The elements of a reward system and the interrelationships between them are shown in Figure 1. A brief description of each element follows.
Business Strategy
The starting point of the reward system is the business strategy of the organization. This identifies the business drivers and sets out the business goals. The drivers are unique to any organization but will often include items such as high performance, profitability, productivity, innovation, customer service, quality, price/cost leadership and the need to satisfy stakeholders – investors, shareholders, employees and, in local authorities, elected representatives.
Reward Strategy and Policy
The reward strategy flows from an analysis of the business drivers. The question is: 'How can these be supported by reward in order to achieve the goals of the business?' The reward strategy will define longer-term intentions in such areas as pay structures, contingent pay, employee benefits, steps to increase engagement and commitment and adopting a total reward approach.
Reward policy will cover such matters as levels of pay, achieving equal pay, approaches to contingent pay, the use of job evaluation and market surveys and flexing benefits.
Base or Basic Pay
The base rate is the amount of pay (the fixed salary or wage) that constitutes the rate for the job. It may be varied according to the grade of the job or, for shop floor workers, the level of skill required.
Base pay will be influenced by internal and external relativities. The internal relativities may be measured by some form of job evaluation. External relativities (going rates) are assessed by tracking market rates. Alternatively, levels of pay may be agreed through collective bargaining with trade unions or by reaching individual agreements.
Base pay may be expressed as an annual, weekly or hourly rate. This is sometimes referred to as a time rate system of payment. Contingent pay or allowances as described later may be added to base pay. The rate may be adjusted to reflect increases in the cost of living or market rates by the organization unilaterally or by agreement with a trade union.
Contingent Pay
Additional financial rewards may be provided that are related to performance, competence, contribution, skill or experience. These are referred to as 'contingent pay'. Contingent payments may be added to base pay, ie 'consolidated'. If such payments are not consolidated (ie paid as cash bonuses) they are described as 'variable pay'.
Employee Benefits
Employee benefits include pensions, sick pay, insurance cover, company cars and a number of other 'perks'. They consist of elements of remuneration additional to the various forms of cash pay and also include provisions for employees that are not strictly remuneration, such as annual holidays.
Allowances
Allowances are paid in addition to basic pay for special circumstances (eg living in London) or features of employment (eg working unsocial hours). They may be determined unilaterally by the organization but they are often the subject of negotiation. The main types of allowances are location allowances, overtime payments, shift payments, working conditions allowances and stand-by or call-out allowances made to those who have to be available to come in to work when required.
Total Earnings
Total earnings (financial rewards) consist of the value of all cash payments (base pay, contingent pay and allowances, ie total earnings).
Total Remuneration
Total remuneration consists of the financial rewards represented by total earnings plus the value of the benefits received by employees.
Job Evaluation
Job evaluation is a systematic process for defining the relative worth or size of jobs within an organization in order to establish internal relativities and provide the basis for designing an equitable grade structure, grading jobs in the structure and managing relativities. It does not determine the level of pay directly. Job evaluation can be analytical or non-analytical. It is based on the analysis of jobs or roles, which leads to the production of job descriptions or role profiles.
Market Rate Analysis
Market rate analysis is the process of identifying the rates of pay in the labour market for comparable jobs to inform decisions on levels of pay within the organization and on pay structures. A policy decision may be made on how internal rates of pay should compare with external rates – an organization's market stance.
Grade and Pay Structures
Jobs may be placed in a graded structure according to their relative size. In such a structure, pay is influenced by market rates, and the pay ranges attached to grades provide scope for pay progression based on performance, competence, contribution or service. Alternatively, a 'spot rate' structure may be used for all or some jobs in which no provision is made for pay progression in a job.
Performance Management
Performance management processes define individual performance and contribution expectations, assess performance against those expectations, provide for regular constructive feedback, and result in agreed plans for performance improvement, learning and personal development. They are a means of providing non-financial motivation and may also inform contingent pay decisions.
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Employee Benefits
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