Achieving the Specific Aims | Reward Management

Support the Achievement of Business Goals and High Performance

Reward management supports the achievement of business goals by helping to ensure that the organization has the talented and engaged people it needs. It contributes to the achievement of high performance by ensuring that the reward system recognizes and encourages it.

Support and Develop the Organization's Culture

Reward management can support and help to change the organization's culture by:

• stressing the importance of high performance through contingent pay and performance management;
• reinforcing the behaviours required in a high-performance culture;
• emphasizing that upholding core values is a major criterion when assessing performance;
• linking rewards specifically to behaviour that is in line with core values;
• demonstrating that the organization cares about the well-being of employees through the provision of pensions and other benefits.

Define the Right Behaviours and Outcomes

Reward management can define expectations through performance management and contingent pay schemes.

Reward People According to the Value They Create and What the Organization Values

People are assessed according to the contribution they make to achieving organizational goals and rewarded accordingly. Having defined expectations, reward management can provide for people to be rewarded in line with the degree to which people meet them. Managers should be aware of the results expected from people and the behaviour needed to achieve these results and to support the organization's values. The reward system should ensure that the results and behaviour are valued and recognized.

Align Reward Practices with Employee Needs

Employees need to be paid fairly for what they do, in line with the principles of distributive and procedural justice and equity as defined above. Their needs for recognition can be directly satisfied by the reward system and a total rewards approach will enable other needs such as those for growth, responsibility and autonomy to be met. Segmentation of rewards may be appropriate to reflect the different needs of employees.

Help to Attract and Retain High-Quality People

Pay levels are important means of attracting people to organizations, although the employer's reputation and the opportunities it provides for career development and scope to use skills and abilities are also important. Decisions to remain with an organization are affected by expectations on pay growth, feelings about the fairness of the reward system and comparisons with what could be earned elsewhere. This is what labour economists call the ‘sorting effect’.

Win the Engagement of People

Employee engagement takes place when people are interested in and positive, even excited, about their jobs and are prepared to go the extra mile to get them done to the best of their ability. A total rewards system can win the engagement of people through a mix of elements tailored to meet individual needs. These elements will include financial incentives but also other forms of non-financial rewards in the form of recognition, scope for growth and job design.

Factors Influencing the Achievement of the Aims

The achievement of the aims is influenced by the context and the reward strategy as affected by the context. The aims of total reward management are also affected by the concepts of the resource-based view, human capital management, human process advantage and HR process advantage.

Achieving the Aims in General | Reward Management

The overall approach to achieving reward aims is based on a philosophy and takes into account factors related to distributive and procedural justice, fairness, equity, consistency and transparency. It is also concerned with achieving strategic alignment and cultural/contextual fit, developing a high-performance culture and segmentation.

Reward Philosophy

Reward management is based on a well-articulated philosophy — a set of beliefs and guiding principles that are consistent with the values of the organization and help to enact them. The philosophy recognizes that if HRM is about investing in human capital from which a reasonable return is required, then it is proper to reward people differentially according to their contribution (ie the return on investment they generate).

The philosophy of reward management also recognizes that it must be strategic in the sense that it addresses longer-term issues relating to how people should be valued for what they do and what they achieve. Reward strategies and the processes that are required to implement them have to flow from the business strategy.

Reward management adopts a ‘total rewards’ approach that emphasizes the importance of considering all aspects of reward as a coherent whole that is linked to other HR initiatives designed to win the engagement of employees and further their development. This requires the integration of reward strategies with other HRM strategies, including talent management and human resource development. Reward management is an integral part of an HRM approach to managing people.

Distributive Justice

Distributive justice refers to how rewards are provided to people. They will feel that they have been treated justly if they believe that the rewardshave been distributed in accordance with the value of their contribution, that they receive what was promised to them and that they get what they need.

Procedural Justice

Procedural justice refers to the ways in which managerial decisions are made and reward policies are put into practice. The five factors that affect perceptions of procedural justice are:

• The viewpoint of employees is given proper consideration.
• Personal bias towards employees is suppressed.
• The criteria for decisions are applied consistently to all employees.
• Employees are provided with early feedback about the outcome of decisions.
• Employees are provided with adequate explanations of why decisions have been made.

Fairness

A fair reward system is one that operates in accordance with the principles of distributive and procedural justice. It also conforms to the ‘felt-fair’ principle. This states that pay systems will be fair if they are felt to be fair. The assumptions underpinning the theory are that:

• There is an unrecognized standard of fair payment for any level of work.
• Unconscious knowledge of the standard is shared among the population at work.
• Pay must match the level of work and the capacity of the individual to do it.
• People should not receive less pay than they deserve by comparison with their fellow workers.

This felt-fair principle has passed into the common language of those involved in reward management. It is sometimes used as the final arbiter of how a job should be graded (the so-called ‘felt-fair’ test), possibly overriding the conclusions reached by an analytical job evaluation exercise. Such tests are in danger of simply reproducing existing prejudices about relative job values.

Equity

Equity is achieved when people are rewarded appropriately in relation to others within the organization. Equitable reward processes ensure that relativities between jobs are measured as objectively as possible and that equal pay is provided for work of equal value.

Consistency

A consistent approach to reward management means that decisions on pay do not vary arbitrarily — without due cause — between different people or at different times. They do not deviate irrationally from what would generally be regarded as fair and equitable.

Transparency

Transparency exists when people understand how reward processes function and how they are affected by them. The reasons for pay decisions are explained at the time they are made. Employees have a voice in the development of reward policies and practices.

Strategic Alignment

The strategic alignment of reward practices ensures that reward initiatives are planned by reference to the requirements of the business strategy and are designed to support the achievement of business goals.

Contextual and Culture Fit

The design of reward processes should be governed by the context (the characteristics of the organization, its business strategy and the type of employees) and the organization's culture (its values and behavioural norms). The design will be affected by the political and social factors present in the organization.

Account should be taken of good practice elsewhere, but this should not be regarded as best practice (ie universally applicable).

Performance and Reward

Reward strategies, policies and practices focus on performance and contribute to the achievement of a high-performance culture. This is one in which people are aware of the need to perform well and behave accordingly in order to meet or exceed expectations. Employees will be engaged with their jobs and the organization and be prepared to exercise productive discretionary effort in getting their work done. Such a culture embraces a number of interrelated processes that together make an impact on the performance of the organization through its people in such areas as productivity, quality, levels of customer service, growth, profits and, ultimately, in profit-making firms, the delivery of increased shareholder value. In our more heavily service and knowledge-based economy, employees have become the most important determinant of organizational success. 

Segmentation

Different segments of the workforce, and individuals at different stages in their career, will be motivated by different combinations of rewards. A total rewards package should be tailored to meet these different needs. Organizations may consider segmenting their package for different types of jobs, or to reflect the different types and levels of contribution people make, or to respond to different needs. For example, it is usually appropriate to have different reward packages for sales and customer services staff because the nature of the sales or service role is different from that of, say, administration.

Characteristics of Reward Management

Reward management is fundamentally about people. It is stakeholder orientated, integrated, strategic and evidence based.

Reward Management and People

Reward management is concerned with people — especially the employees who are rewarded for their efforts, skills and contribution but also the directors, managers and reward specialists who plan, manage and administrate rewards. This is in accordance that:

organizations are the people in them:… people make the place. His point was that: Attraction to an organization, selection by it, and attrition from it yield particular kinds of persons in an organization. These people determine organizational behaviour… Positive job attitudes for workers in an organization can be expected when the natural inclinations of the persons there are allowed to be reflected in their behaviours by the kinds of processes and structures that have evolved there.

A Stakeholder Approach

The purpose of human resource management (HRM) is to meet the needs of all the stakeholders in the business — employees, customers, suppliers and the public at large as well as management and shareholders. Reward management shares that purpose. In doing so, it can make a significant contribution to meeting the varied needs of stakeholders successfully. It is accordingly concerned with improving business performance, shaping the behaviour of employees and developing a climate of trust. And reward management can best do this if it is evidence-based.

But there is also an ethical dimension. Reward management policies in association with HR policies can help to create a working environment that provides for the just, fair and ethical treatment of employees. These are policies about treating people properly and avoiding the creation of unacceptable reward practices that reflect badly on the organization. The bonus schemes for top management operated in the banks and elsewhere in the financial services sector are good examples of where reward policy and practice went wrong. They were against the interests of every stakeholder except the recipients of the huge sums of money involved.

Integrated Reward Management

Integrated reward management is an approach to reward management that provides for reward policies and practices to be treated as a coherent whole in which the parts contribute in conjunction with one another to ensure that the contribution people make to achieving organizational, departmental and team goals is recognized and rewarded. It consists of a related set of activities that impinge and impact on all aspects of the business and the HRM practices within it. In an integrated approach ‘each individual element of reward supports the other to reinforce organizational objectives.’

Integration takes three forms:

• Strategic integration: the vertical integration of reward strategy with business strategy.
• HRM integration: the horizontal integration of reward strategies with other HR strategies, especially those concerned with high performance, engagement, talent management and learning and development.
• Reward integration: the internal integration of reward to ensure that its various aspects cohere and that a total reward philosophy is adopted that means a full range of mutually supporting financial and non-financial rewards is used.

The integrated approach adopted by Aegon UK is:

• Reward: market driven, with overall performance dictating rate of progress of salaries within broad bands rather then existing grades.
• Recruitment: competency based, with multi-assessment processes as the basic approach.
• Performance management: not linked to pay, concentrated on personal development, objective setting and competency development.
• Training and development: targeted on key competencies and emphasizing self-development.

Strategic Reward Management

Strategic reward can be described as an attitude of mind — to be convinced of the virtue of systematically deciding what must be done and to believe in the need to plan ahead and make the plans happen. Strategic reward ‘is ultimately a way of thinking that you can apply to any reward issue arising in your organization, to see how you can create value. Its aim is to create reward processes which are based on beliefs about what the organization values and wants to achieve. It does this by aligning reward practices with both business goals and employee values.’ Strategic reward focuses on methods of achieving vertical, horizontal and internal integration.

Evidence-Based Reward Management

Evidence-based reward management is the management of reward systems on the basis of fact rather than opinion, on understanding rather than assumptions, on grounded theory rather than dogma. This is in line with the views of the logical positivists  that it is necessary to seek ‘analytical truths’ and that the fundamental question to ask when examining beliefs is: ‘How do you know what you think you know?’ It is also in accord that beliefs can only be expressed in statements that ‘face the tribunal of experience’.

Use is made in evidence-based reward management of the extensive research conducted over the last 50 years into how reward systems work in organizations and what can be done to improve them. It subjects the theories derived from this research to critical evaluation on their relevance and application in the context of particular organizations. Someone once said that ‘theory without practice is sterile, practice without theory is futile.’ But it should be remembered that, there is nothing as practical as a good theory: that is, one substantiated by rigorous research within organizations that tells you how it is and not how you think it is.

Importantly, evidence-based reward management also makes use of the information obtained from the detailed evaluation of the effectiveness and impact of existing reward practices and from systematic benchmarking. It is concerned with establishing what constitutes good practice, although it does not assume that good practice is necessarily ‘best practice’. What works well elsewhere will not necessarily work as well within the organization. In general, best fit is more important than best practice.

The Development Of Reward Management

The development of the concept of reward management and the reward system as described above has taken place over a number of years. An analysis of the overall developments is given in Figure 1.

Adapted from: Michael Armstrong and Duncan Brown (2006) Strategic Reward, Kogan Page, London

Figure 1: Overall developments in reward management

The contributions of the more influential commentators (mainly US) to these developments are summarized below.

Strategic Pay (Lawler)

Lawler emphasized that when developing reward policies it is necessary to think and act strategically about reward. Reward policies should take account of the organization's goals, values and culture and of the challenges of a more competitive global economy. New pay helps to develop the individual and organizational behaviour that a company needs if its business goals are to be met. Pay policies and practices must flow from the overall strategy and they can help to emphasize important objectives such as customer satisfaction and retention and product or service quality.

The New Pay (Schuster and Zingheim)

Lawler's concept of the new pay was developed by Schuster and Zingheim, who described its fundamental principles as follows:

• Total compensation programmes should be designed to reward results and behaviour consistent with the key goals of the organization.
• Pay can be a positive force for organizational change.
• The major thrust of new pay is in introducing variable (at risk) pay.
• The new pay emphasis is on team as well as individual rewards, with employees sharing financially in the organization's success.
• Pay is an employee relations issue – employees have the right to determine whether the values, culture and reward systems of the organization match their own.

But Lawler later emphasized that the 'new pay' ideology should be regarded as a conceptual approach to payment rather than a list of prescriptions, pointing out that: 'The new pay is not a set of compensation practices at all, but rather a way of thinking about reward systems in a complex organization… The new pay does not necessarily mean implementing new reward practices or abandoning traditional ones; it means identifying pay practices that enhance the organization's strategic effectiveness.'

Dynamic Pay (Flannery, Hofrichter and Platten)

Flannery, Hofrichter and Platten expounded the concept of 'dynamic pay' and suggested that the nine principles that support a successful pay strategy are:

1. Align compensation with the organization's culture, values and strategic business goals.
2. Link compensation to the other changes.
3. Time the compensation programme to best support other change initiatives.
4. Integrate pay with other people processes.
5. Democratize the pay process.
6. Demystify compensation.
7. Measure results.
8. Refine. Refine again. Refine some more.
9. Be selective. Don't take to heart everything you hear or read about pay.

Pay People Right (Zingheim and Schuster)

Zingheim and Schuster have laid down the following six principles for 'paying people right':

1. Create a positive and 'natural' reward experience.
2. Align rewards with business goals to achieve 'a win–win partnership'.
3. Extend people's 'line of sight' between effort and outcome, motivating 'smart working' over simply expending extra effort.
4. Integrate reward with strategic aims and the kind of contribution desired.
5. Reward individual ongoing (input) value to the organization with base pay.
6. Reward results (outputs) with variable pay.

The New Realism (Armstrong and Brown)

The US writers referred to above created the belief that reward management was a major lever for change, even the main lever. This view was tempered by Armstrong and Brown, who wrote:

Models of pay popularized in the 1980s and 1990s are not necessarily regarded as appropriate or workable in the 21st century. The belief that reward can be a leading driver of, rather than a contributor to, cultural change is not accepted in the UK so readily as it used to be. Mark Thompson at Oxford University writes that, 'Managing reward is often a job of short-term damage limitation, not the strategic lever for change that appears so seductive in the writing of American commentators'. The dream of all-powerful strategic reward, of the Tom Cruise Top Gun style reward managers described by Schuster and Zingheim has been subjected to a reality check.

Armstrong and Brown have suggested the following approach to reward strategy, which more realistically fits the UK scene. This has the following characteristics:

• appreciating that a good strategy is one that works and therefore focusing on implementation programmes;
• 'planning with implementation in mind' – recognizing during the design process that plans have to be converted into reality and taking steps to anticipate the problems involved;
• aligning reward strategies with the business and HR strategies;
• ensuring that reward strategy fits the culture and characteristics of the organization, meets business needs and takes account of individual needs and preferences;
• being aware of good practice elsewhere but not being seduced by the notion that it is best practice, ie universally applicable and easily replicated;
• paying more attention to using strategic reward initiatives to support the engagement and commitment of people so that they are motivated and productive, rather than focusing on the mechanics of new reward 'fads';
• bearing in mind that the development and implementation of reward strategy is an evolutionary process – it is about doing things better at a manageable pace rather than extraordinary new developments;
• providing 'flexibility within a framework', ie developing a flexible approach to the reward of different people but always within a framework that provides for consistent treatment;
• appreciating that implementing reward strategy will require a comprehensive change management programme;
• recognizing the importance of the part played by line managers in implementing reward strategy and the need to ensure that they are committed and have the necessary skills;
• paying close and continuous attention to communicating with employees and involving them in the development as well as the implementation of reward strategy;
• being absolutely clear about the objectives of the strategy and resolute about evaluating its effectiveness.

Factors Affecting Reward Management Policy And Practice

Reward management policy and practice are subject to a number of influences. As summarized below, these consist of contextual factors arising from the internal and external environment and conceptual factors relating to theories and beliefs about strategic management, total reward, human capital management, the factors affecting pay levels, motivation, engagement, commitment and the psychological contract.

The Internal Environment

The internal environment consists of the organization's culture and its business, technology and people.

The External Environment

The features of the external environment are competitive pressure, globalization, and changes in demographics and employment. 

Strategic Management

Strategic reward is an aspect of strategic management the purpose of which, is to 'elicit the present actions for the future' and become 'action vehicles – integrating and institutionalizing mechanisms for change'. Strategic management as 'the set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of an organization'.

However, strategic management in reality is not necessarily a formal, well-articulated and linear process. Strategies may be formulated as they are used, strategy emerges over time in response to evolving situations. He believes that business strategy is best regarded as a 'pattern in a stream of activities'. This applies equally to reward strategy.

Total Reward

Total reward policies provide for a holistic approach to be adopted to reward management, which ensures that all aspects of reward are treated as a coherent portfolio of policies and practices.

Human Capital Management

Human capital management (HCM) is concerned with obtaining, analysing and reporting on data, which informs the direction of value-adding people management strategic, investment and operational decisions at corporate level and at the level of front-line management. An HCM approach to reward management will assemble data on the effectiveness of reward management policies but in a more advanced form will attempt to assess the impact of remuneration policies on people and the business, thus informing strategic plans.

The Factors Affecting Levels of Pay

The factors affecting levels of pay influence pay decisions regarding the rate for the job, market rates and pay reviews.

Motivation

Motivation theory is important as a guide to the use of contingent pay and the non-financial elements of total reward.

Engagement and Commitment

The concepts of job engagement and organizational commitment also provide guidance on total reward policies and contingent pay.

The Psychological Contract

It is necessary to understand what the psychological contract is and its significance when formulating and implementing reward policy as a key aspect of relationships with employees.

Elements Of A Reward System

The elements of a reward system and the interrelationships between them are shown in Figure 1. A brief description of each element follows.

 

Figure 1: Reward system elements and interrelationships

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.

Non-Financial Tewards

Non-financial rewards do not involve any direct payments and often arise from the work itself, for example achievement, autonomy, recognition, scope to use and develop skills, training, career development opportunities and high-quality leadership.

Total Reward

Total reward is the combination of financial and non-financial rewards available to employees

The Reward System | Reward Management

The approaches to achieving the aims of reward management as described above are incorporated in the reward system of an organization. This consists of:

• Reward strategies, which set out what the organization intends to do in the longer term to develop and implement reward policies, practices, processes and procedures that will further the achievement of its business goals. For example, an organization may have a strategy to maintain competitive rates of pay.
• Reward policies, which set guidelines for decision making and action. For example, an organization may have a policy that sets the levels of pay in the organization compared with median market rates.
• Reward practices, which consist of the grade and pay structures, techniques such as job evaluation, and schemes such as contingent pay used to implement reward strategy and policy. For example, the policy on pay levels will lead to the practice of collecting and analysing market rate data, and making pay adjustments that reflect market rates of increase.
• Reward processes, which consist of the ways in which policies are implemented and practices carried out, for example the way in which the outcomes of surveys are applied and how managers manage the pay adjustment and review process.
• Reward procedures, which are operated in order to maintain the system and to ensure that it operates efficiently and flexibly and provides value for money. For example, a procedure will be used for conducting the annual pay review.

Achieving The Aims | Reward Management

The aims of reward management are achieved by developing and implementing strategies, policies, processes and practices that are founded on a philosophy, operate in accordance with the principles of distributive and natural justice, function fairly, equitably, consistently and transparently, are aligned to the business strategy, fit the context and culture of the organization, are fit for purpose and help to develop a high-performance culture.

Reward Philosophy

Reward management is based on a well-articulated philosophy – a set of beliefs and guiding principles that are consistent with the values of the organization and help to enact them. The philosophy recognizes that, if human resource management (HRM) is about investing in human capital from which a reasonable return is required, then it is proper to reward people differentially according to their contribution (ie the return on investment they generate).

The philosophy of reward management also recognizes that it must be strategic in the sense that it addresses longer-term issues relating to how people should be valued for what they do and what they achieve. Reward strategies and the processes that are required to implement them have to flow from the business strategy.

Reward management adopts a 'total reward' approach, which emphasizes the importance of considering all aspects of reward as a coherent whole that is linked to other HR initiatives designed to achieve the motivation, commitment, engagement and development of employees. This requires the integration of reward strategies with other HRM strategies, including talent management and human resource development. Reward management is an integral part of an HRM approach to managing people.

Distributive Justice

Distributive justice refers to how rewards are provided to people. They will feel that they have been treated justly if they believe that the rewards have been distributed in accordance with the value of their contribution, that they receive what was promised to them and that they get what they need.

Procedural Justice

Procedural justice refers to the ways in which managerial decisions are made and reward policies are put into practice. The five factors that affect perceptions of procedural justice are:

1. The viewpoint of employees is given proper consideration.
2. Personal bias towards employees is suppressed.
3. The criteria for decisions are applied consistently to all employees.
4. Employees are provided with early feedback about the outcome of decisions.
5. Employees are provided with adequate explanations of why decisions have been made.

Fairness

A fair reward system is one that operates in accordance with the principles of distributive and procedural justice. It also conforms to the 'felt-fair' principle. This states that pay systems will be fair if they are felt to be fair. The assumptions underpinning the theory are that:

• there is an unrecognized standard of fair payment for any level of work;
• unconscious knowledge of the standard is shared among the population at work;
• pay must match the level of work and the capacity of the individual to do it;
• people should not receive less pay than they deserve by comparison with their fellow workers.

This felt-fair principle has passed into the common language of those involved in reward management. It is sometimes used as the final arbiter of how a job should be graded, possibly overriding the conclusions reached by an analytical job evaluation exercise (the so-called 'felt-fair test'). Such tests are in danger of simply reproducing existing prejudices about relative job values.

Equity

Equity is achieved when people are rewarded appropriately in relation to others within the organization. Equitable reward processes ensure that relativities between jobs are measured as objectively as possible and that equal pay is provided for work of equal value.

Consistency

A consistent approach to reward management means that decisions on pay do not vary arbitrarily – without due cause – between different people or at different times. They do not deviate irrationally from what would generally be regarded as fair and equitable.

Transparency

Transparency exists when people understand how reward processes function and how they are affected by them. The reasons for pay decisions are explained at the time they are made. Employees have a voice in the development of reward policies and practices.

Strategic Alignment

The strategic alignment of reward practices ensures that reward initiatives are planned by reference to the requirements of the business strategy and are designed to support the achievement of business goals.

Contextual and Culture Fit

The design of reward processes should be governed by the context (the characteristics of the organization, its business strategy and the type of employees) and the organization's culture (its values and behavioural norms). Account should be taken of good practice elsewhere, but this should not be regarded as best practice, ie universally applicable. Best fit is more important than best practice.

Fit For Purpose

The formulation of reward strategy and the design of the reward system should be based on an understanding of the objectives of reward management and should be developed to achieve that purpose.

Developing a High-Performance Culture

A high-performance culture is one in which people are aware of the need to perform well and behave accordingly in order to meet or exceed expectations. Employees will be engaged in their work and committed to the organization. Such a culture embraces a number of interrelated processes that together make an impact on the performance of the organization through its people in such areas as productivity, quality, levels of customer service, growth, profits and, ultimately in profit-making firms, the delivery of increased shareholder value. In our more heavily service- and knowledge-based economy, employees have become the most important determinant of organizational success.

Lloyds TSB has produced the following definition of what they mean by a high-performance organization:

• People know what's expected of them – they are clear about their goals and accountabilities.
• They have the skills and competencies to achieve their goals.
• High performance is recognized and rewarded accordingly.
• People feel that their job is worth doing, and that there's a strong fit between the job and their capabilities.
• Managers act as supportive leaders and coaches, providing regular feedback, performance reviews and development.
• A pool of talent ensures a continuous supply of high performers in key roles.
• There's a climate of trust and teamwork, aimed at delivering a distinctive service to the customer.

A high-performance culture can be developed by taking into account characteristics such as those listed above and applying an integrated set of processes, of which reward is an important part. Besides reward, the processes will include those concerned with resourcing and talent management (ensuring that the organization has the high-performing people it needs), learning and development, performance management, the enhancement of the working environment (for example, work design and work/ life balance) and communication.