Reward System – Meaning, Objectives and Requirements

Reward is an objective way to describe the positive value an individual ascribes to an object, behavioral act or an internal physical state. Primary rewards include those that are necessary for the survival of species, such as food and successful aggression. Secondary rewards can be derived from primary rewards. Money is a common type of reward. Most of the times, organization rewards its staffs by pay increment or higher bonus. Money is the most direct and easiest way to reward the staff and create a sense of satisfaction.

Nowadays, companies are making many modifications on their rewards system to adopt internal and external changes. Reward system is used as a critical tool for driving business growth and boosting staff morale. It is important to align the right measures and reward systems with firm’s structure and culture.

However, the reward system is not emphasized when the operational system is designed. Finical and HR systems are prioritized in the organization. The firm needs to be aware of the importance of the reward system and spend enough manpower and resources to design a decent reward system.

Five Main Objectives of Reward System

To design an efficient reward system, the organization needs to fully understand the definition and meaning of reward system. It also needs to setup a clear objectives for its reward system.

These are five key objectives that can be achieved by applying reward system.

1. Attraction and Retention:

Research shows that reward system can directly affects the job choice, career choice and turnover rate of the organization. Organization’s that give the highest rewards tend to attract and retain more people. This indicates that the better reward system can give a higher satisfaction level to employee. The higher satisfaction level will lead to a longer length of service and reduce organizational turnover rate.

In retail industry, employees are the most important resources. The organization needs to retain high performance employees and remove inefficient employees. To maintain the top performers, current reward system need to be compared with other organization’s. The firm need to ensure that its reward system is superior than its competitors.

However, it is very costly to maintain a higher reward system. This will increase the labor cost of the organization. In certain organization, the labor cost covers 50% of overall operational cost. In addition, if all employees are awarded in the same level, it can cause feelings of inequity because the better performers are likely to feel inequitably treated when they are rewarded at the same level as poor performers in the same organization.

2. Motivation of Performance:

When certain conditions exist, reward systems have been demonstrated to motivate performance.

The reward system must be directly link to the effective performance. Staffs should be rewarded according to their needs. Once the staff is rewarded for their outstanding performance, they will further improve their work process. The effect of this reward system depends on the situation and the needs of people. There are three factors that can affect the motivation effect by using reward system.

  1. Performance-Outcome Expectancy: Individuals expect that if they behave in a certain way, they will get certain outcomes due to their behaviors. For example, if a person sells ten units of product within one month, they will receive their based salary without any additional bonus. In the other hand, they can receive 15% of commission if they can sell 15 units per month. In this case, the staff will be motivated to achieve a higher sells level in order to receive 15% of commission.
  2. Attractiveness: Based on the perception of the staff, the outcome of the reward system will lead to different attractiveness to employees. For example, some staffs want to be promoted as they have higher desire to gain more control power. Other staffs might prefer increment of their salary rather than promotion. The firm needs to understand the employee’s need and select the most attractive way to retain and attract motivated staffs. In retail industry, the firm should select the most appropriate approach to reward its employees. For staffs who want to lead a team and manage people, the firm can promote them to be a leader of a sells team. For staffs who enjoy the interaction with customer, the organization can increase their commission and keep them at ground level.
  3. Effort-Performance Expectancy: The expectancy represents the individual’s perception of how hard it will be to achieve certain behavior. For example, if the employee has very negative thought, they feel that they can never achieve the sells target. The employees will be further discouraged if they really fail to achieve the target. However, if the firm creates a positive working environment, the staff will feel that the quota is achievable and they will be motivated to hit the target and receive the reward. Therefore, most of the retail firms want to encourage their staff to think positively and believe that the sells target is achievable. This could help the staff to performance better.

3. Create Positive Organizational Culture:

Reward system can help the firm to create a positive culture. Depend on the way that reward systems are developed, administered, and managed, the organizational culture will be affected according to these factors. For example, the reward system can influence the human resources oriented culture, entrepreneurial culture, innovative culture, competence based culture, fair culture and participative culture. It can also affect the communication, motivation and satisfaction of the employees. For example, the employees will work hard to achieve their personal value if their efforts are recognized organization. However if the organization rewards all staffs equally without appreciation of the individual’s effort, most of the staff will tend to slack.

The established culture should be able to meet following standards:

  1. The individual believes that the better behavior will lead to better outcomes.
  2. The individual feels that the reward is attractive enough for them to improve their work. Organization needs to understand the needs of the staff
  3. The individual believes that it is possible to achieve certain level of target. The firm should encourage the staff to think positively and set an achievable target for them. For example, the monthly sells quota need to be reasonable.

4. Improve on Skills and Knowledge:

The reward system can encourages employees continuously improve their skill sets. The firm can pay employees based on their skill levels. Staffs will be motivated to attend extra courses and improve their skill sets in order to receive more benefit.

For example, the firm can reward staff with outstanding explanation and presentation skills. Staffs will take more initiatives to improve their presentation skill and attend related courses.

Both organization and staffs can be benefited from this. The firm can adjust the setup of the reward system based on the requirement of the organization. For example, effective communication skill and customer service skill are more important in retail industry. The firm can provide benefits to staffs who attend relevant courses and have outstanding customer service skills.

5. Reinforce and Define Organizational Structure:

The reward system can reinforce and define the organizational structure. The firm might not foresee the impact of reward system on firm’s structure changes. However, the reward systems can have a strong impact of how integrated the organization is and how differentiated it is.

For example, if the company wants to create a united structure, it can reward all staff in the same manner. In this case, more teamwork will be encouraged and there are less competition within the organization. If the firm wants to differentiate the top performers from average performers, they can apply a reward system that can create a more competitive environment. In this system, employees focus on their individual work instead of the benefit of the whole team. Insurance companies encourages on agent’s individual efforts. The reward system provides intensive benefit for top sellers and insurance agents are not sharing their information even within their own team.

By studying this theory, the reward system can be used to motivate the staff; encourage continues learning process and build organizational culture/structure. The retail firm needs to select the most attractive approach that can best fit into the needs of staff.

It is not necessary for the retail firm to focus all five objectives. The firm should select one or two main objectives that have highest priority. For example, some retail firms focus on Motivation of Performance. Supervisors need to consistently encourage their staffs and create a positive working environment. Staffs are informed that the sells quota is achievable if they work hard enough.

Based on the structure of the firm, the reward system need to be carefully designed to meet the organizational target. The retail firm should never underestimate the impact of the reward system on the structure of the firm.

Requirements of an Ideal Reward System

After identifying the objective of the reward system, the organization also needs to understand the needs of its staffs. A good reward system can meet the needs of the staffs in order to maximize its effect. Reward system needs to address four basic needs of the employees.

  1. Compensation: Monthly basic pay and salary.
  2. Benefits: Sharing of organizational profit; bonus and other types of staff welfare
  3. Recognition: Staffs want to be recognized for their effort and good work. The organization needs to create opportunities for staff to have more exposure and gain recognition.
  4. Appreciation: The firm should show appreciation to staffs for their achievements. The firm can show its appreciation by promote premonition and giving out award to top performers.

Many businesses miss one or more of these elements (usually recognition and/or appreciation). Most firms only focus on financial compensate since it is the easiest way to reward the staffs, however there are many employees emphasize on recognition and appreciation. If the firm miss these two elements, it might not be able to retain staff effectively.

In addition, an ideal reward system should be able to award both employee’s performance and behavior. The performance is easier to measures since it is a direct comparison between the desired target and actual performance of employee. For example, the top sellers should be awarded for achieving and exceeding the selling target. This can be easily measured by looking at the profit generated by individual employee.

It is harder to use reward system to affect the employee’s behavior’s. The firm needs to define the behavior’s that the employee should adopt and design the reward system based on this target. For example, manufacturing firms will award the employees based on their work efficiency. The aim of the reward system is to motivate staff to achieve higher productivity yield. In the other hand, most of the design companies focus more on the innovation and creativity of the staff. Instead of time spend in the office, the firm will reward employees who have more creative ideas.

According to this theory, an ideal rewards system needs to be able to address the needs of the staff and effectively affect staff’s behavior’s based on the needs of the organization.

Factors that Need to be Considered When Designing a Reward System

Only set up a clear objective and understand the requirements of an ideal reward system are not enough to design a decent reward system. The firm needs to consider the feasibility of the rewards system before proceed to the designing stage.

There are a few common queries that need to be answered before start to design the reward system.

  • Should reward system be a driver or reinforce of behavior? The firm can motivate the staff by using reward system. However, this should not be the only driving force for employees to improve their performance.
  • Where does the firm wish to position itself in the labor market (at what percentile)? By providing an attractive reward system, the firm can recruit and retain a better workforce. The firm should also position themselves based on their financial state and external market environment.
  • What portion of total rewards will be distributed in cash, equity and social benefit programs? The reward system can be applied in many different forms. Other than cash, the social benefits such as insurance and staff welfare can also contribute to the overall reward system.
  • How much leverage should variable rewards have (how much pay should be at risk at different levels of the organization)? The firm needs to consider the amount of capital that should be used to apply the reward system. Both over paying and under paying of the reward system will cause serious consequences. The amount of payment should be comparable to the market average salary level.

The firm needs to consider these operational issues seriously to ensure the efficiency of the reward system. The designer might has many wonderful ideas when designing the reward system. They need to consider the feasibility of these ideas in local market environment. For example, Wal-Mart’s rewards system in U.S.A is not feasible in china due to the market and culture different.

Efficient Way of Designing the Reward System

After defining the objective, requirements and consideration of an ideal reward system, the firm can proceed to the design stage.

Reward systems need to be able to fit into the organization’s operation system. It will directly affect the effectiveness of the organization and employee’s working experience. Therefore, it is crucial to design a reward system based on the type of the industry and the setup of the organization.

In many large organization’s, the reward system is not solely adopted from the book. Modification will be made based on the organization’s core value, process features and system practices. The firm needs to align the reward system with these three key factors during the designing process.

Core Principle:

This is the key value of the organization. The firm needs to help the employees to build trust on the core principle. The core principle can be the belief in pay for performance; a belief in secrecy about pay and other fundamental long-term commitments such as long service award.

All rewards system need to be designed based on this core principle. The firm needs to maintain the consistency when applying the reward system. It is not convincing enough if the firm is keep changing its core principle and reward system. For example, if the firm wants to promote a fair and united working environment, the reward system needs to treat every employee equally. Even with certain level of objection from the ground level, the organization still needs to make its stand by consistently practicing in the same manner. If the firm wants to promote a competitive working environment, the reward system shall only provide benefit for top performers. The system will create a gap between top performers and average performers.

Process Features:

The process feature will determine how the reward system can be implemented in organization. For example, the communication policies will determine the approach of the reward system. In retail industry, positive communication approach is widely used to motivate staffs. The reward system needs to emphasize the benefit of achieving the target instead of remind the staff on the consequences of fail to achieve the target. The rewards system needs to fit the process features of the firm.

System Practices:

System practice can determine the method of delivering reward to staffs. This includes pay delivery systems such as profit-sharing plans and other organizational welfare programs. Instead of paying a fixed salary, the firm can share its benefit by paying bonus quarterly. It can also provide a better facility and healthcare benefit to staff. The way of delivering reward system should determine by staff needs and system practices of the organization. Different organization’s are having varies ways to deliver their reward systems. For example, insurance company provides free trip for its top performers every year to boost the staff morale. In addition, the insurance agent can receive 50% of the commission for each policy that they sold to client. This encourages agents to reach out for more clients. However, the same practice is not feasible at all in the retail industry. Due to the high operational cost, the firm cannot afford to pay 50% of commission to its employees.

The literature review shows that the firms need to put in many considerations in order to design a decent reward system that can be best fit into their organizational structures.

Firstly, the firm needs to fully understand the definition and objectives of the reward system. In retail industry, the reward system is mainly used to motivate staff and create a positive organizational culture.

In addition, management team needs to consider through the firm’s economic state and needs of their employees in order to achieve the best outcome of the reward system. The needs of staff in retail industry might be different depends on their designations. The ground staff might focus on the based benefit and staff welfare. While staffs that work at management level need more recognition and appreciations.

Organization needs to consider its core value, process feature and system practices when the reward system is designed. Therefore, many new reward systems practices have become popular in order to align reward systems with the important changes that are occurring in the way organization’s are designed and managed.

There is no good or bad for a particular reward system. The organization must evaluate the context of other systems and business strategy of the organization. The reward system needs to match with the information system; human resource management system and other crucial operating systems for maximize its effect.

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