Traditionally employees have always been paid with money and only relatively recently
organizations have begun to approach reward in a strategic fashion, focusing their
attention on developing bespoke reward strategies whose aim is to help businesses to
achieve their specific organizational objectives and priorities.
Until 1980s in the private sector, and even until more recently in the public sector,
employee pay and working conditions were basically decided through collective
bargaining, more often than not at national or at industry level, with trade unions. The
multi-employer bargaining system declined sharply during the 1980s and 1990s, insofar
as in 2004 only 36 per cent of public sector employers and a meagre 1 per cent of
private sector companies had still salary arrangement determined through collective
bargaining processes in the UK.
The end of this long-established system has enabled organizations to introduce and
develop payment systems more specifically destined to reward individual skills, efforts
and performance and to achieve a higher level of flexibility in determining the employee
benefits offering.
In the last two decades reward management has attracted the interest of consultants
and academic researchers as well, so that a good deal of literature has been made
available on which organizations have found the basis and the inspiration to develop and
implement reward practices. Nonetheless, as pointed out by Armstrong et al (2005), a
worrying “knowing-doing gap” remains. To some extent, strategic reward approaches
can be considered as still being in somewhat of a probationary period. The effectiveness,
efficiency and fairness of the various types of rewarding systems differently implemented
in different businesses are, hence, still under investigation.
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The available wording options
First and foremost, it could be interesting to find out why the term reward itself has been
used to refer to the whole range of benefits an employee receive from his employer in
exchange for his/her work.
As appropriately stressed by Torrington et al. (2008), the term “payment” would have
been too limited in scope in that many of the rewards an employee takes from his work
do not actually take a monetary form.
The word “compensation”, widely used in the American literature, gives mostly the idea
of making amends for something that has caused loss or injury to someone else, which
would not exactly be the most appropriate idea to associate with work activities.
The term “remuneration” has the same meaning as “payment”; additionally it allegedly
is the most misspelled (renumeration) word in the HR lexicon.
“Reward” would not actually be the best term to use either, in that it suggests the idea
of a special payment for a special act; nonetheless, amongst the available options, it
seems to remain the most appropriate term to which resorting when referring to the
financial and non-financial package employees receive from their employer for their
contribution to the attainment of organizational objectives.
Considering the issue from the transactional point of view and, to some extent, from the
psychological contract point of view, it would not be completely inapt referring to the
term “return”, but it would definitely be inappropriate and misleading of the efforts
companies are actually making in order to offer their staff a whole range of elements
combining to make work rewarding and worthwhile, what is today known as “total
reward” (Longo, 2010b).
The term “reward” is nowadays no longer used as exclusively associated with the
financial/tangible components of reward, but rather in its wider and overarching meaning
of a combination of both financial and non-financial rewards, with the latter grouping
gaining an increasingly growing importance to the achievement of the organizational
objectives. More recently, reward professionals and academics are mainly directing their
investigations to strategic reward approaches based on the concept of total reward.
However, since financial reward, usually referred to as compensation or pay, is still
considered having a distinctive impact and influence over individuals, it continues to
remain object of investigation of its own and very often of passionate and intense debate
too.
Albeit the concepts of strategic reward and reward strategy are basically referring to the
same idea, they are indeed different in that each of them is associated with the different
stage by means of which reward practices are developed and introduced within a firm.
Whereas strategic reward is concerned with the methods, approaches and definition of
the underpinning principles on the basis of which reward strategies have to be developed,
according to the identification of the aims and objectives that employers intend to
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pursue by means of these; reward strategies are basically concerned with the
identification and development of the most suitable means and instruments which will be
used by employers to practically and consistently execute strategic reward and achieve
its intended aims and objectives.
Defining strategic reward
Strategic reward is first of all the result of a fundamental decision employers need to
make before introducing reward practices within their organizations or eventually
changing those currently existing. It is very much associated with the type of approach,
method, founding concept and tenets on the basis of which have to be subsequently
developed the reward practices that employers intend to introduce and foster within
their firms. The definition of strategic reward, hence, represents a mandatory
prerequisite necessary to design, develop and execute consistent reward management
policies within a business.
Inasmuch as business strategy is concerned with the mid- to long-term direction a
business intends to pursue, reward strategy is concerned with the identification of the
reward practices considered as the most suitable for helping and enabling employers to
attain their mid to long run pre-identified reward, and by means of these, business
objectives. Essentially, a strategic approach to reward is meant to help employers to
determine where they want to go and the kinds of initiatives and actions necessary to
reach the intended position in terms of reward choices.
As suggested by Armstrong (2010), strategic reward is, therefore, concerned with both
“ends and means” in that strategic reward management is basically involved with
representing a vision about the future of reward procedures within an organization and
with determining the actions which need to be carried out in order to achieve the
intended objectives.
Strategic reward can also be described as the most appropriate and effective approach
to reward management enabling employers to reward their staff according to their
practical contribution to the achievement of organizational aims and objectives, where
both individual and organization needs are met (Longo, 2011). As suggested by the CIPD
(2012), a strategic approach to reward is ultimately intended to support the attainment
of both organizational aims and individuals aspirations.
Although in theory the concept of designing and introducing reward practices supporting
the achievement of organizational objectives can be considered unquestionable and even
attractive, findings of CIPD investigation (CIPD, 2010) revealed that only 33 per cent of
the UK organizations have a written reward strategy, whilst a further 31 per cent is
planning to formulate and adopt one. Arguably, in many other countries things are not
going any better. All of that, despite many researches and consultancy studies reveal
that firms having a defined reward strategy attain better financial results than those
organizations not having any strategy in place.
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Once the direction and the most suitable path to reach this have been determined,
employers and reward professionals still needs to identify and determine the philosophy
and guiding principles on which practices and policies, enabling organizations to attain
the intended strategy, have to be underpinned.
Making the case for a strategic approach to reward management
Organizations which have decided to adopt an aggressive approach to the relevant
labour market usually have recourse to the efficiency wage theory, that is, to an
approach based on setting salaries levels at an above-than-average percentile in order to
attract and retain talented people and use pay-per-performance schemes to motivate
and engage them.
Indeed, in no organization a scheme, system or issue is managed and sorted out in a so
simplistic way whatsoever. Just try to imagine what would it happen if a marketing
project team should propose to its organization business leaders to introduce in the
market a new product similar in price, features and overall value proposition to a product
already available in stores. It is absolutely easy to imagine, in this case, what the
employer reaction would be. Notwithstanding, in terms of reward this actually occurs,
many organizations in fact tend to replicate and introduce the same rewarding system
used in other businesses. This, despite according to the best fit approach it is definitely
preferable, and even more suitable, introducing practices and schemes fitting the specific
circumstances.
Yet, why should people desire to work for, and stay with, an employer? What makes an
organization attractive to the extent people wanting to work for it? Additionally, how
much money spend firms to pay salaries? Which percentage of the overall revenues or
operating income do personnel costs represent? Does the organization resort to the
same level of strategic and operational decisions process to deal with labour costs as it
does for other types of investments and/or expenditures? Finally, it comes without
saying that every time an employer spends or invests money is expected to maximise
the return from these expenditures. The need for an organization having a strategic
approach to reward relates to the contribution, in terms of added value, it is able to
make basically giving employers appropriate answers to all of these questions (Wilson,
2008).
Strategic reward essentially aims to help employers finding sound and fitting solutions to
the current and, most of all, future issues, possibly avoiding or anticipating them, and
enable businesses to effectively and consistently sorting all of them out. All of this;
trying to balancing employer and individual wants and expectations.
Needless to say, the one-size-fits-all approach in this case, as in many other cases, is
most likely to produce detrimental effects rather than good ones. A strategic approach to
reward management, hence, entails and enables employers to focus on internal needs
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whilst considering and taking into due and careful consideration all of the forces and
indications coming from the external environment.
Reward philosophy
Each reward strategy has to be developed on the basis of a reward philosophy which,
according to the behaviour and standards an organization values the most, defines how
to reward individuals within the business. Reward philosophy main objective is hence
that to foster those standards and behaviour amongst staff and encourage people to
respectively meet and exhibit them (Longo, 2011).
Whether a reward philosophy should aim, for instance, to enhance productivity and
promote high performance and significant contribution to a firm efficiency, it would very
likely be based on the principle that individuals will be rewarded according to their actual
contribution to the business success and to the return on investment they are able to
generate.
Reward philosophies need to essentially develop from organizational values and beliefs
taking into account, in addition to organizational needs, also employee wants and
expectations, of which these have to be basically considered part (Armstrong, 2010). In
particular, staff expectations need to be taken into due consideration in order to avoid
breaching individuals psychological contract and trigger off the negative behaviour
usually associated with this occurrence.
General and fundamental tenets as fairness, impartiality, equal opportunities and equity
also need to be duly considered amongst the founding pillars of a sound reward
philosophy. The effectiveness and consistency of a reward philosophy, however, need to
be proved in practical terms rather than in theoretical ones.
Armstrong (2006) suggests that a reward philosophy should be strategic in that it should
strive to address “longer-term issues relating to how people should be valued for what
they do and what they achieve.”
The link between business strategy, reward strategy and reward philosophy is clearly
very tight. Being sensibly influenced and affected by the external environment a
business strategy is very likely to be subject to a frequent, and in some cases even
continual, process of change (especially in those cases in which strategy changes and
evolves at such a pace to be considered emergent). These changes are very likely to
produce in turn effects on reward strategy and philosophy, which can consequently
require amendments and adjustments from time to time. Employers should be aware of
and seriously consider this aspect too amongst all of the other factors influencing a
reward strategy and philosophy formulation and review (Longo, 2011).
External legal developments, for instance, have actually remarkably accounted for equity
and fairness to be taken into account amongst the tenets to consider when developing
reward philosophies. In many countries, governments have in fact introduced equal pay
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legislations to which employers, albeit this has not to be intended as a legal requirement
only, cannot, properly speaking, refrain from conforming to.
In order to help and facilitate the practical translation of a reward strategy and
philosophy into policies and practices, it is particularly important for organizations to also
identify a set of guiding principles defining the approach and guidelines to reward
management (Armstrong, 2006).
Guiding principles
Guiding principles can be considered as something in between a reward philosophy and
the policies and practices emanating from it. Broadly speaking they are intended to
facilitate the shift from theory to practice, but being based on an organization’s values
and beliefs they also aim to foster and apply these to the way individuals are rewarded
within an organization (Longo, 2011).
Being expression of organizations reward philosophy, guiding principles enable
organizations to consistently translate into actions, that is, into policies and practices,
what has more rhetorically been stated into a reward strategy and philosophy.
This might appear to be the most tedious and uninteresting part of reward management;
however, whether organizations should miss not only to carry this activity out, but also
to properly and carefully manage it, reward management practices implementation will
surely result in a complete failure. Particular care and attention need, hence, to be paid
to this aspect from the outset (Longo, 2011).
Moreover, although this part of the process is essentially concerned with theory, its
practical implications are absolutely remarkable and crucial for the successful
implementation of a reward strategy.
As suggested by Armstrong (2010), the guidelines and recommendations contained in
the guiding principles for the identification of the practical initiatives to implement are
also of paramount importance to communicate employees the mechanism of the reward
system and the solution adopted by the business in order to balance employee and
employer needs and expectations.
Guiding principles relate and are intended to establish and identify the position of the
organization vis-à-vis the most important reward issues. These are intended to help
employers to identify and fix some of the most important and frequent matters usually
associated with reward management and provide sound answers to the most frequent
questions arising during reward strategy and practices preparation. For instance: reward
employees on the basis of their contribution to organizational performance or strategy
achievement? Reward individuals according to their input and level of participation or
reward top performers only? Create a value proposition capable of attract and retain
quality staff at all levels or mostly intended for high-flyers only? Offering competitive pay
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regardless of fairness or equitable salaries? Amongst the most frequent and important
matters guiding principles need to settle, has not to be overlooked the definition of the
role played by line managers in reward practices execution (Armstrong, 2010).
Strategic extent of reward management
Even though the need for a strategic approach to reward management should be taken
as axiomatic, relatively recently, some Authors have cast doubt on the strategic value of
reward. Indeed, in some cases, more than the effectiveness of strategic reward it seems
that is the need for prudence and the necessity to empirically test strategic reward
theory the real reason for reservations. Whether this should actually be the case,
disquiet could be acknowledged and understood.
The Authors who firstly raised a certain degree of uncertainty over the strategic role of
reward management were Armstrong and Brown (2006) who, outlining the traits of new
strategic reward management, warned against the excess of attention paid by employers
and reward practitioners to reward design and planning rather than to its
implementation. The Authors basically stressed the negative attitude of reward
specialists, increasingly involved on emphasising the rhetoric of the strategic reward idea,
rather than its practical impact on business performance and results. Yet, some factors
such as the importance of line managers and communications, definitely critical for the
successful and consistent implementation of reward management practices, seem to be,
all too often, exceedingly neglected too. Armstrong and Brown (2006) also maintained
that business are usually over reliant on the effects of strategic reward and so
concentrated on using the best fit approach insofar as they end up to overlook the
growing pressures coming from the external environment. Rhetoric is usually so
predominant that not only the need for line managers having the necessary capabilities
and skills, but also reward managers and specialists assessment of expertise and
technical knowledge, are frequently underestimated and virtually ignored by employers.
This warning was subsequently echoed by Trevor (2008 and 2009) on account of the
findings of his research based on the analysis and comparison of a number of case
studies concerning multinationals organizations operating in the consumer goods
industry.
Findings of this extensive research revealed that not invariably, in terms of strategic pay,
what it is attained in practice coincides with what has been planned and designed in
theory. More in particular, the study revealed a sensitive gap between strategy, practices
and implementation. Ineffective and inappropriate strategy and policy execution can
clearly lead to generate a different employee perception vis-à-vis the employer
expectations and aims, ultimately causing reward practices implementation ending in
failure and the consequent withdrawal of the programmes associated with these.
The study also revealed that not always using strategic compensation, such as incentives,
can enable firms to motivate their staff from management to the shop floor. In some
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cases, organizations which considered pay as the main lever to induce motivation even
experienced some remarkable drawbacks. More in particular, employers had to deal with
the conflicts generated by the compensation system which in turn caused
disengagement, poor performance and unwanted behaviour. Yet, these conflicts also
usually need a good deal of time and resources to be managed and settled, contributing
to even keep further afield employers from the attainment of their strategic objectives.
Even though Trevor research provides strong support to the contingent, best fit model
he maintains that, at the same time, it also provides evidence of the existence of a
certain degree of isomorphism. The same managers were in fact moving from one
organization to the other. Yet, all of the multinational firms investigated were using to
have recourse to the same external consultancy (also in the case of different
consultancies caution is imperative in that these essentially adopt the same standardized
approach and provide the same professional solutions and advice). This contributed and
accounted for all of the businesses concerned to essentially introduce nearly the same
compensation practices, which clearly represents a risk of its own. This risk was further
reinforced by the dominating, wrong habit to introduce within a business determined pay
policies only because these have proved to work well in other firms.
According to Trevor (2008 and 2009), pay practices rather than being designed and
inspired by the economic circumstances are rather primarily driven by the social and