Reward systems: Emerging trends and issues.

Abstract

Abstract In response to the emerging environmental pressures, organizations are transforming their structures and management systems. As a result, many organizations are rethinking their reward strategies to better align them with the new realities. This paper provides an overview of key considerations that must be kept in mind in developing organizational reward systems. Against this background, it examines four alternative approaches to rewards that have been recently suggested in the literature. These include skill-based pay, broadbanding, variable pay, and team rewards. The paper highlights relevant design issues that need to be addressed in developing and implementing these approaches. Today's organizations are faced with a highly dynamic, complex and competitive environment. In order to cope with this environment, organizations are undergoing fundamental changes in their structures and management systems. In this paper, we focus on the impact of these changes on employee reward systems. We begin by providing an overview of key requirements for effectiveness of reward systems. Next, we describe the prevailing reward systems in organizations and the pressures on these systems to change. We then provide a detailed discussion on selected new approaches to rewards. For each approach, the underlying logic is explained, the available evidence on its usage and experience is examined, and key design and implementation issues are highlighted.Designing Effective Reward SystemsThe primary purpose of organizational reward systems is to influence two types of employee behaviours: membership and performance. The former includes such behaviours as joining the organization, remaining with the organization, and coming to work regularly and punctually. The latter comprises the entire range of behaviours required in the performance of a given job or role. The specific context of each organization will determine the relative importance to be placed on membership and performance behaviours. For example, employee membership behaviours may be more important than performance behaviours to an organization that operates in a tight labour market or operates at a remote, undesirable location or employs technology which drastically limits the scope for variability in employee performance. The reverse might be true in other situations. Which specific membership and performance behaviours will be important will also depend upon the organizational context. For example, using the typology of business strategy developed by Miles & Snow (1984), one could argue that a different mix of specific job performance behaviours will be appropriate for a prospector organization that focusses on new products, markets, and technologies than a defender organization operating in stable markets and focussing on efficiency. The former will likely place greater emphasis on creative, risk-taking, and team-based behaviours while the latter on consistent, standardized, and cost-saving behaviours.In order to be effective in influencing behaviour, reward systems should satisfy three key design requirements. These requirements are derived from established behavioural science theories and research. The first requirement is that appropriate behaviour-reward contingencies be established i.e., rewards should be made contingent upon specific behaviours that are of importance to the organization. Reinforcement theory suggests that a response followed by a reward is more likely to occur in the future. Applied to organizational settings, the theory implies that employees learn to behave in ways that get rewarded and avoid behaviour that does not get rewarded (Lawler, 1981). The basis of learning here is the employee actually experiencing rewards following desired behaviour. Expectancy theory (Lawler, 1973; and Vroom, 1995) also emphasizes the importance of behaviour-reward relationships as a key motivational factor but it focusses more on expected rather than experienced rewards. …