Financial and Non-Financial Reward Systems in Business
Payment or Financial Reward Systems
Hourly Wage Rate:
- Payment to a worker made for each hour worked.
- Offers security to workers but is not directly linked to effort.
Piece Rate:
- A payment to a worker for each unit produced.
- If set too low, it could demotivate workers, but if too high, it could reduce incentives.
Advantages:
- Encourages greater effort and faster work.
- Labor cost per unit can be determined in advance.
Disadvantages:
- Requires output to be measurable and standardized.
- May lead to falling quality.
- Provides little security over pay level.
Salary:
- Annual income that is usually paid on a monthly basis.
- The most common form of payment for professional, supervisory, and management staff.
Advantages:
- Gives security of income.
- Provides status.
- Suitable for jobs where output is not measurable.
Disadvantages:
- Can fail to motivate staff.
- Claims of manager favoritism can harm morale.
- May increase control over staff.
Commission:
- A payment to a salesperson for each sale made.
- Same advantages and disadvantages as piece rate systems.
Performance-Related Pay:
- A bonus scheme to reward staff for above-average work performance.
- Requires regular target setting, annual record of worker performance, and paying according to the degree by which objectives have been exceeded.
Advantages:
- Staff are motivated to improve performance.
- Target setting can help to give purpose and direction.
- Offers an opportunity for feedback on the performance of each individual.
Disadvantages:
- Can fail to motivate if staff don’t need financial rewards.
- Team spirit can be damaged.
- May lead to increased control over staff by managers.
Profit Sharing:
- A bonus for staff based on the profit of the business, usually paid as a proportion of basic salary.
- Some shareholders may not agree.
Advantages:
- Conflict between owners and workers is reduced.
- Design may not lead to higher worker effort.
- Can be successful in increasing motivation.
Disadvantages:
- Reward offered is not closely related to individual effort.
- Small profit shares are paid at the end.
- Will reduce profit available for owners.
Fringe Benefits:
- Non-cash forms of rewards such as a company car, free insurance, discounts on company products, etc.
Non-Financial Reward Systems
Job Rotation:
- Increasing the flexibility of the workforce and the variety of work they do by switching from one job to another.
Job Enlargement:
- Attempting to increase the scope of a job by broadening or deepening the tasks undertaken.
Job Enrichment:
- Involves the principle of organizing work so that employees are encouraged and allowed to use their full abilities, not just physical effort.
Job Redesign:
- Involves the restructuring of a job, usually with employee’s involvement and agreement, to make work more interesting, satisfying, and challenging.
Quality Circles:
- Voluntary groups of workers who meet regularly to discuss work-related problems and issues.
Worker Participation:
- Workers are actively encouraged to become involved in decision-making within the organization.
Team Working:
- Production is organized so that groups of workers undertake complete units of work.
Advantages:
- Workers are motivated, leading to greater productivity and reduced labor turnover.
- Complete units of work can be given to teams.
- Team working can reduce management costs.
Disadvantages:
- Not everyone is a team player.
- Teams may develop a set of values or attitudes that may conflict with those of the organization.
- Introduction of team working will require training costs.
Target Setting:
- The purpose is to enable direct feedback to workers on how their performance compares to the agreed objectives.
- The basic idea is that people are more likely to do well when they are working towards a goal that they helped to establish and identify.
Delegation and Empowerment:
- Involves passing down of authority to perform tasks to workers.
- Empowerment goes further, allowing workers some degree of control over how the task should be undertaken.
Evaluation of Payment Systems and Motivational Methods
- What works for some groups of workers might not be effective with others.
- Managers need to be flexible and adapt methods and approaches to the particular circumstances of their business and workforce.
- Attitudes and beliefs of senior managers are very influential.