MGMT2718

Human Resource Management

Lecture 12:
Remuneration, Rewards and
Performance-Based Pay

Introduction
Recap

PA dual purposes developmental and judgemental

Lay basis for termination
PA is very difficult to get right
Importance of felt fairness if PA is to be acceptable and not to
undermine morale > especially if linked to remuneration
Dangers: - many orgs are moving away from PA

Shields:
Technically demanding: difficult to do well, easy to do badly
Signs of reward mismanagement: perceived inequity; reduced
commitment; poor engagement
Constructively critical, non-managerialist, pluralist approach

Introduction
1. Rewards: Nature and Purpose
Types and typologies of rewards: Direct vs Indirect,
Extrinsic vs Intrinsic

2. Base Pay
Job-based, person based

3. Performance-related reward
Individual vs collective (short & long term)

4. Critical Considerations
Dangers of PBP > Importance of communication and
involvement

Types of employee reward

anything tangible (eg pay) or intangible (praise) that an organization
offers to its employees in exchange for their contribution to the
organization. (Shields)

A reward system has four primary objectives

vTo attract (or buy) the right people at the right time for
the right jobs, tasks or roles.
vTo retain the best people by satisfying their work-related
needs and aspirations, and recognizing and rewarding
their contribution.
vTo develop (or build) the required workforce capabilities
by recognizing and rewarding employees actions to
enhance their knowledge, skill and ability.
vTo motivate employees to contribute to the best of their
capability by recognizing and rewarding high individual
and group contributions towards meeting the
organizations strategic objectives.

and six secondary objectives: to be

1.Needs-fulfilling of value to employees in fulfilling their
needs
2.Equitable or felt fair commensurate with individual
contributions and with the rewards received by others
3.Legal should comply with relevant legal requirements re
employees rights and entitlements esp minimum pay
levels and I would add anti-discrimination requirements
4.Affordable should be within the orgs financial means
5.Cost-effective there should be an appropriate return on
investment
6.Strategically-aligned should support the orgs strategic
objectives.
These can come into conflict

Intrinsic versus extrinsic rewards

Intrinsic rewards arise from the content of the job
Interest, challenge, task variety, autonomy, feedback,
significance ie elements of JQ
Effectiveness as motivators cf Content theories

Extrinsic rewards arise from factors associated with

but external to the job that the employee does.

financial rewards
developmental rewards
social rewards.
Ie Process theories of motivation

Financial Rewards
Base pay the fixed component of total remuneration
Benefits like the employer contribution to
superannuation, workers compensation insurance
Performance-related pay, including incentives which
vary with measured performance.
Aka variable pay, at risk pay
The greater the component of at risk, the more

Motivating?
Effective as an employee control system?
Potentially disruptive to the employees life?

Motivation theories
Content Process and Equity as discussed
Agency theory
Potential conflict of interests between
principles (owners) and agents (managers)
PBP = best way of aligning interests of agents and
principles when outcomes are linked to remuneration
But this can go wrong when agents capture the
remuneration process, and pay themselves exhorbitant
bonuses issue of executive pay
rewarded themselves often at expense of shareholders
and customers GFC

Debates: motivation theories

Question claimed effectiveness of extrinsic rewards
intrinsic rewards are the only effective ones
Cognitive Evaluation Theory if a reward is
attached to job content, people will revise their
motivations and attitudes
If PBP is reduced, people will adjust their
psychological contract
Importance of employee influence in design of PA
and PBP.
Role of unions: usually excluded; decline in density
and influence

2) Base Pay: Job-based and person-based

Job-based base pay: Two ways of determining:
1. Market Surveys: what are similar employers paying for
similar jobs? external competitiveness
The organisation decides where it wants to position itself
in relation to average
2. Job Evaluation (JE)
First, establish job content - tasks, duties and
responsibilities through JA (>PD) job size is crucial idea
Then, determine the value of the job through JE
internal equity

Job Evaluation
The systematic determination of the relative worth of
jobs within an organisation : how big or how small a
job is.
Basis for establishing the organisations job hierarchy and
associated pay structure.
Outcome of process = Job Grading or Classification
Two approaches: whole job (qualitative) and job
factors (quantitative)

Example of job ranking

Job Grading or Classification: Points Systems

Identify job related factors
Eg education, experience, responsibility, mental demands
(stress), physical demands
Allocate points to each eg.

Dangers:
What counts for points (what is compensable)?

Person-based base pay

Pay for skill or competency of the job demands, OR of
the person occupying the job
Person description output of JA

But: what is competence and skill?

Hard, technical skills and qualifications
Soft skills? (communication skills, coordination,
awareness) hard to measure and weight and often left
uncodified; use of proxies maturity
Skill set and skill elements components
Deep competencies EI; leadership; composure
soft skills in another guise?

Job-based versus person-based pay

3) Performance-related reward: Individual vs

Collective (short vs long)

Individual
Performance Pay (merit)
Shields and Stone call them merit based pay systems
Problematic, cf lean payment systems in Japan in 1980s

Even so merit raises on basis of appraised

performance for past year (at risk) rolled into base pay incremental
Not same as seniority (not at risk)

Merit bonuses
NOT rolled into base pay has to be re-earned each
year
Piece rates, commissions, goal-based bonuses
Even in kind or vouchers

Collective performance pay plans

appropriate when work is interdependent and
organized in cross-functional teams and where
individuals in a team or work group make
contributions to output that are difficult to distinguish
Dangers of unleashing peer pressure

OR social loafing free riding

3 kinds
Profit-sharing (whole org)
Gain-sharing (individual component of org)
Goal-sharing (goal based bonuses)

Collective Long-Term Equity Incentive Plans

Share Grant; Share purchase; Employee Options

Performance-related reward plans

4) Criticism of performance-related rewards

undermine intrinsic interest in the job
motivate people to pursue the reward rather
than do a good job
are instruments of behavioural manipulation and
punishment
rupture cooperative work relationships
ignore or mask the reasons underlying work
problems
discourage sensible risk-taking [Kohn]

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Conclusion: (Shields)
Can work in certain cultures and contexts if not in
others
Effectiveness and felt fairness depend on:
Link between pay and performance how the perf
criteria are designed
How well the link is explained and communicated
And conforms to procedural and distributive justice
Reward Communication
To sharpen the line of sight between perf and pay
(me) Appeal Mechanism is important
But this probably makes it unwieldy!

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