Jul 1, 2011

Contextual Factors | Reward Strategies

Reward strategies and practices must take account of the internal and external context — the concept of ‘best fit’.

Internal Context

The characteristic features of the internal context are as follows.

The Organization's Culture

Organizational culture consists of shared values, norms and assumptions that influence the way people act and the way things get done. In reward management, the most important aspects of culture that need to be taken into account are the core values of the organization, which express beliefs on what sort of behaviour is desirable. Reward practices should fit in with and support the culture and they can help to reshape it.

The Organization's Business or Sector

The business or sector of the organization, for example manufacturing, financial services, retail services, transport, media, public sector services, not-for-profit services or education — will govern its ethos and therefore its core values. It will influence the type of people it employs and the degree to which it is subject to turbulence and change. All these factors will contribute to the reward strategy.

Work Environment

The ways in which work is organized, managed and carried out will influence pay structure and the use of contingent pay. The introduction of new technology may result in considerable changes to systems and processes. Different skills are required, new methods of working and therefore reward are developed. The result may be an extension of the skills base of the organization and its employees, including multiskilling (ensuring that people have a range of skills that enable them to work flexibly on a variety of tasks, often within a teamworking environment). Traditional piecework pay systems in manufacturing industry have been replaced by higher fixed pay and rewards focused on quality and employee teamwork.


People's occupations may affect their wants and needs. Entrepreneurial directors or sales representatives may be more interested in financial incentives than, say, people engaged in charitable work. Reward strategies and policies should take account of the different needs of people and this may mean segmenting rewards to meet those individual needs.

Business Strategy

Where the business is going — the business strategy — determines where reward should go — the reward strategy. Integrating reward and business strategies means combining them as a whole so they contribute effectively to achieving the mission or purpose of the organization.

Political and Social Climate

Organizational politics and social factors such as the way people interact will affect how the organization functions and therefore what approach to reward management it adopts.

External Context

The following aspects of the external context may affect reward management policies.


Globalization requires organizations to move people, ideas, products and information around the world to meet local needs. Traditionally, discussions of international reward strategies and practices have tended to focus on an elite of expatriate workers, sourced from headquarter locations and rewarded in isolation from local country staff. We are now seeing a more diverse and complex pattern emerging, requiring a much more strategic approach.

Rates of Pay in the Market Place

The external environment exerts a major influence on rates of pay and pay reviews within organizations. Market or going-rate levels and movements have to be taken into account by organizations if they want their pay to be competitive. Some organizations are affected by national agreements with trade unions.

The Economy

The economy, whether it is in a boom or bust mode, will inevitably affect reward policy and practice. A recession such as the one that began in 2008 increases the attention organizations pay to getting value for money and reduces the amounts that can be distributed in the form of base and contingent pay and the scale of benefits provision.

Societal Factors

Views about reward held in society at large may affect internal reward policies. For example, the opprobrium levelled in 2009 at ‘fat cats’ in boardrooms and the bonus culture in the City may possibly have some influence on members of remuneration committees. Again, it may not.

UK Employment Legislation

The following pieces of UK legislation directly or indirectly affect pay policies and practices:
  • The Equal Pay Act 1970 and the Equal Pay (Amendment) Regulations 1983 provide that pay differences are allowable only if the reason for them is not related to the sex of the job holder. The Employment Act 2002 provides for the use of equal pay questionnaires. Equal pay legislation is described in Chapter 17.
  • The National Minimum Wage Act 1998 provides workers in the UK with a level of pay below which their wages must not fall — regardless of where they live or work or the sector or size of company in which they work. It is not a going rate. The government prescribes by regulation the minimum wage.
  • The Working Time Regulations 1998 provide, inter alia, for a limit of 48 hours on average weekly working time, which an individual worker may voluntarily agree to exceed, and a minimum of four week's paid annual leave subject to a 13-week qualifying period.
  • The Data Protection Act 1998 provides among other things that employees are entitled to make a formal request to access information on the personal data held on them and the uses to which this will be put.
  • The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) provide that when a business or part of a business is transferred, the workers in that business automatically transfer into the employment of the transferee together with their existing terms and conditions of employment (except for pensions) intact and with their accrued periods of continuous service.
  • The Financial Services Act 1986 places restrictions on the provision of financial advice to employees. Only those who are directly authorized by one of the regulatoryorganizations or professional bodies are permitted to give detailed financial advice on investments.

The Trade Unions

Trade unions influence reward practices at national level through national pay negotiations, pronouncements on such issues as the pay of top executives, and exerting pressure to achieve equal pay. They produce policies and advice for their members on job evaluation (they are in favour of analytical schemes while emphasizing the need for involvement in their design), pay structures (they tend to be against broad-banded structures) and performance-related pay (they are generally hostile to it, preferring the traditional service-related incremental scales).


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