Employee Reward Strategy

• From last week: How can Rewards be linked to other HR subsystem as recruitment and retention, training and performance management?

Other HR Practices: Compensation Effects

• Recruitment and Retention

– Number and quality of job applications received during recruitment.

– Employees’ decisions to stay with their employers.

• Training and Development

– Value of tuition reimbursements, management development programs offered by employers

• Performance Management

– Alignment between the pay system and performance measurement affects employees’ motivation

Employee Rewards Strategy

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Strategic Importance of Managing Human Resources

“It’s all about people.

Everybody can buy coffee

beans and open stores. So

when it comes to being

successful, it’s all about how

you manage your people.”

Howard Schultz

Chair and Chief Global Strategist

Starbucks

L E A R N I N G G O A L

1

1-5

What Is Strategy?

• A firm’s strategy refers to the actions that managers take to attain the goals of the firm; … which in most cases means not only profit, but also profit growth.

1-6

Strategies to Increase Value

• Porter’s Strategic Positioning …

1. Differentiation strategy - adding value to a product so that customers are willing to pay more for it … – the higher the value customers place on a firm’s

products, the higher the price the firm can charge for those products

2. Low cost strategy - lowering costs - Assumes that customers are more price sensitive than brand loyal

Market Rate Analisis

Pay progression though

contingency pay

HR Strategy

context

Reward Strategy

Grade and pay structure

Base and pay management

Allowances

Perfomance Management

Job Evaluation

Employee Benefit

Reward Philosophy

Total Remuneration

Total Rewards

Non-financial rewards

Achieve aims: - Performance - Attract and

retain - Motivate

and engage - Add value

Source, Armstrong, 2015

Strategic fit: cost leader

Business strategy - to be a low-cost competitor (cost leader):

• HR priority - productivity (short-term performance) and cost reduction

• Reward strategy - just competitive; tied to efficiency.

• Reward policy - pay at the median or lower if possible; limited benefits provision (legal requirements as benchmark); incentive pay tied to output/sales (individual if possible).

Strategic fit: differentiation

Business strategy - to compete on service quality (differentiation):

• HR priority - attract, retain and motivate high quality, customer-oriented employees.

• Reward strategy - more than competitive; reward loyalty and quality

• Reward policy - pay at 75th quartile; extensive benefits provision; link pay to quality service and/or development of customer service skills

Comparison of Compensation at Costco and Wal-Mart

Source: https://money.cnn.com/2013/08/06/news/economy/costco- fast-food-strikes/

Can a company pay its workers well and also make money?

Source: https://www.thedailybeast.com/why-cant-walmart-be- more-like-costco

Discuss:

1) What are the consequences for the companies on having such pay difference?

2) What are the consequences for the employee on those differences?

Theories of rewards and incentives: Economics, Sociology, Psychology,

and Management

Professor Roberta Aguzzoli

Key reward issues

• Theories in Economics, Psychology, and to a lesser extent in Sociology and Management.

Motivation to perform

• Economic theories – assume money (extrinsic rewards) and self-interest are the primary motivators

• Psychological theories

– Tend to emphasise intrinsic rewards

– More complex view of processes of motivation and emphasise individual decision processes

• Sociological theories – emphasis on influence of social setting, including norms on pay and work behaviour

• Management theories – focus on conditions where incentives work, and where they don’t.

Economic Theories

Attraction/retention of labour

Key starting point: classical model of the labour market in Economics.

Key features and assumptions

1. Supply and demand for labour intersect to determine wage levels in occupations, industries, firms

2. Tendency to equilibrium affecting all workers and employees in the labour market.

Source: https://cnx.org/contents/aWGdK2jw@8.17:lVf3bgHm@7/Demand-and- Supply-at-Work-in-Labor-Markets

For employers If pay too low, difficult to attract and return workers. If pay too high, will attract labour but have to charge higher product prices, and go out of business

For workers. If seek too high pay will not be hired, therefore adjust downwards.

Equilibrium wage is where all employers hire the desired number of workers and where all workers are employed.

Implication: no need to have reward policies, just pay the market rate

Classical model: critique

• Workers don’t have perfect information about alternative work

• Not usually the case that switching costs are zero

• Workers may be motivated by other factors than money eg. Intrinsic rewards

• Presence of state regulations, minimum wages and the presence of trade unions.

Human Capital Theory

Human capital theory Human capital theory focuses on the role of skills, knowledge, and capabilities in determining pay levels

• Associated with Gary Becker (1964)

• Individuals accumulate human capital by investing time and money in education, training, experience etc, and this brings benefits to employer. Wages reflect human capital investment.

• Variations in human quality within occupations. This may explain variations in wages between individuals, occupations, and industries.

• Take for example Brazil:

– In 1990 the country had around 8% of its population graduated.

– In 2008 those with graduation (around 12%) would earn 219% more than those with basic education.

– In 2017 this difference is 140% (around 15% now have graduated).

• https://www.youtube.com/watch?v=SVWX4Xj l4Os

Agency Theory

Economics: Principal-agent theory

• Two parties in a (employment) relationship: principal (owner), agent (employee).

• Their interests conflict.

• How does the principal get the agent to do what the principal wants? Agency costs = the loss of value arising from this agency problem. Two particular problems: – Moral hazard. The incentives of the agent are different from those of the

principal. Need to re-order incentives to reduce agency costs – Adverse selection. Agents differ in their qualities and information.

• The principal can attempt to reduce agency costs by closely monitoring the effort expended by the agent. But monitoring can be costly. So, use incentives for agent tied to outcomes desired by the principal.

See Jensen and Meckling (1976)

Agency theory: assumptions

• Motivated by monetary incentives (extrinsic)

• Assumes not motivated by non-monetary factors such as sentiment, loyalty, desire for status, love of the job (intrinsic) etc

• Need to provide performance-based remuneration systems

Sociological Theory

Sociological theories

Sociological theories highlight the role of the social context in influencing behavioural responses to pay. Also emphasise the social nature of labour markets

• Hawthorn experiments. Role of group norms in influencing individual behaviour, whilst showing limitations of individual incentives

• Equity theory – role of social comparisons. • Caution about use of incentives because social

norms and comparisons inhibit straightforward use of incentives.

• Labour markets embody social norms and power.

• Where did the interest begin?

– Hawthorne Studies

• not ‘busting the rate’

• not producing too little

• not ‘chiselling’

Contexts: perceptions of equity

Internal equity

• Perceptions of how the job and its reward relate to other jobs and people in the organisation, especially those closest to it and to the person doing the job

External equity and competiveness

• How does the job and its rewards relate to similar jobs in the relevant labour market (Local/national/international)?

Psychological Theories

https://www.youtube.com/watch?v=DfGs2Y5 WJ14

Psychological theories

Content theories (people have fundamental needs) • Maslow – hierarchy of needs • Alderfer – ERG theory (existence, relatedness,

growth). Reduces Maslow needs to 3, and sees them as occurring simultaneously.

• Herzberg – two factor theory. • Hackman and Oldham – job characteristics

model. Job characteristics that give rise to intrinsic motivation (task identity, significance, skill variety, autonomy, feedback)

Content Theories – ‘what’ motivates?

Alderfer Maslow Herzberg McClelland Deci & Ryan

Existence Physiological

Safety

Hygiene

factors

Need for

Power

Need for

Competence

Relatedness

Social

Esteem

Hygiene

&

Motivational

Need for

Affiliation

Need for

Relatedness

Growth

Knowing &

Understanding

Aesthetic

Transcendence

Freedom of

Enquiry and

Expression

Self-actualisation

Motivational

factors

Need for

Achievement

Need for

Autonomy

https://www.youtube.com/watch?v=3sRBBNkS XpY

Herzberg’s Two-factor theory

• Motivators → job satisfaction

– mainly intrinsic to work - potential to motivate

• promotion opportunities, recognition, responsibility, achievement

• Hygiene factors → job dissatisfaction

– mainly extrinsic factors - do not motivate

• Supervision, pay, company policies, conditions, relationships, job security

• Implications for management:

– Get hygiene factors OK, then focus on motivators

• Motivating Factors

– Achievement

– Recognition

– Responsibility

– Advancement

– Growth

• Hygiene Factors

– Relationship with boss

– Relationship with peers

– Work conditions

– Salary

– Status

– Security

Source: https://www.managementstudyguide.com /maslows-hierarchy-needs-theory.htm

Growth needs Growth needs

Relatedness needs

Existence needs

Alderfer

• Maslow's Hierarchy of Needs (youtube.com)

Choosing a Job: the relevance of Salary and Benefits in your option

• You are searching for a job and have found three interesting companies to work for: P&G, IBM and SAS. Reflect on the importance of elements other than payment in your decision to apply. Consider what motivates you.

• http://www.pg.co.uk/

• http://www.sas.com/en_gb/home.html

• http://www.ibm.com/uk-en/

• http://www.payscale.com/?co=uk

• Source:

• Websites from the companies and glassdoor.

44

Other approaches to motivation

• Job characteristics/job enrichment model (Hackman and Oldham) – Practical implementation of content and expectancy/valence

approaches.

– Influential in design of work teams, counter to Taylorism/Fordism

– Features: • Skill Variety

• Task Identity

• Task Significance

• Autonomy

• Feedback

Process theories (explain cognitive processes by which individuals decide something is worth doing).

• Expectancy theory (Vroom).

• Goal setting theory (Locke and Latham). Motivated when specific, challenging, and important goals

January 24 46

Other approaches to motivation

• Locke’s (1975) goal setting theory

– ‘goal-setting is more appropriately viewed as a motivational technique rather than a formal theory’ (Locke 1975: 465).

– Key components:

– setting challenging and specific goals

– knowledge of results as feedback

– explanation and acceptance of goals

– participation in goal setting only when anticipated by participants

– support from studies of mainly individually based manual work

Vroom’s (1964) Expectancy Theory “A person will be motivated to put forth a higher level of effort if they believe their efforts will result in higher performance and thus better rewards”

3 Key Components Expectancy: the level of effort an employee is willing to exert in the hope that the increased performance will lead to a better performance Performance: the strength of the relationship between an employee’s behaviours and the rewards that they can receive from those actions. Instrumentality Reward: how valuable the employee finds the reward to be - Valence

If I work hard, can I do this

job?

If I do this job well, will I be

rewarded?

It is worth it?

Expectancy theory

Implications for pay incentives:

E

objectives/targets must be attainable.

I

clear and understandable basis/formula for reward.

V

reward should be significant to the individual.

Expectancy theory

• Motivation force or effort expended:

Effort = E x I x V

• Choose behaviour likely to yield the most attractive outcome

https://www.youtube.com/watch?v=IpnzW06s hsM

Management theories

No clear single theory in Management as such but use of theories from Economics, Psychology, and Sociology

• Tendency to accept that incentives can work but the conditions in which they are used moderates the outcome (‘contingency’)

– Effective where simple, repetitive tasks

– May be less effective where complex and dynamic tasks

• Read Semco’s case and identify the motivational theories observed in the company.

Summing up

• Should reward be based mainly on financial incentives?

• Are psychological, economic, or sociological views of incentives more compelling?

• Under what conditions may incentives be effective?