Fundamental Concepts | Reward Management

Fundamental Concepts

The following fundamental concepts influence the aims of reward management, reward strategy and how people are valued.

The Resource-Based View

This is the view that it is the range of resources in an organization, including its human resources, that produces its unique character and creates competitive advantage. HRM delivers added value and helps to achieve sustainable competitive advantage through the strategic development of the organization's rare, hard to imitate and hard to substitute human resources. The situation in which people are employed with competitively valuable knowledge and skills, as one that confers ‘human capital advantage’.

The role of reward management is to contribute to the acquisition and retention of such people.

Human Capital Management

The concept of human capital is often associated with the resource-based view. ‘it is human capital that is the differentiator for organizations and the actual basis for competitive advantage’. Human capital management (HCM) is often described as being about measurement in the sense of obtaining, analysing and reporting on data relating to employees that inform HRM decisions. But it is sometimes defined more broadly without the emphasis on measurement. Chatzkel states that ‘Human capital management is an integrated effort to manage and develop human capabilities to achieve significantly higher levels of performance.’ HCM as ‘The total development of human potential expressed as organizational value’. He believes that ‘HCM is about creating value through people’ and this is a prime purpose of reward management.

Human Process Advantage

A distinction should be made between ‘human process advantage’ and ‘human capital advantage’. The former results from the establishment of ‘difficult to imitate, highly evolved processes within the firm’, while the latter follows from employing people with competitively valuable knowledge and skills. This suggests that one of the roles of reward management is to differentiate from rather than imitate the ‘best practices’ of other firms.

Motivation Theory

Motivation is the force that energizes, directs and sustains behaviour. Motivation theory explains how motivation works and the factors that determine its strength. It deals with how money and other types of rewards affect the motivation to work and levels of performance, what creates job satisfaction, and the link between job satisfaction and performance. It therefore influences decisions on how people should be valued, the choice and design of financial rewards and the use of non-financial rewards.

A distinction is made between extrinsic and intrinsic motivation. Extrinsic motivation occurs when things are done to or for people to motivate them. These include rewards, such as incentives, increased pay, praise, or promotion, and punishments, such as disciplinary action, withholding pay, or criticism. Intrinsic motivation is provided by the work itself.

There are four main categories of motivation theories as described below.

Instrumentality Theory

‘Instrumentality’ is the belief that if we do one thing it will lead to another. In its crudest form, instrumentality theory states that people only work for money. It assumes that people will be motivated to work if rewards and penalties are tied directly to their performance; thus the awards are contingent upon effective performance. Instrumentality theory has its roots in the scientific management methods ‘It is impossible, through any long period of time, to get workmen to work much harder than the average men around them unless they are assured a large and permanent increase in their pay.’

Content (Needs) Theory

This theory focuses on the content of motivation in the shape of needs. It provides guidance on what needs should be satisfied by the reward system if motivation is to occur. The basis of content theory is the belief that an unsatisfied need creates tension and a state of disequilibrium. To restore the balance a goal is identified that will satisfy the need, and a behaviour pathway is selected that will lead to the achievement of the goal and the satisfaction of the need. All behaviour is therefore motivated by unsatisfied needs. 

The main needs identified by these and other writers are those for achievement, recognition, responsibility, autonomy and the opportunity to develop and use skills. These have to be taken into account in deciding how people should be rewarded and also in achieving motivation through job design. But a note of caution is necessary. Content theories propose that to a large extent all people strive for the same fundamental goals. In fact, people are more varied and complex than this. Theories stating that there are strong similarities between people lead to the conclusion that there is ‘one best way’ to motivate and reward them, which is simply not true. Process theory as described below is based on more realistic, albeit more complex ideas.

Process Theory

In process theory, the focus is on the psychological processes or forces that affect motivation, as well as on basic needs. The three main theories are:

• Expectancy theory which states that motivation will be high when people know what they have to do to get a reward, expect that they will be able to get the reward and expect that the reward will be worthwhile.
• Goal theory which states that motivation and performance are higher when individuals are set specific goals, when goals are difficult but accepted, and when there is feedback on performance.
• Equity theory which states that people will be better motivated if they are treated equitably, and demotivated if they are treated inequitably. There are two forms of equity: distributive equity or distributive justice, which is concerned with the fairness with which people feel they are rewarded in accordance with their contribution and in comparison with others; and procedural equity or procedural justice, which is concerned with the perceptions employees have about the fairness with which company procedures in such areas as performance management, promotion and discipline are being operated.

The main distinction between content and process theory is that the former provides guidance on what needs should be satisfied by a reward system while the latter indicates how they should be satisfied, especially in pay schemes that are contingent on performance, contribution or skill. In their case, process theory is the most important.

Cognitive Evaluation Theory

Cognitive evaluation theory (CET) argues that placing strong emphasis on monetary rewards decreases people's interest in the work itself, thus dampening a powerful alternative source of motivation. In other words, extrinsic rewards erode intrinsic interest.

Principal Agent Theory

Principal agent theory, sometimes known as agency theory, is based on the supposition that the separation between the owners (the principals) and the agents (the managers) means that the principals may not have complete control over their agents. The latter may therefore act in ways which conflict with what the principals want. So it is desirable to provide for ‘incentive alignment’, which means paying for measurable results deemed to be in the best interests of the owners.

The Psychological Contract

A psychological contract is a set of unwritten expectations that exist between individual employees and their employers. It is concerned with: ‘The perceptions of both parties to the employment relationship of the reciprocal promises and obligations implied in that relationship’. A psychological contract is a system of beliefs that encompasses the actions employees think are expected of them and what response they expect in return from their employer, and, reciprocally, the actions employers believe are expected of them and what response they expect in return from their employees.

The concept of the psychological contract highlights the fact that employee/employer expectations take the form of unarticulated assumptions. Disappointments on the part of management as well as employees may therefore be inevitable. These disappointments can, however, be alleviated if managements appreciate that one of their key roles is to manage expectations, which means clarifying what they believe employees should achieve, the competencies they should possess and the values they should uphold. All this can be done through reward and performance management.