Employee Reward Strategy

Pension

Pensions

Definition: ‘A regular payment to those who

have retired from work due to age or ill-

health paid by the state or an employer’

Heery and Noon, 2001

• Pensions are provided as both a statutory

benefit through the National Insurance

system and by employers (extra-statutory

‘occupational’ pensions)

Types of occupational pension scheme

Two main forms of occupational pension schemes

• Defined benefits schemes (e.g., final salary or career average schemes) DB

• Defined contribution (money purchase) schemes DC

Transition from DB to DC in the UK and US. Other countries traditionally more reliant on earnings-related state pensions, financed through taxation/national insurance

Defined benefit (final salary) schemes

Defined benefit (final salary) schemes

Contributions monthly from employer and employee (e.g. 5%)

Invested in a fund plus profits

Benefits based on employer and employee contributions plus profits

May purchase an annuity on retirement (requirement to do this in the UK recently relaxed)

Pension benefit depends on the performance of the fund

The employee bears the risk

Defined contribution schemes

• DB schemes were the norm in UK public sector and large private sector employers

• BUT – current trends do not favour them:

– Ageing population living longer

– Reduced earnings in stock and bond markets

– Workers switch employers more often and retire early

– Many funds are insolvent (more stringent actuarial calculations)

• Employers are:

– Switching to defined contribution schemes (cheaper)

– Reducing cost of final salary schemes (cut benefits) Example: UK teachers pension scheme has been gradually reformed

Current trends

Source: https://bipartisanpolicy.org/blog/defined- benefit-plans-whered-they-go/

Source: https://www.oecd .org/els/public- pensions/PAG- 2021-social- media- infographic.pdf

Retirement Programs

• Early retirement

• Programs

– Counselling

– Workshops

– Tryouts

Conclusions

• Some benefits must be provided (legal requirement) but employers can adapt these/

• Other benefits assisted by tax benefits

• ‘Good employers’ provide a range of benefits, sometimes to underpin an employer brand.

• Seek to maximise value for money and impact through flexible benefits

https://investors.vodafone.com/sites/vodafone-ir/files/2022-05/vodafone-2022-annual-report.pdf

Rewarding Employee Performance

Roberta Aguzzoli

What we will do today

In this session:

• Examine variable pay

• Examine pay for performance

• Evaluate the effectiveness of pay for performance

Total Rewards

Base pay

Benefits

Variable pay

https://www.youtube.com/watch?v=pqtYQb9n bRk

Three bases of pay

Conceptual differences between the underlying basis of pay systems

• Job: what does the job involve? – job size: responsibilities etc.

– Position in the hierarchy

– Use of job evaluation to determine how much a job is paid

• Performance: pay is based on performance (output) – E.g., output, sales, targets/objectives

– Individual, team, or organisation-wide

– May assess using objective output data or performance appraisal

• Person (inputs) – seniority/age

– education/qualifications/training

– skill/ competencies From: Mahoney, T A 'Multiple pay contingencies: strategic design of compensation', in G Salaman (ed) Human Resource Strategies, London: Sage, 1992.

Pay for Performance

Strategic Importance of Performance- Based Pay

• Supporting Strategic Objectives – Use pay to align individual goals with strategic objectives

• Growth

• Customer service

– Can change and direct employee behavior during times of change and diversification

• Managing Labor Costs – It is important to reward good performance.

– Merit pay raises increase labor costs but do not guarantee ongoing productivity increases.

– Variable pay controls costs and shifts financial risk to employees.

Source: Wener et al., 2102

© 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.

Strategic Importance of Performance-Based Pay (cont’d)

• Attracting, Retaining, and Motivating Talent

– Want best employees to find system attractive

– Want to interest best applicants for jobs

Business Goal (increase

revenues in 20%)

Department goal (recommend for

new potential markets)

Team goal (research the

potential markets and present data)

Individual goal

Pay for Individual Performance

Individual results-based rewards

• Most common form of variable pay

• Individual bonuses can help focus on desired results or behaviours

• Results-based rewards can be piecework, commission, work-measured schemes

Pay systems based on individual performance

Pay may vary according to output (‘payment by results) or inputs (work behaviour and performance)

• Output-based systems

– E.g., Piecework and standard time systems

• Sales incentives (commission and bonuses)

• Performance-related and merit pay

We will examine each of these shortly

Incentive and merit pay

Payment is linked to work processes and work behaviour as well as outputs

• Behaviour appraised through performance review. Often in relation to objectives set in earlier year.

• Rater gives a grade (excellent, average etc) • Additional pay linked to better grades (maybe).

– Merit increments ie permanent increase to employee pay. May be % or move up incremental scale

– bonus – not permanent.

Linking pay to appraisals

APPRAISAL RATING SALARY AWARD

Outstanding Scale adjustment plus 6%

Highly effective Scale adjustment plus 4%

Effective Scale adjustment plus 2%

Adequate* Scale adjustment only

Unacceptable** Nil

* Includes those not eligible for performance-linked increase, for

example because they have been in the job only a few weeks.

** Staff may be subject to disciplinary action.

Tolson and Kopmanis, 2016

© 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.

EXHIBIT 10.11 Traditional Merit Pay versus Merit Lump SumMerit Pay Lump Sum Merit

Salary 8% raise Annual Earnings

Salary 8% Bonus Annual Earnings

Year 1 50,000 4,000 54,000 50,000 4,000 54,000

Year 2 54,000 4,320 58,320 50,000 4,000 54,000

Year 3 58,320 4,665 62,985 50,000 4,000 54,000

Year 4 62,985 5,039 68,024 50,000 4,000 54,000

Year 5 68,024 5,442 73,466 50,000 4,000 54,000

Year 6 73,466 5,877 79,343 50,000 4,000 54,000

Year 7 79,343 6,347 85,690 50,000 4,000 54,000

Year 8 85,690 6,855 92,545 50,000 4,000 54,000

Year 9 92,545 7,403 99,948 50,000 4,000 54,000

Year 10 99,948 7,996 107,944 50,000 4,000 54,000

Total earnings

724,321 57,944 782,265 500,000 40,000 540,000

Problems with merit pay

Individual performance-related (merit) pay is widely used, but…

• Heavily reliant on the accuracy and acceptability of supervisor’s appraisal ratings

– Suffers from all the problems of appraisal systems • Rater biases

• Merit increases are typically small and are based on last year’s performance (time lapse problem)

See: Campbell, Donald J., Campbell, Kathleen M., & Chia, Ho-Beng. (1998).

Benefits of merit pay

• Strong signals about performance

• Incentive for future performance

• No downside risk for employees – not usually taken away (but some manage low performers out of organisation)

© 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.

Stock Ownership

• Stock Options

– Give employees right to buy company stock at later date at price established when the purchase option was granted.

– Executive stock options: • Often exceeds all other compensation

• Encourages executives to “think like owners”?

• https://www.youtube.com/watch?v=8td1laTY vcM

OUTPUT-BASED SYSTEMS

Traditional Piecework

• payment per ‘piece’ completed to a minimum passable quality level.

• may be a minimum earnings level guaranteed.

• used in production work.

• standard-time system also often referred to a ‘piecework’.

Advantages of piecework

Declined in US/Europe – but still used in factories in some industries – why?

• Incentive effect

• Reduces the need for direct supervision

– Supervision often rudimentary

• Acceptable and seen as equitable?

• Relatively simple and easy to implement

Disadvantages of piecework

Piecework can increase productivity, but… • Potential to generate grievances, conflict and distrust

– Communication often limited

• Workers may manipulate (timing, short-cuts, satisficing) using asymmetric information

• Workers determine productivity, machine utilisation etc.NOT management

• Often high turnover of new employees

• Makes it harder to adjust to changing styles and move “upmarket”, and to adopt advanced manufacturing

HOVEY AND BEARD COMPANY

• It manufactured wooden toys.

• One part of the manufacturing process involved paint on the partially assembled toys and hanging them on moving hooks which were then carried through a drying oven. This department was characterized by absenteeism, turnover, and low morale.

Source: www.academia.edu/38778100/Job_Design_Case

HOVEY AND BEARD COMPANY

Eight painting employees sat in a line by an endless chain of hooks that were in continuous motion.

The rate at which the hooks moved had been calculated by the engineers so that each employee, when fully trained, would be able to hang a painted toy on each hook before it passed beyond reach.

Since the operation was new to them, they were receiving a learning bonus which decreased by regular amounts each month. The learning bonus was scheduled to last for the time of the training - six months.

Source: www.academia.edu/38778100/Job_Design_Case

HOVEY AND BEARD COMPANY They also got a piecework payment.

The painters learned more slowly than had been anticipated and complained that the speed rate was too fast. Employees quit and had to be replaced.

The complaints had generalized frustration: the job was a messy one, the hooks moved too fast, the job was too dirty, the room was hot and poorly ventilated, the incentive pay was not being correctly calculated.

Fans were brought in: the painters were completely satisfied with the results, and relations between them and the supervisor improved.

"Let us adjust the speed of the belt faster or slower depending on how we feel.“ "low, medium, fast" dials were installed.

Source: www.academia.edu/38778100/Job_Design_Case

HOVEY AND BEARD COMPANY

The painters were very happy with the possibility of giving inputs on the speed.

Production increased, and within three weeks the painters were operating at 30 to 50 percent above the level that had been expected under the original arrangement. Naturally their earnings were correspondingly higher than anticipated.

They were collecting their base pay, a considerable piece-rate bonus, and the learning bonus.

Source: www.academia.edu/38778100/Job_Design_Case

SALES INCENTIVES

Commission • Pay related wholly to sales value/ volume

• Basic salary plus commission (x% of sales value) – Sometimes basic salary is comparatively low

Advantages:

– motivator

– only successful staff remain

– easy to understand and monitor

– contains pay costs

Disadvantages

– uncertainty of earnings

– sales at any cost

Sales bonus

• Bonus paid relative to target

• Once and for all payment – not part of basic salary

• Group or individual targets

e.g. Sales team target of £1 million this year

Performance Bonus % Salary Below threshold No bonus

Threshold - 75% target 25%

100% target 50%

Cap 125% target 75%

Paid to each person as % of their basic salary

• www.youtube.com/watch?v=sxKias9Nwtg

Pay for Group and Organisational Performance

Team-based rewards

Forms of collective/group-based pay

• Team/group/departmental pay by results/bonuses, often linked to KPIs.

• Gain sharing. Employees share in cost savings achieved by employer. Developed in the US in 1930s by union organiser Joe Scanlon

• Profit sharing. Pay supplement based on profits of the enterprise. Typically paid annually.

Team-based rewards

• Rewards are based partly on the performance of the team or unit

– Usually an at risk bonus paid in addition to base salary

• Sales team, production unit, restaurant, store, branch, etc.

• Unit-level incentives often seen as an alternative to individual incentives and merit pay

– Performance indicators may be more objective

– Addresses the issue of inter-dependencies in performance See: Campbell, D.J., Campbell, K.M., & Chia, H.-B. (1998).

Team-based rewards: example

• Retailer – customer service call centre (customer service agents); teams of 8-10 agents

• Aims to improve:

– productivity,

– teamwork, and

– service quality

• Bonus factors at team level:

– Maximum bonus £500 per half year

– Average daily telephone occupancy → % of maximum bonus earned

– Deductions from % bonus earned, based on average response times to letters and emails

Team-based rewards: example

• Paid May and November

• Eligibility for bonus payment:

– Permanent staff

– In post for full bonus period

– Must avoid disciplinary action

• Bonus deduction for individuals with unapproved absence

– 5% lost per day absent

Team-based rewards - evaluation

• Team rewards and their intensity are positively associated with:

– Provision of help to teammates See: Bamberger, P. A. & Levi, R. (2009).

Design features associated with success:

– Communication with employees about the details of the scheme

– Employee involvement in design and implementation

– Employees’ fairness perceptions See: McClurg, L.N. (2001).

© 2011 Cengage Learning All rights reserved.

https://www.youtube.com/watch?v=C26sJOe0Ki U

© 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.

Team Incentives

• Advantages

– Presence of team members reinforces individual behaviors.

– Competition among coworkers is replaced by cooperation.

– Group rewards increase individual reward value.

– High group performers are role models.

• Disadvantages

– May foster competition among groups.

– Does not reduce plan administrative responsibilities

– Individuals may not work as hard.

– Individual performance rewards may create equity problems.

GAINSHARING

Gainsharing

• A workplace or organisation-wide bonus system

– Employees participate in making “gains” (e.g., cost savings) and then share some of the savings

• Usually paid to all employees (perhaps excluding management)

• May pay out monthly, quarterly, half-yearly or yearly

Gainsharing: objectives

What does the bonus try to achieve?

• Seeks to provide an incentive to work together to make the “gains” in the bonus target

– added value in this case

• Underpins employee involvement and builds group effort

• Targets can be changed to reflect changing business priorities

– E.g., cost savings, waste, quality indicators…

Implementation Issues

Evaluating Effectiveness

Implementing Performance-Based Pay

Gaining Employee Acceptance

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

5

Source: Werner et al.., 2012

Implementation Issues (cont’d)

Misunderstanding

Employee Opposition to Performance-Based Pay

Fear Distrust

Source: Werner et al.., 2012

Conditions for success of performance pay

Recent work in reward tries to identify the conditions under which performance pay can be effective • Plan must fit with the work and the culture • Nature of plan and performance criteria must be

communicated • Performance criteria must be valid and consistently applied • Employees believe they have control over measured

performance • Rewards should be commensurate with validly and reliably

measured work performance • Administered fairly • Rewards should be of value • Promised rewards should be delivered in timely manner