually quantified in such terms as output or sales.

v. Commissions – It is a special form of incentive in which sales representatives are paid on the basis of a percentage of the sales value they generate.

vi. Service-related pay – It increases by fixed increments on a scale depending on service in the job. Sometimes, there may sometimes be scope for varying the rate of progress up the scale according to performance.

vii. Skill-based pay – This is also known as knowledge-based pay; it varies according to the level of skill the individual achieves.

viii. Competence-related pay – It varies according to the level of competence achieved by the individual.

ix. Career development pay – It rewards people for taking on additional responsibilities as their career develops laterally within a broad grade (a broad-banded pay structure).

x. Allowances – Elements of pay in the form of a separate sum of money for aspects of employment such as overtime, shift work, or call-outs, etc.

xi. Employee benefits – These benefits are also known as indirect pay and include pension, sick pay, insurance cover, and company cars. Benefits comprise elements of remuneration in addition to the various forms of cash pay, and also include provisions for employees that are not strictly remuneration, such as annual holidays.

xii. Total remuneration – It is the value of all cash payments or total earnings and benefits received by employees.

xiii. Non-financial reward – It includes any reward that focuses on the need that people have in varying degrees for achievement, recognition, responsibility, influence, and personal growth.

xiv. Employee stock options – Stock options are common in executive compensation. By offering stock options to managerial employees, companies try retain their talent and move ahead of the competition. It is a significant component of compensation.

Employee Rewards – Structure and Design of Employee Rewards

Rewards are symbols of recognition. It is primary importance for an organization to decide on what it must reinforce through rewards. Organizations generally like to reinforce performance, effort, process, credibility, teambuilding, loyalty (retention), sincerity, punctuality, etc., as employees need clear com­munication about the parameters that the organization is interested for. Employees should preferably be involved in such decision-making process.

Extrinsic and intrinsic rewards are the two broad types of rewards. Extrinsic rewards can be mon­etary and non-monetary. Examples of extrinsic rewards are bonuses, paid holidays, flexible work hours. Intrinsic rewards include empowerment, providing more responsibilities, more freedom in the workplace, allowing using discretion, assigning interesting and challenging tasks, diversity of activities, opportuni­ties for personal growth, and so forth.

Examples of monetary rewards are performance bonus, profit sharing, stocks, etc. Non-monetary rewards include holidays, gifts, facilities, and so forth. At present, organizations prefer employees to work in teams to enable collective wisdom. So, it is necessary to reward both individuals and teams.

An organization should first develop consensus involving organizational citi­zens. Consensus is needed on values, norms, and behaviour that an organization wants to reinforce. In other words, the effort is directed to creating or changing the organizational culture.

The significant points that need consideration while designing reward system are as follows:

1. Employee representatives should be involved in reward design.

2. Rewards should be given to both individuals and teams.

3. Multi-dimensional and wider reward system reduces possibility of attrition.

4. Variable components of compensation may be part of the reward system.

5. Rewards should be so designed that they enhance organization belonging.

6. Lump sum rewards are liked more by employees than extra increments.

7. Rewards design must consider the findings of annual or half-yearly survey done by the HRD department.

8. Employees must be informed about the factor that is emphasized in the reward system.

9. Organization may think of raising funds for rewards, like ‘reward corpus’ from managers’ wage bill.

10. Transparency and fairness should be ensured in the reward system.

11. Basis of selecting persons for the rewards should be objective.

12. Persons selected to receive the reward should be communicated to all employees.

Reward Design – Role of the Internet:

Compensation is partly an economic concept; compensation decisions are made considering a number of environmental and organizational variables. It is important to consider how unions view the compensa­tion packages and wage structure. During collective bargaining, they give examples of similar, local, and other companies. Social environment impacts the compensation decisions.

Members of a society possess ideas about the worth of different jobs, and these ideas need to be taken into account. Subsequent to the entry of women into the workforce, the social environment has been changing dramatically. This change is compelling to value the diversity while taking compensation decisions.

The dynamics of a particular organization affect compensation decisions. Employee’s pay must be consistent within the organization’s structure. The organizational culture helps determine the priority to be given to various compensation goals. The organizations workforce characteristics influence the success of different compensation programmes.

Furthermore, compensation decisions are affected by the worldwide information highway. Internet facilitates collection of data relating to compensation and benefits. Availability of this information produces a significant impact on the compensation design. One can expect severe communication conflicts relating to competitive practices.

E-mail, chat boards, and dotcom companies attract visitors to their site by giving employees com­pensation data. Larger organizations are now administering their stock, salary, and incentive plans on a worldwide basis through the internet. Smaller organizations will also gain by this capability over time. The internet is about to give benefit and compensation administration a new identity.

Employee Rewards – Compensation Strategy According to Lawler

Lawler’s model proposes that the compensation strategy can make a valuable contribution to the development of these employee behaviours. As such, compensation is, of course, only part of the wider HR strategy.

Lawler (1984) argues that there should be congruence between these various aspects of the HRM strategy in that the reward system needs to fit the other features of the HR strategy, such as job design and managers’ leadership styles, to ensure that total human resource management congruence exists.

According to Lawler (1995) the reward strategy consists of three components- the organization’s core reward values. The organization’s core reward values are what the organisation stands for, which informs the principles on which the reward strategy is founded.

Structural issues include the strategy features (e.g. performance-related or profit-related pay) and the administrative policies surrounding these features. Process features include principally how the strategy is communicated and implemented and the extent to which employees are involved in the design and implementation of the strategy.

Lawler makes the point that the stronger the alignment between the core reward values, structural features and processes, the more effective the reward strategy will be. He argues that the key consideration is the level of consistency between what organizations say and what they do. In the event of inconsistency, Lawler notes that there is likely to be employee misunderstanding about how the reward strategy works, with a consequence being a failure to generate the required behaviours.

Employee Rewards Performance-Linked Reward Schemes

Many organizations have developed a system of linking rewards with performance.

Some performance-linked reward schemes are:

(a) Schemes based on individual performance (IPW),

(b) Schemes for per­forming the whole job,

(c) Schemes based on small group performance (GPW), and

(d) Schemes based on productivity (PLB) of the whole organization.

(a) Schemes based on individual performance – In the production department, employees are paid based on piece work rate. The industrial engineering department, based on time study, is recording the observed time. Then, it is multiplied by the factor. Thereafter, considering fatigue allowance and other permissible allowances, the standard time is calculated.

(b) Schemes for performing whole job – The whole job is first is split into elements. The, the time for each element is calculated. This is followed by summing the time for each element and the total time of the whole job is calculated.

(c) Schemes based on small group performance – Maintenance jobs cannot be generally done individually as they necessitate collective efforts. Maintenance department assigns a task to a group of mechanics. The group is paid for the jobs they do. This system is also termed as ‘gang piece work’. In such departments, the activities of persons cannot be separated.

(d) Schemes based on productivity – In this scheme, a base year is fixed. Organizations consider the production of number of years, find the average, and ultimately decide on the base year. Then, the organization calculates the ratio of production in the current year and the base year. Bonus is calculated considering productivity in both base year and the current year.

In addition to the schemes discussed here, there exist schemes based on productivity bargaining, and employee stock option plan (ESOP).

Employee Rewards – What are Total Rewards: Meaning, Elements, Integrated Strategy

Total rewards emphasize collection of all the tools available to the employer that may be used to attract, advance, develop, motivate, and retain employees. Total rewards include everything the employee per­ceives to be of value resulting from the employment relationship. Organizational history is replete with examples where employers have been challenged with attracting, motivating, and retaining employees.

From the simplest barter systems of the ancient past to the complex incentive formulas of today’s competitive business scenario, the organizational premise has been the same. Offer your productivity and results to our enterprise and we will provide you with ‘something of value’ that is a ‘total reward’.

Elements of Total Rewards:

Total rewards embrace five elements which are both financial and non-financial in nature. Each of the elements includes programmes (curriculum), practices, elements and dimensions that collectively define an organization’s strategy to attract, motivate, and retain employees.

These elements are the following:

1. Compensation

2. Benefits

3. Work-life

4. Performance and recognition

5. Development and career opportunities.

Organizations decide on elements to create value, and align a value proposition to both the organization and the employee. The total rewards strategy, if effective, results in satisfaction, employee engagement, and productive employees, who, in turn, create desired business performance and results.

1. Compensation:

Compensation is the pay provided by an employer to an employee for services rendered (time, effort, and skill). Compensation comprises four core elements—fixed pay, variable pay, short-term incentive pay, and long-term incentive pay.

2. Benefits:

Benefits are programmes or actions that an employer uses to supplement the cash compensation given to employees. These programs are designed to protect the employee and his/her family from financial risks, and can be categorized into the following three elements—social insurance, group insurance, and pay for time not worked.

Employee Benefits:

i. Social Insurance:

(a) Unemployment

(b) Workers’ compensation

(c) Social security

(d) Disability (occupational).

ii. Group Insurance:

(a) Medical

(b) Dental

(c) Vision

(d) Prescription drug

(e) Mental health

(f) Life insurance

(g) AD&D insurance

(h) Disability

(i) Retirement

(j) Savings.

iii. Pay for Time not Worked:

These programmes are designed to protect the employee’s income flow when not actively engaged at work.

(a) At work (breaks, clean-up time, uniform changing time)

(b) Away from work (vacation, company holidays, personal days).

3. Work-Life Balance:

Employees of an organization must perform the organizational role and at the same time, pursue a happy family life. They need to achieve success at both work and home. A specific set of organizational practices, policies, programmes, and a defined sound philosophy actively supports efforts to help employees to achieve both the goals. Organizations can extend support for work-life effectiveness in the workplace.

The support can be classified into seven categories. These categories encompass compensation, benefits, and other HR programmes. The seven categories encompass the key aspects of the workers, their families, the community and the workplace.

The seven major categories are the following:

(a) Workplace flexibility

(b) Paid and unpaid time off

(c) Health and well-being

(d) Caring for dependents

(e) Financial support

(f) Community involvement

(g) Management involvement/culture change interventions.

Employees must maintain work-life balance and yet perform for the organization.

4. Performance and Recognition:

Rewards are given to recognize exemplary performance beyond the scheduled assignments, when employees perform the assignments in a cost-effective manner, or develop a newer way to complete faster without compromising with the qualitative requirements. Performance concerns the behaviours directed toward achieving the organization’s missions and business goals, and manufacturing the prod­ucts or services resulting from those behaviours.

It refers to only those behaviours related to production of goods or services maintaining the qualitative requirements. Performance differs from effectiveness, which generally involves making judgements about the adequacy of behaviour with respect to certain criteria such as work group or organizational goal.


Performance involves the alignment of organizational, team, and individual effort toward the achieve­ment of business goals and organizational success. Performance planning, performance, and performance feedback are all essential for organizational success.

Performance is the manner of demonstrating skills or capacities to achieve the assigned tasks. Per­formance planning is a process whereby organizational expectations are established and organizational goals are linked with individuals and team efforts. Adequate care needs to be taken to ensure that goals at all levels are aligned to achieve the organizational objectives and strategies set at the highest levels of the organization.

Performance feedback is a mechanism to communicate to the employees how well people do a job or task compared to expectations, performance standards, and goals. Feedback should comprise both quantitative and qualitative aspects of the assignments. Performance feedback can motivate employees to improve performance.


Recognition is a strong tool of motivating people. Acknowledgements or giving special attention to employee actions, efforts, behaviour, or performance meet an intrinsic psychological employee needs. Acknowledgements reinforce certain behaviours (like more devotion, extraordinary accomplishments) that contribute to organizational success.

Whether formal or informal, recognition programmes acknowledge employee contributions after the fact. Immediate recognition impacts more. Awards can be monetary or non- monetary (verbal recognition, trophies, certificates, plaques, dinners, tickets, etc.). Organizations recognize and reward exemplary performances on versatile fields.

The values of recognition are manifold as follows:

1. Reinforce the urge of performance improvement.

2. Foster continual improvement.

3. Modify behavioural disposition.

4. Improve work environment and restore positive culture.

5. Foster communication of valued behaviour and attitudes.

Development and Career Opportunities:

Workers of an organization need all round development—technical, general, moral, and other types of development. Organizations should carefully attempt to develop the inner potential of the workforce. HRD efforts, mainly career opportunities, for workers are essential to help them to lead a productive life. A person needs developmental supervision. They need development and career opportunities.

Development Opportunities:

A set of learning experiences must be designed to enhance skills and competencies of employees. Development facilitates employees to perform better. They should be able to lead a productive life. In order to help them, you have to provide them with certain information.

Some of the information you should share with employees is as follows:

a. Make them aware of the available resources.

b. Let them know the business environment.

c. Make them aware of the company’s strategy.

d. Recognize the achievements of the worker in all possible ways.

e. Identify the occupational competencies that an employee should possess.

f. Develop the occupational competencies using HRD mechanisms.

g. Develop self-management skills.

h. Help them to broaden their inner potential.

i. Develop psychological contracts, and social and cultural bonds.

Career Opportunities:

Career denotes all the jobs that are held in the working life of a person. An employee looks for career goals which represent the future positions that he may occupy. Career planning is the process of selecting career goals and the path to achieve the career goals. Employees need career opportunities and career counseling as a process of advising employees on setting career goals and assisting them find suitable career paths.

A responsible person of an organization can be career counselor. The organization supports career opportunities internally so that talented employees are deployed in positions that enable them to deliver their greatest value to their organization.

Development and career opportunities include the following:

(a) Learning opportunities,

(b) Coaching and mentoring, and

(c) Advancement opportunities.

(a) Learning Opportunities:

Any employee needs self-growth and advancements. An organization may extend facilities to extend –

i. Sponsoring to attend course programmes to corporate universities

ii. Providing training on new technology

iii. Allowing attending external seminars, conferences, virtual education, etc.

iv. Self-development tools and techniques

v. Conducting opportunities of on the job learning; rotational assignments at a progressively higher level

vi. Approving sabbaticals with the express purpose of acquiring specific skills, knowledge, or experience.

(b) Coaching/Mentoring:

The purposing of coaching is to gain expertise to perform work roles effectively, and that of mentoring is to gain confidence and capacity of technically leading a work group in the workplace. Employees need –

i. Leadership training

ii. Access to experts/information networks—association memberships, attendance and/or presentation at conferences outside one’s area of expertise

iii. Exposure to organizational experts

iv. Formal or informal mentoring programs, inside or outside the organization.

(c) Advancement Opportunities:

Apart from learning opportunities and availing coaching and mentoring facilities, employees further need –

i. Internships

ii. Apprenticeships with experts

iii. Overseas assignments (having knowledge of managing cross-cultural issues)

iv. Internal job postings

v. Job advancement or promotion

vi. Career ladders and pathways

vii. Succession planning, providing defined and respectable ‘on and off ramps’ throughout the career life cycle.

Integrated Total Rewards Strategy:

An integrated total rewards strategy encompasses and emphasizes the culture, organizational environ­ment, approach to attract people, line of action to retain them, and keeps them motivated.

1. Role of Culture:

The culture of organization refers to the collective attitudes and behaviours that influence behavioural disposition of employees. Culture determines how and why a company operates the way it does. Typically, culture comprises a set of often unstated expectations, behavioural norms, and performance standards to which the organization has become accustomed.

Changing culture calls for changing attitudes and behaviours by altering their fundamental beliefs and values. Hence, a changing culture is difficult to achieve. Organizational culture is subject to internal and external influences; thus, culture is depicted as a contextual element of the total rewards model, overlapping within and outside the organization.

2. Role of Environment:

Environment refers to the total collection of observable physical, psychological, and behavioural ele­ments in the workplace. Work environment or organizational climate is the tangible manifestation of organizational culture. Any new recruit should be accustomed to the environment prevailing in the workplace. They may react to the environment either consciously or unconsciously.

Environment is directly observable and often measurable, and specific elements of the environment can be deliberately manipulated or changed. The external environment in which an organization operates is likely to influ­ence the internal environment. Obviously, the environment is portrayed as a contextual element of the total rewards. The external environment also overlaps within and outside the organization.

3. Need for Talent Attraction:

Organizations need to fulfil the manpower needs either through internal promotions or recruitment from external sources. When an organization needs experienced persons in a requisite area, it advertises the requirement in mass media. Attracting manpower refers to the ability of an organization to draw the right kind of talent to achieve organizational success.

Attraction of an adequate and everlasting supply of qualified talent is essential for the organization’s survival. Acquiring and retaining qualified talent is the key plank of a business strategy. The organization can obviously use AIDA (attention, interest, desire, action) model in the advertisement to fill the vacancy. A deliberate strategy to attract the quantity and quality of employees needed to drive organizational success is one of the key success factors of business strategy.

4. Need to Retain Talent:

An organization should initially identify its valued contributors to achieve the business objectives. Thereafter, the organization needs to adopt ways and means to retain them in the organization for its overall success. Total rewards package can be well-utilized to promote retention and keeping them in the organization. However, it is desirable that the organization must develop a formal retention strategy with appropriate steps.

5. Motivating the Talent:

Human relations encompass the important reactions of people to one another in the society, club, organization, or anywhere else. The relations among individuals, between individuals and groups, and between groups constitute a critical phase of industrial psychology. Motivation cuts across all topics in industrial psychology.

Employee motivation and attitudes to an event may vary from being positive or negative. Motivation is the ability to cause employees to behave in a way that achieves the highest performance levels. Motivation is classified as intrinsic motivation and extrinsic motivation.

Intrinsic motivation relates to work content and is linked to factors that include an employee’s sense of achievement, respect for the whole person, trust, and appropriate advancement opportunities. Intrinsic motivation consistently results in higher performance levels.

Extrinsic motivation is most frequently associated with rewards that are tangible and given for doing an activity. Extrinsic motivation relates to work context.

Satisfaction, commitment, and engagement are the three defined levels of intensity with regard to motivation.

a. Satisfaction—how much you like your job, nature of duty, colleagues, communication, supervision, etc.

b. Commitment—how long you want to continue here.

c. Engagement—how much you are involved with the assignments entrusted and you will actually do to improve business results.

Employee Rewards – Key Issues

Develop a reward strategy and system that is logical, defensible, and that supports organization’s values and business results. A reward philosophy will be developed that articulates what organization will pay for and why. A reward strategy will then be developed outlining how organization will pay, or how organization will implement its stated reward philosophy.

With the reward philosophy and strategy agreed, we will determine the mix of fixed and variable reward components. These components will be balanced so as to support and reinforce organization’s values, behaviours, competencies and business results. A well-defined reward system is a powerful driver of performance. Conversely, a poorly defined reward system can lead to low levels of motivation, high turnover, and lower productivity.

People work hardest when they care about the results, when the activity fits their natural inclinations, when they are challenged, when they are learning, and when they have made a personal commitment. In other words, people work hardest when their motivation springs from within.

Promised rewards may drag attention away from intrinsically motivating tasks for short periods of time, but rarely with the same degree of enthusiasm, determination, and productivity. Furthermore, promising rewards for intrinsically motivating activities can actually damage that motivation.

Employee Rewards – Key Employee Reward Management Trends in Today’s Scenario

In view of the complex business scenario, acute competition, globalization, and other factors, the com­pensation system is rapidly changing.

Pressed forward by competitive forces, organizations are laying far more emphasis on variable compensation. The use of incentive pay to motivate performance (individual, team, and company- wide) continues to grow and become more sophisticated. Many companies are moving to broad-based ownership designing creative compensations.

The design of sales, management, executive, and board of director’s compensation plans are becoming more innovative. Organizations are in spree to design and launch creative compensation packages. Fundamental transformations are occurring in aligning rewards with organizational change. Moreover, computer and communication technologies have radically altered the compensation landscape.

Following are the key employee reward management trend in today’s scenario:

i. Greater sensitivity to sector and functional market practice to enable more effective market positioning to help with attracting and retaining high caliber employees.

ii. The implementation of increasingly focused performance awards starting at the top and working down through organizations as performance orientation increases.

iii. Pay increases linked to market worth and individual or team performance-not service and/or cost of living.

iv. More attention given to achievement or success-oriented individual bonuses rather than payment increases in base pay.

v. A move towards team pay as the importance of teamwork increases.

vi. More flexible pay structures based on job families and using broader pay bands or pay curves.

vii. More integrated pay structures covering all categories of employees.

viii. A growing linkage between pay practice and training and development initiatives through the design and implementation of skills and competency based pay processes which reward the acquisition and use of new skills and behaviours.

ix. The development of integrated performance management systems with the emphasis on coaching development, motivation and recognition through the identification of opportunities to succeed.

x. A search for simpler and more flexible approaches to job evaluation which enable a move away from the control of uniformity to the management of diversity. This will make use of techniques such as job family modelling and computer assisted job evaluation.

xi. Increased awareness of the need to treat job measurement as a process for managing relativities which, as necessary, has to adapt to new organizational environments and much greater role flexibility and can no longer be applied rigidly as a system for preserving existing hierarchies.

xii. More emphasis on the choice of benefits and ‘clean cash’ rather than a multiplicity of perquisites.

xiii. Greater creativity and sensitivity in benefit practice.