Pay and reward

Published on July 7, 2011 Reviewed on May 31, 2020   28 min

Other Talks in the Series: Human Resource Management

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Hello. My name is Charles Cotton and I work for the CIPD as their adviser on performance and reward. In this area, I'm responsible for policy and practice development, as well as public policy and media commentary.
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What do we mean by reward and why is it so important? Nowadays, when talking about pay and benefits, HR and reward professionals usually take a holistic and integrated approach. What I mean by that, is reward is seen as comprising everything that an individual finds of value in the working environment. This definition includes financial and non-financial rewards, incentives, and benefits. Let's examine this a bit more. Cash pay comprises fixed elements such as salary and location payments. For instance, if working in an expensive city, cash pay may also comprise variable elements such as bonuses, overtime, and incentives. Now an incentive is an award to encourage future employee contribution or performance, while a bonus tends to reflect past contribution or performance. An example of an individual scheme would be sales commission, where the more an individual sells, the more they can earn. While an example of a bonus could be a profit share, where staff would get a sum at the end of a period, linked to the profit that their firm had made. Bonuses and incentives can be linked to individual, team or organisational achievement, or a combination, such as individual and team. They can also relate to outputs such as performance, or inputs such as behaviours, or a mixture of both, which is usually called contribution. What is important is that such elements as performance and behaviours can be easily defined, measured, managed, and appraised so both employees and employers know what's being done and why. One approach to fixed and variable pay that some employers have adopted is to reward individual effort through a pay rise and collective effort through a bonus. Another is to reward individual contributions with a bonus and employees only enjoy a pay rise if the market rate for that job has increased. While others link a salary increase to a union negotiated settlement and a bonus to organisational success. Now non-cash pay could include company shares or stock options. It could also include the deferment of a cash bonus over a number of years or the payments of a proportion of the bonus in company shares that have to be held for a number of years before they are sold. Such approaches can help retain staff. If they leave the organisation, they could lose that amount of deferred cash or shares. It can also be used to reduce the risk of rewarding inappropriate behaviours. For instance, if the bonus is awarded over four years and an employee won't be encouraged to focus on the short term and make a quick profit at the expense of long-term customer satisfaction.