Performance Management and Reward Practices

Today organizations are showing a high degree of commitment towards reinforcement of reward practices which are aligned with other HR practices and the goals of the organization for attracting, retaining and motivating employees.

Efficient reward practices helps in attracting result driven professionals who can thrive and succeed in performance based environments. Hence, it is a crucial motivator and may contribute towards the enhancement of the productivity of the employees if implemented properly.

For example, Continental Airlines as a part of their turnaround strategy introduced on time bonus incentive package according to which an employee will gain a bonus of $65 every month for ensuring on time flight operations.

An effective reward system should be linked with the performance development system, which focuses on performance based pay and offers ample learning opportunities along with a healthy work environment.

Variable pay can play a crucial role in boosting the performance of the employees especially the star performers instead of the fixed pay packages. Few such reward practices may take the forms of gain sharing, bonuses, team based incentives, profit sharing, ESOP’s and equity based incentive awards.

An efficient management of reward system may have a beneficial effect upon the performance in several ways - instilling a sense of ownership amongst the employees, may facilitate long term focus with continuous improvement, reduces service operating costs, promotes team work, minimizes employee dissatisfaction and enhanced employee interest in the financial performance of the company.

Few organizations like General Mills, reward their employees for attaining new skills which may add value to the organizational performance and thereby facilitate job rotation, cross training and self managed work teams.

Few organizations also recognize exceptional performance by providing recognition awards and lump-sum merit awards for winning employee commitment and attaining long term beneficial results. Example, TISCO, offers instant or on the spot rewards, monthly rewards and annual rewards to its employees under its ‘Shabashi scheme’.

A healthy pay for performance strategy should incorporate the following components as is provided in the table given below:

Pay for Performance Strategy
CategoryPerformance MeasuresBasis for Rewards
Corporate LeadersBSC, shareholders returns and EVAEmployee stock ownership and profit sharing.
Business Unit LeadersProfitability of the unitResults Sharing.
Functional LeadersLevel of contribution towards the corporate goalsMilestone Awards
General EmployeesSpecific KRA’s achieved measured periodicallyProfit/gain sharing, bonuses
Source: Sullivan E (1999), “Moving to a pay for performance strategy: Lessons from the Trenches”, In Risher, H(Ed.), Aligning Pay and Results, AMACOM:NY.

Today, variable pay is a very vital component in the reward practices of an organization and it differs across various sectors also.

A table given below presents the trends in the usage of variable pay component across different sectors in two different years:

Sector2001 (Variable pay in %)2005 (Variable pay in %)
Financial Services19.223.5

Rewards can be a vital source of motivation for the employees but only if it is administered under right conditions. Few strategies which improve the effectiveness of rewards are given below:

  • Linking rewards with the performance

  • Implement team rewards for the interdependent jobs for example Xerox.

  • Ensuring that the rewards are relevant. Example Wal-Mart, rewards bonuses to the top executives which is based on the company’s overall performance whereas the frontline employees earn bonus on the basis of the sales figure or targets attained by their store.

  • Ensuring that the rewards are valued by the employees.

  • Checking out for the undesirable consequences of administration of any reward practice.

Besides the monetary rewards, the contemporary employees desire for non monetary rewards which may be in the form of better career opportunities, skills development and recognition programs. Many IT and project based organizations give much importance to non-monetary rewards for maximizing employee satisfaction.

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