PHILOSOPHY OF REWARD SYSTEM

1. EMPLOYEE
BENEFITS AND
COMPENSATION
PHILOSOPHY OF REWARD
MANAGEMENT
Habibu Ayuba; B.Sc; PGDE; M.Sc; ACA in-view
08030527135
11/01/14 octorber,2013 1

2. OBJECTIVES OF THE PRESENTATION
At the end of the session the
participants should be able to:
 Define the philosophy of a reward
management.
 Understand the characteristics/qualities of the
sound philosophy of the reward management.
 Examine the factors influencing organizational
philosophy of reward management.
 Identify predetermined dangerous myths about
employees’ pay.
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3. Philosophy of reward/compensation
management
A philosophy is seen as a critical examination of the ground
for the fundamental beliefs and analysis of the basic
concepts employed in the expression of such beliefs.
 Therefore, Philosophy of reward is a set of beliefs and guiding
principles that are consistent with the value of the organization
which is built in the companies’ compensation package and is
aimed at achieving the following:
 fairness,
 equity,
 efficiency
 consistency and
 transparency in the compensation system.
The philosophy emphases on investing in the human capital
thereby a reasonable returns (Return on investment) as
required can be achieved.
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4. Philosophy of rewards…
cont….
 The philosophy assumes that the reward should be designed to reward
employees differently in accordance with their contribution to
organizational goal.
 The reward policy must be strategic aimed at achieving longer term
result with regard to how employee should be valued for what they do or
what they achieve.
 Its implementation always flows from the business strategy.
 The philosophy adopts total reward approach to compensation which is
aimed at achieving employees’ Motivation, Commitment, Engagement
and Development.
 It assumes to be acting as an integral part of a company’s overall
Human resource management approach in managing people.
 It is also affected by the organizational business strategy and human
resources strategy. The formulation and survival of sound philosophy of
reward management is relied on the external environment’s action and
factors. These factors are herewith highlighted next.
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5. Factors influencing companies’
philosophy of reward management
Cost of living
(inflation)
Organizational
Ability
To pay
Organizational
Or
Technological
changes
Bargaining power
Government
legislation
Philosophy
Of
Reward
Management
of the
Trade union Custom and
Practice
In the
industry
Government
Economic
Policy
comparability
And
action
Labor market
condition
Productivity
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6. Characteristics/Qualities
of the
Philosophy of Reward Management
 Notably; managers are confronted with numerous
challenges in determining how to reward employees.
 There needs to balance the market competitiveness ,
internal equity, organizational performance and individual
performance when designing attractive pay system that
will shape organizational philosophy of reward
management.
 These qualities; as presented next; have been empirically
determined as factors that contribute to and strongly
related to/associated with employees'’ perception of pay,
their attitude and pay/ job satisfaction.
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7. Fairness
as characteristic of the sound philosophy
 Fairness: implies that the philosophy should be capable
of being maintained to ensure that the compensation
system treat all the stakeholders equally and without
favoring any group (management versus subordinates,
company versus staff etc) at the expense of another.
 Reward programs, policies and practices that are not
perceived as fair will not necessarily and successfully
attract, retain and engage employees.
 Reward fairness (Scott. D, McMullen. T, and Royal .M;
2011) have been found to be strongly related to
employee attitude including pay satisfaction.
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8. Equity and justice
as characteristic of the sound philosophy
 Equity: implies that not only justice according to
natural law/right or freedom from bias or
favoritism the system is free from but all jobs
are categorized into job grades with reference
to the job content and job sizes so as the same
salary/pay range is apply to individuals of the
same job grade.
 Equity and justice are related concepts that
have been determined as related constructs
that are found to be strongly related to
employees’ pay satisfaction.
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9. Efficiency
as characteristic of the sound philosophy
 Efficiency: implies that an achievement of the
compensation’ system principles is made at a
reasonable cost and within the organizational
budget.
 Efficient compensation system is the package
whose components are items that are related to
employees’ pay only.
 All other items of pay such as vouchers to
assist someone, training allowance if it is not
paid together with salary, Executive donation
and gifts Etc; should not constitute part of
compensation package.
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10. Consistency
as characteristic of the sound philosophy
 Consistency: implies an ability of a
reward system to be designed and
prepared to maintain uniformity in pay
structure thereby all similar items or
individuals are treated equally over a
long period of time.
 It enhances employees’ feeling of
equitably treated.
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11. Transparency
as characteristic of the sound philosophy
 Transparency: implies that the
compensation system is designed in
such a way that all stakeholders can
interpret it with minimum effort and is
accessible to all stakeholders.
 Transparent reward system enhances
employees’ satisfaction on pay.
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12. Dangerous Myths
about
Employees’ Pay
Myth is a popular belief/tradition that has grown up around
something/someone embodying the ideals and institutions of a
society or its segment and usually is having an imaginary or
unverifiable existence.
The dangerous myths about employee compensation are as
follows:
 People works for money.
 Employee incentive pay improves his performance.
 Labor rates and labor costs are the same.
 Labor costs are lowered by cutting labor rate.
 Labor costs constitute a significant proportion of
organization's total costs.
 Low labor costs are a potent and sustainable competitive
weapon to organization
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13. Six Dangerous Myths
Managers are made to believe due to
the much circulated conventional
wisdom and public discussion about pay
which are largely misleading, incorrect
and sometime both. This results in
business person and managers ended
up adopting wrongheaded notions about
how to pay employees and why. This
belief serves as genesis of these six(6)
dangerous Myths about Pay.
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14. Employees work for Money
 Money is not a motivator as discovered. It is
hygienic factor which only make employees to
experience job no satisfaction.
 To be satisfied with the work, employees need
the job to be even more meaningful to their
lives. To be a work works to have fun. Thus, the
company/manager who share the belief usually
ends up as bribing their employees which later
in the long run manifest itself as employees’
lack of loyalty and commitment to the
organization.
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15. Employee incentive pay
improves his performance
 It was discovered in practice and in reality, it
rather undermines performance of the individual
and the organization.
 Studies have strongly suggested that individual
employee’s incentives pay undermine team
work and encourages a short-term focus.
 It leads people to believe that pay is not related
to performance at all, instead, it is about having
right relationships and ingratiating personality.
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16. Labor Rate and Labor Cost are the same
 Labor rates are straight total wages
divided by the time/output.
 Labor cost, however, is a calculation of
how much a company pays its people in
one hand and how much they produce,
on the other hand.
 Labor rate is relative to time/output while
labor cost is relative to employees’
productivity.
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17. Labor costs are lowered by cutting labor rate
 This belief is bought by managers who agree
that labor costs are the same with labor rates.
 Thus, since labor costs are the function of labor
rates and labor productivity simultaneously,
lowering them requires the need to address
both productivity and rate. But, denominator
Mangers find it difficult to do that.
 That is why, sometime, lowering labor rate,
instead, increases labor costs. Because,
productivity may suffer due to low morale of
employees.
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18. Labor costs constitute a
significant proportion of total
organizational cost
 The assertion is true only if the labor costs is
proportional to a total costs.
 It is noted that labor costs, sometime, do not
proportionally vary with the total organizational
cost. Because, labor costs usually vary widely
according to the type of industry and
companies.
 This has encouraged denominator managers to
improves their performance by cutting labor
cost which is the only most immediate
malleable expenses.
 Managers should be developed and trained to
act as numerator managers.
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19. Low labor costs are a potent
and sustainable competitive
weapon
 Although, professor porter suggested in his generic
strategy (costs, differentiation, focus), he does not say
labor cost along is the total cost of an organization.
 Low labor costs is good, but, is a most slippery and least
sustainable way to compete. It can easily be copied.
 There are many competitive strategic advantage through
quality, product/service, customer care services,
product/process/service innovation or technology
leadership which a company can adopt and are even
very difficult to be imitated than the labor costs cut.
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20. conclusion
 Critically examining these myths, one can
observe how the belief system usually
undermine the effort of company to justify the
qualities/characteristics of sound philosophy of
reward management.
 In addition, it is observed that many
motivational theories’ assertions have
confirmed many of these submission.
 The relevant theories include: Two factors
theory of motivation (Herzberg,1966); Equity
theory of motivation (Adams, 1963);
Expectancy theory of motivation (Vroom,1964)
to name but few.
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21. Thanks for Listening and
Attendance
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