cannot be expected to receive it every month. Differently from fixed pay and with some
exceptions, the various existing forms of variable pay are in fact hardly received by
individuals on a monthly basis, but are rather more frequently received on an annual
basis. Yet, the circumstance that an amount of money in the form of variable pay earned
on a given year will not necessarily be repeated on the following ones accounts for this
type of pay being also dubbed “pay at risk.”
Individual entitlement to receive variable financial rewards can be associated and
determined on the basis of three different main indicators:
The performance and results achieved by the organization,
The outcome produced by the team or unit to which the employee contributes,
The performance and results directly achieved by the individual him/herself.
These different ways to link the payment of additional rewards to each individual enable
employers to influence employee performance not only individually but also as members
of a team. The final aim is hence that to encourage individual contribution to the success
of the unit they work with and ultimately facilitate the attainment of the business aim
and objectives (Management Study Guide, 2012).
Components of variable reward
The components of variable pay can be grouped in two main categories, in one group
can be included all of those elements of variable pay which can be considered work-
related, whereas in the other grouping can be included all of those elements which are
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mostly linked to outcome and performance, regardless of the circumstance that these
are associated with individual, unit or organizational results.
Can be defined as work-related components of variable reward the additions which
employers pay to employees for the extra activities they perform. The reference is to the
quantitative rather than to the qualitative aspect of a person’s activity. Being genuinely
and exclusively correlated to the quantitative aspect of the work, these additions are
paid by employers in proportion to the real additional quantity of work undertaken by the
individual concerned, irrespective of the results this has produced during the relevant
period of time.
Another sub-category of work-related variable rewards is represented by the extra cash
employers pay to their staff for the occasional working activity these carry out at
unsocial hours, holidays and night. Also in these cases, the fact that the working
activities are performed only occasionally and under specific circumstances accounts for
individual entitlement to the additional payment depending on the real quantity of time
worked under these specific conditions.
Table 23 – Components of variable reward
Such variable supplements could also be offered by organizations to individuals working
according to extended service cover-associated patterns of work, in addition to a fixed
allowance already granted for the same reason. In practice, employers could opt to offer
employees a combination of a fixed allowance associated with the fact that these
undertake their work in disagreeable circumstances and a supplement whose amount will
be commensurate with the effective duration of the working activity under the unusual
circumstances. In this case, employers might decide to grant individuals more modest
fixed allowances since these will be increased by the variable supplements offered on top
of these.
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Usually, these types of additions are paid at a higher rate than the standard hourly rate;
their amount is in fact typically determined by adding to the base hourly rate a pre-set
percentage of this.
The other grouping, differently from the work-related grouping where payments are
made according to quantitative measurements, includes the forms of financial reward
that employers offer employees for the outcome or level of performance they produce
individually, as components of a team or for the results achieved by the business.
Work-related variable rewards
Overtime
The term overtime is used to indicate the compensation paid by employers to employees
for the additional time these work, with reference to a given spell, beyond the statutory
or contractually agreed working time. The working time which needs to be taken as a
reference might vary according to the circumstances: in some cases it could be identified
with the daily working hours, whereas in some other cases with the weekly working
hours, that is, the total number of hours that have to be worked by an employee during
the entire week as stated in the written contract of employment. In the former case the
supplement is paid on the basis of the additional time worked by a person separately in
each single day, regardless of the total number of hours which this has worked during
the whole week. In the latter case overtime will be paid for the extra time eventually
worked by an individual during the entire week, in excess of the total number of weekly
hours. The difference between the first and the second case is that in the second case it
might occur that an employee could work more hours in one or more day of the week
compensating this extra time working fewer hours in other days of the same week. In
this circumstance, the individual will not be entitled to receive any additional sum of
money for overtime.
In some cases, especially when employers might have varying needs during the different
months of the year, as it could be the case of seasonal activities, such a type of balance
could be operated and achieved over a longer period of time. Employers having a given
number of FTEs on a permanent contract basis might in fact find it more financially
sound and savvy enabling individuals to work more hours during determined periods of
the year and let them to compensate these during other less work-intense periods of the
year. In the end, the total number of hours worked by every employee concerned over
each year should clearly result unchanged and unaltered. For this working pattern being
welcomed or, if anything, fully accepted by staff and eventually by Unions and Works
Councils, employee salary has to be maintained unchanged along the overall considered
term. This will ensure employees to have a stable income throughout the year. Usually,
such an approach is used over a length of time not exceeding 3/4 consecutive months. It
basically enables employers to better face workloads during predictable peak periods,
avoiding to pay overtime, and to manage in a more productive and efficient way their
human capital throughout each financial year.
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Although overtime represents a supplement employees receive in the form of variable
pay, the sums received to this extent are essentially linked to the normal activity carried
out by individuals and are basically and genuinely associated with the quantitative side
of their job. People work more than contractually agreed and they are, by extension,
compensated accordingly.
Night shifts, weekends, holidays and unsocial hours additions
Whenever employees are called to work during unsocial hours, weekends and holidays
not on a regular basis but in a completely occasional fashion, individuals are entitled to
the payment of cash additions directly linked to the number of hours actually worked.
These supplements are usually calculated applying a predetermined additional
percentage of the base hourly rate of pay received by each individual.
Performance-related variable rewards
Bonuses and incentives
Performance related pay and more in general variable pay, are usually paid by
employers to staff in the form of bonuses and financial incentives. Indeed, there is not a
widespread agreement about the exact definition and aim associated with the ideas of
bonus and incentive.
According to the CIPD (2012), incentives are mostly aimed at encouraging future
performance, whereas bonuses are more in particular aimed at rewarding the attainment
of specific outcomes and results already achieved by individuals, hence past performance.
Similarly, the ACAS (2006) associates the payment of bonuses with individual
performance and objectives attainment, whilst incentives would be paid by employers to
employees in order to favour the development and improvement of the standard of
quality of the services and products offered by an organization, including customer
service. It can thus be concluded that for the ACAS too incentives should more directly
be associated with future performance and outcomes.
In contrast, Torrington et al (2008) define as incentives the cash supplements which
individuals receive for their performance on the basis of specific agreements they reach
with employers, whereas bonuses as “gratuitous payments” whose determination does
not directly depend on individuals performance and outcomes such as, for instance,
Christmas bonuses. The main feature of incentives will hence be associated with
individuals awareness about what employers are expected from them or, to put it
another way, with the knowledge of what they have to do in order to be receive this
form of variable pay. The payment of these additions is therefore strictly associated with
and consequent to the attainment of a predetermined objective or outcome. The amount
of bonuses, in contrast, whose payment is not linked to individual performance, would
escape out of employees control as for their determination (Torrington et al, 2008).
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Armstrong (2010) defines bonuses as payments of cash that employers offer to their
staff for organization, unit or individual goals achievement. The Author also adds that
bonuses practically enable businesses to reward individuals for the attainment of
exceptional objectives and to provide recognition to those who, although being at the top
of the salary range of the relevant grade, continue to perform well. It clearly seems that
the supported idea is that these supplements are actually linked to achievements, rather
than to future performance. Incentives are rather basically meant to encourage
individuals to go the extra mile and induce discretionary behaviour, “do this and we will
make it worth your while”, a method to some extent based on the stick and carrot
approach. Furthermore, incentives not necessarily have to be associated with cash, also
non-financial recognition as promotion or challenging assignments have to be indeed
considered as forms of incentives (Armstrong, 2010).
In practice the two terms bonus and incentive are very often used as substitute the one
of the other. It could be said that incentives represent the pre-phase of the payment of
bonuses or other forms of financial supplements and additions, or rather, the explication
of the rules and the determination of the objectives which need to be attained by a
person in order to receive a determined amount of extra cash in the form of a bonus.
The terms bonus and incentive do not indeed refer to the achievement of well-defined
and universally identified objectives; neither can the payment of these supplements be
associated with specific reasons valid for all the employers. Bonuses can be paid to
individuals for a whole range of reasons, in any case essentially associated with the
attainment of positive results or outstanding performance; incentives can be agreed with
individuals in order to encourage them to attain a wide range of different objectives. The
latter represent the means to an end, whereas the former the end itself.
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References
Advisory, Conciliation and Arbitration Service, (2006), Pay systems – Advisory
booklet; London: ACAS.
Chartered Institute of Personnel and Development, (2012), Reward and pay: an
overview – Factsheets; London: CIPD.
Grabham, A. , (2003), Composition of pay, Labour Market Trends, August.
Incomes Data Services, (2011), London Allowances 2011; London: IDS.
Industrial Relations Service, (2012), Survey Report; London: IRS.
Karvy, (2012), Hum – Tum – Report No. PF / HT / 010707 /238, 1st July 2007,
Hyderabad: Karvy.
Labour Research Department, (2012), Workplace Report; London.
Management Study Guide, (2012), Components of compensation – Part II.
National Health Service, (2012), NHS Terms and conditions of service handbook –
Amendment number 27; London: NHS.
Northern Ireland Civil Servants, (2012), HR Policy, Version 4.0; Belfast.
People and Business Integration Consulting, (2011), 2012 National salary band
recommendations IOG (Institute of Groundsmanship); Addlestone: PBI.
Royal College of Nursing, (2012), High cost area supplements; London.
The London Weighting Advisory Panel, (2002), Report of the London Weighting
Advisory Panel – London Weighting; London: Greater London Authority.
Torrington, D., Hall, L. and Taylor, S. , (2008), Human Resource Management, 7th
Edition; London: Prentice Hall.
Unison Bargaining Support, (2012), London Allowances; London: Unison.
University of Oxford, (2005), Oxford Dictionary of English; Oxford: Oxford University
Press.
Western Australian Industrial Relations Commission, (2012), Award Circular –
Government Officers Salaries, Allowances and Conditions award 1989, Circ. 1 -2012.
WorkplaceInfo, (2012), Allowance payments; Sidney: New South Wales Business
Chamber.
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Section VI
Non-financial Reward
Meaning and composition of non-financial reward
Employers have realized and learned over the years that reward systems exclusively
based and relying on financial rewards were no longer effective and that in order to
attract and retain quality staff they had to extend the contents of their value proposition.
This can be basically considered as the most compelling argument forming the basis for
the total reward idea development.
The circumstance that individuals are different one another and that each person wants
tend to change with the passing of time, insofar as neither a rule of thumb could be
identified in order to exactly determine individual preferences except than directly asking
them, has possibly contributed to the development of the current dominant trend
according to which non-financial rewards have acquired a growing significance, especially
over the last decades, within firms’ overall reward systems.
Non-financial rewards are in general associated with all of the benefits an individual or a
group of individuals working within an organization receive in every form but money. It
is, therefore, widely acknowledged that many forms of reward have to be considered as
non-financial rewards albeit being tangible, directly or indirectly associable with money
and despite their financial appreciation and worthiness can be rather objectively
evaluated. Idea which will be later challenged.
Differently from financial rewards, one of the main and characterizing features of non-
financial rewards is that these are essentially intangible. More in particular the term
intangible refers to the circumstance that non-financial rewards are expressed by
something which can neither be shown nor touched and with which, it can be added,
cannot be associated a specific and objective financial value.
Some non-financial rewards, such as for example learning and training programmes,
could also be actually the object of an indirect financial appreciation, as for instance the
programme enrolment fees and the attendance costs. However, this financial
appreciation does not necessarily coincide with nor is representative of the perception
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that each individual might have of the same programme. Some individuals might
attribute to a training programme a high value, whereas others might not even consider
this worth the money the employer needs to pay in order to offer it to the employees.
Notwithstanding, since training and learning opportunities are provided by employers to
employees in direct correlation with their working activities, for instance: to enable them
to improve their performance, to give individuals more responsibility and more
challenging assignments, to help individuals feel more confident and able to work
autonomously; regardless of the financial value associated with these opportunities,
these are anyhow ultimately aiming to improve and make it better for employees the
working experience and can hence be attributed to the job itself.
On the other hand associating a precise financial value with a non-financial reward
deriving from the job itself such as feedback, praise, involvement, autonomy and
participation becomes clearly much trickier and even virtually impossible.
An additional important distinguishing feature of non-financial rewards, vis-à-vis financial
rewards, is that the former can either be intrinsic or extrinsic whereas the latter can only
be extrinsic. Are intended as extrinsic those kinds of rewards which can be considered
external, or rather, not directly associated with or deriving from the activities and the
job carried out by a person. Financial rewards are clearly paid by employers to
individuals for the work they perform, but the financial rewards employees receive for
their work are neither directly deriving from nor are expression of the activities they
carry out. As such, money is considered as a form of reward external and detached from
the activities performed by a person, hence extrinsic. These kinds of rewards are likely
to provide individuals with a sense of stability. Receiving a salary from their employers
certainly contributes to provide individuals a certain degree of serenity and confidence as
for what concerns both their professional and personal situations.
Conversely, non-financial rewards like job enrichment, feedback, job design,
empowerment and job involvement and participation are clearly strictly related and
deriving from the job itself. In these circumstances people feel awarded just when they
are performing their activities. It is hence the concomitant feeling of achievement and
fulfilment they perceive during their working activities which they feel and consider as
rewarding. Money is clearly provided to employees for their work but at a different time.
Yet, it does not necessarily provide individuals with the same feeling of fulfilment as
intrinsic rewards do.
Some types of non-financial rewards can also be considered extrinsic, that is not directly
deriving from a pleasant and compelling working experience, but as a direct
consequence of this. As suggested by Armstrong (2010), some kinds of non-financial
rewards such as praise, feedback and recognition can be considered as individual
extrinsic rewards and some others, such us work-life balance and learning and
development, as collective extrinsic rewards.
To properly assess in which grouping a given form of non-financial reward should be
included, what needs to be taken into consideration is the active phase of the job, hence
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