REWARD SYSTEM AND ITS IMPACT ON EMPLOYEE MOTIVATION

Shisir Kumar Sethi

UGC- Research Fellow,Department of Industrial Relations & Personnel Management,

Berhampur University, Berhampur

Dr. Satyabrata Patro

Assistant Professor, PG Department of IR&PM, Berhampur University, Berhampur

Abstract

In the present situation every organization are realizing that they have to establish an

equitable balance between the employee’s contribution to the organization and the

organization’s contribution to the employee. Establishing this balance is one of the main

reasons to reward employees. Organizations that follow a strategic approach to creating this

balance focus on the three main components of a reward system, which includes,

compensation, benefits and recognition. Most of the studies that have been conducted on the

topic indicate that the most common problem in organizations today is that they miss the

important component of Reward, which is the low-cost, high-return ingredient to a well-

balanced reward system. The aim of this study is to investigate how rewards and recognition

has an impact on employee motivation.

Keywords: Reward, Motivation, Employee, Organisation, Recognition

1. Introduction

In order for an organization to meet its obligations to shareholders, employees and society, its

top management must develop a relationship between the organization and employees that

will fulfil the continually changing needs of both parties. At a minimum the organization

expects employees to perform reliably the tasks assigned to them and at the standards set for

them, and to follow the rules that have been established to govern the workplace.

Management often expects more: that employees take initiative, supervise themselves,

continue to learn new skills, and be responsive to business needs. At a minimum, employees

expect their organization to provide fair pay, safe working conditions, and fair treatment.

Like management, employees often expect more, depending on the strength of their needs for

security, status, involvement, challenge, power, and responsibility. Just how ambitious the

expectations of each party are, vary from organization to organization. Kreitner and Kinicki

(1992), suggest that motivation represents “those psychological processes that cause the

arousal, direction and persistence of voluntary actions that are goal directed.” If it is the role

of managers to successfully guide employees toward accomplishing organizational

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objectives, it is imperative that they understand these psychological processes. On the other

hand Hafiza et al (2011) pointed out that working conditions, worker and employer

relationships, training and development, job security and companies overall policies and

procedures for rewarding employee have an impact on employee performance. However a

large number of researches (Pratheepkanth, 2011: Qureshi et al, 2010: Deeprose, 1994:

Zaman, 2011) have divulged that reward system causes satisfaction of employee, which

directly influences the performance of the employee.

2. Literature Review

According to Armstrong (2008), performance management is a systematic process for

improving organizational performance by developing the performance of individuals and

teams. He further explained it is means of getting better results by understanding and

managing performance within an agreed framework of planned goals, standard and

competency requirements. In addition to that Armstrong and Murlis (1994) define

performance management as “a process or set of processes for establishing shared

understanding about what is to be achieved, and of managing and developing people in a way

which increases the probability that it will be achieved in the short and longer term.” To

measure employee performance organization s use performance appraisal in order to ensure

of achievement of goals. Organizations measure under Employee performance employee

productivity, job quality, job accomplishment, willingness to exert extra effort, commitment

and goal achievement. (Yapa, 2002: Dharmasiri and Wickramasinghe, 2006: Taljaard, 2003).

Carraher et al (2006) advocate that there should be an effective reward system to

retain the high performers in the organization and reward should be related with their

productivity. Mehmood (2013) points out rewards play a vital role on increasing employee

rewards and change the behaviour of dissatisfies employees. A well as he elucidates a fair

reward system could build job satisfaction and productive behaviour in employees. Reward

system helps to improve organizational performance as well as it fulfills other objectives such

as legal compliance, labour cost control, perceived fairness towards employees and

enhancement of employee performance to achieve high level of productivity and customer

satisfaction. (Maire & Nick, 2002).

2.1 Definition of rewards

Monetary rewards are legal obligations in the employment relationship and are critical

incentives to attract and retain employees. However, the relevant literature indicates that

rewards transcend monetary boundaries and several reward categorisations have been

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proposed (Chen, Ford & Farris, 1999; Katz & Van Maanen, 1977; Malhotra, Budhwar &

Prowse, 2007; Weatherly, 2002). A classic categorisation by Porter and Lawler (1968)

distinguishes between intrinsic and extrinsic rewards. Porter and Lawler defined intrinsic

rewards as the satisfaction that a person derives from doing the job and extrinsic rewards as

tangible benefits obtained as a result of doing the job, such as pay and promotions. Mottaz

(1985), on the other hand, differentiated between task, social and organisational rewards.

Task rewards are intrinsic by nature and refer to the inherent aspects of an employee’s duties

such as the responsibility and autonomy he or she is given in completing a task and the

importance of the task for the overall organisation. Conversely, social and organisational

rewards are extrinsic rewards. Social rewards refer to non job related factors such as the

interpersonal relationships with colleagues and supervisory support. Organisational rewards

appertain to visible rewards provided by the organisation such as pay, bonuses and fringe

benefits (Katz & Van Maanen, 1977; Malhotra et al., 2007; Mottaz, 1985). Rewards have

also been classified as either monetary or nonmonetary. Monetary rewards refer to tangible

objects, such as pay, bonuses, promotions and formal recognitions, whilst non-monetary

rewards are non-tangible and include praise and personal recognitions (Weatherly, 2002).

3. Intention of Reward System:

The term rewards though many used different terminology, such as “total compensation” and

understood the purpose of total rewards to attract, motivate and retain employees. The term

“total rewards” means all aspects of pay, benefits and anything that employees feel is of value

and combination of all rewards both monetary and nonmonetary.

A competitive package of the entire list of remuneration and recognition tools offered by an

employer that enables an organization to leverage itself as an employer of choice. The total

rewards elements are intended to be used holistically in the following factors:

Organizational environment

Stakeholders

Employee expectations

In the current economic landscape it was expected Certified Compensation Professional

(CCP) and/or Certified Benefits Professional (CBP) designations were the most familiar with

concepts related to the design and administration of total reward systems.

3.1. The Context of Total Rewards

A total rewards strategy was informed like:

Organizational culture

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Business strategy

Human resource strategy.

In reviewing the total rewards system it is felt that the context of the total reward system

might be overlooking several external factors as well as several important stakeholders:

a. External factors

Citizens’ needs and desires

Responsibility to the public

b. Stakeholders

Elected officials

Taxpayers

Unions.

However, the total rewards system is not intended to be exhaustive; additional external

factors whether for the public or private sectors are acknowledged as important.

4. CONCEPTUAL FRAME WORK

The Following Conceptual Model is formulated to illustrate the relationship between Reward

System and Employee Motivation. The study examines the relationship between rewards and

employee motivation. Motivation is taken as dependent variable and intrinsic and extrinsic

rewards are taken as independent variable. The framework of the proposed conceptual model

is shown in figure no.1 in below:

(Figure: 1, prepared by own)

4.1. Reward and Motivation

Intrinsic rewards stem from Maslow’s higher level needs (Roberts, 2005). It proposes that

people can give themselves rewards in the form of self-esteem as well as in feelings of

achievement and growth. Individuals can literally reward themselves for certain kinds of

behaviour because they feel they have accomplished something of worth, achieved a personal

goal, learnt a new skill, or experienced excitement or intellectual stimulation. It would appear

that the greatest amount of motivation is present when people perform tasks that are both

intrinsically and extrinsically rewarding (Lawler, 2003). Wright (2007) emphasized on public

Reward

System

Employee

Motivation

Intrinsic

Rewards

Extrinsic

Rewards

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ethos, while Frank and Lewis (2004) have stressed the importance of public employees in

such work characteristics as meaningful service and job security. As stated by Tippet and

Kluvers (2009), there is a significant and positive relationship between intrinsic rewards and

employee motivation. Human beings are motivated by requirements that fulfill their needs.

These depend on many factors and vary by the individual requirements and necessary

situation.

In order to maximize the performance of the employees organization must make such

policies and procedures and formulate such reward system under those policies and

procedures which increase employee satisfaction and motivation (Hafiza et al. 2011).

Sometimes management pays more attention to extrinsic rewards but intrinsic rewards are

equally important in employee motivation. Intangible or psychological rewards like

appreciation and recognition plays a vital role in motivating employee and increasing his or

her performance. From the study by Badrinarayan and Tilekar (2011), it found that job

security, career advancement opportunity has a very positive impact on motivation.

5. ASPECT OF REWARD SYSTEM

Reward system refers to the procedure, rules, and standards associated with the allocation of

benefits and compensation to employees. An employee reward system consist of an

organisations integrated policies, processes and practices for rewarding its employees in

accordance with their contribution , skill and competence and their market worth. A typical

reward system basically comprises of; financial reward and non-financial reward system

which depends on the performance, the below model developed by the researcher as depicted

in the figure no.2 reward system (Shisir Kumar Sethi, 2015).

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(Prepared by own, 2020)

A. Financial Reward

Financial reward refers to financial benefits offered and provided to employees I return of

the services they provide to the organisation. It includes:

11.. Direct Methods: they are given at a regular interval at a definite time and include the

following:

Basic wage/Salary: an employee’s base salary is the minimum annual money

received, or the standard salary that and employee receives for doing a specific job.

Basic salary is the core of salary, and many other components may be calculated

based on this amount. It is determined by personal factors such as age, years of

employment, academic qualification, sex, etc.

Bonus: bonus represents a share of profits made by an industry as a result of the joint

contribution of capital and labour in a particular year. Bonus is more an ex-gratia

Personal

growth

Recognition

Responsibility

Influence:

Achievement

Basic

wage/Salary

Bonus

Incentives

Allowances

Leave policy

Overtime

Policy

Insurance

Hospitalisation

Leave Travel

Retirement

Benefits

Holiday

Homes

Direct method In-Direct Method

Reward System

Financial

reward

Non-financial

reward

Performance

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payment. Bonuses can be based o objective goal attainment or a subjective rating.

Examples of bonuses include:

Attendance bonus

Profit-related bonus

Performance bonus payments for high achievers

Work study related bonus payments for manual workers in manufacturing

or local authorities.

Allowances: allowance is generally defined as fixed quantity of money or other

substances given regularly in addition to salary for the purpose of meeting some

particular requirements connected with the service rendered by the employee or as

compensation for unusual conditions of that service. Some other well-known

allowances like: (Dearness Allowance, House Rent Allowance, Travel Allowance,

Daily Allowance incase of outstation travel, Shift Allowance, etc.)

Incentives: An incentive is anything which attracts an employee’s attention and

stimulates him to work more effectively. Incentive programmes are usually built on

financial rewards abut may also include non-financial rewards. It acts as an

inducement to employees for achieving higher productivity and profitability for the

organisation.

22.. Indirect Method: Indirect methods refer to extra benefits or fringe benefits offered

and provide to employees in lieu of the services provide by them to the organisation.

They include following:

Leave policy: the leave policy enables the employees in organisations to enjoy the

leaves allotted to them. It is the right of employee to get adequate number of leave

while working with the organisation. The organisations provide paid leaves such as:

casual leaves, medical leave, maternity leave, etc.

Overtime Policy: Overtime is the time put in by employees and work done by them

beyond normal hours of work. According to the factories act 1948, every worker is to

be paid overtime at a higher rate, generally double the normal wage rate.

Insurance: Organisations also provide accidental insurance and life insurance to their

employees. This gives them the emotional security and they feel themselves valued in

the organisation.

Hospitalisation: the employee’s should be provided allowances to get their regular

checkups, for example, at an interval of one year. Even their dependents should be

eligible for the mediclaims that provide them emotional and social security.

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Leave Travel: The employees are provided with leaves and travel allowances to go

for holiday with their families. Some organisations arrange tours for their employees.

This is usually done to make the employees stress free.

Retirement Benefits: organisations provide pension plans and other benefits for their

employees which benefits them after they retire from the organisation at the

prescribed age.

Holiday Homes: Organisations provide holiday homes and guest house for their

employees at different locations. The organisations make sure that the employees don

not face any kind of difficulties during their stay in the guest house.

B. Non-Financial Reward: non-financial reward consists of the satisfaction that a person

receives from the job itself or from the psychological and physical work environment in

which the person works. Non-monetary rewards are of no actual financial value to the

employee, but they provide him with the stimulus to increase his work performance.

Non-financial rewards can be given in the following forms:

Achievement: the need for achievement is defined as the need for competitive

success measured against a personal standard of excellence. Achievement

motivation can take place by providing people with the opportunity to perform

and the scope in their jobs to use their skills and abilities.

Recognition: recognition means showing appreciation to employees for

effective performance, significant achievements and important contributions to

the organisation. It may be any gesture from the employer which should come

at the right time. Even a word of appreciation from employers would motivate

the employees to maintain the same level of performance or do even better.

This positive form of recognition is known as praise. Praise, however, should

be given judiciously and it must be related to real achievements.

Responsibility: people can be motivated by being given more responsibility

for their own work. This is essentially what empowerment is about and is in

line with the concept of intrinsic motivation based on the content of the job. It

is also related to the fundamental concept that individuals are motivated when

they are provided with the means to achieve their goals.

Influence: people can be motivated by the drive to exert influence or to

exercise power. The organisation, through its policies for involvement can

prove motivation by putting people in to situation where their views can be

expressed, listened to and acted upon.

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Personal growth: the personal growth of any individual is a unique

experience. An individual who is experiencing such growth senses his or her

development and can see bow his or her capabilities are being expanded. By

expanding capabilities, a person is able to maximise or atleast satisfy skill

potential.

6. Motivation and the Theory of Expectancy

There are various theoretical frameworks on motivation: Maslow, Herzberg, McClelland,

Expectancy, and Equity. But, it is worth declaring, based on field research, that no

motivational theory on its own can fully explain human motivation. In this chapter,

expectancy theory, as proposed by Victor Vroom, will be addressed, since it is a more

contemporary theory and possesses a direct relationship between performance and reward.

Expectancy theory was proposed by Vroom in the 60s. He states that an employee

will be motivated to work hard when he/she believes their efforts will produce a performance

which, when recognized, will lead them to having rewards that have value to them (Vroom &

Kenneth, 1968). This theory is targeted on the workplace. It is considered a theory of process,

and not simply of content, because it identifies relationships between dynamic variables that

explain the behaviour of people at work. Vroom developed a multiplicative model between

the three variables: Valence, Instrumentality and Expectancy. According to him, what

motivates a person to make a decision is a product of these three variables: of how much a

person desires a reward (valence); his/her estimate of the probability that effort will result in

successful performance (expectancy); and his/her estimate that that performance will be a

means to get the reward (instrumentality). Thus, a person will reduce their efforts if he/she

believes that they will not achieve the required performance, if they believe that it is

impossible to achieve the rewards or if they believe that the reward is undesirable. According

to Vroom, achieving rewards to which a large value is assigned leads a person to making

more intensive efforts.

7. Overview of Reward systems

There is much empirical evidence that suggests that reward systems influence the behaviour

and performance of the members of organizations (Maltz & Kohli, 2002, Furtado et al.,

2009). According to Humphrey (1987) a reward is appropriate when the employee

contributes in an extraordinary way to the profits of the organization. To qualify for a reward,

the goal must be clear, meaningful and consistent with other rewards for similar goals. For a

reward system to be effective and to be able to encourage motivation it needs to satisfy some

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individual need of an employee, in particular, besides keeping track of the changes in their

needs. Otherwise, it is unlikely to achieve the performance desired. In more recent studies,

Kaplan (Kaplan & Henderson, 2005) states the importance of formal or informal incentives in

organizations and their being used, in some companies, as a way of stimulating an increase in

the performance of employees. He points out, however, the following concern regarding the

measurement systems on which they are based: “Incentive systems are usually based on

measures that are subject to interpretation. Although the economics literature says that these

parameters, despite being subjective, are instantly understood by everyone in the company,

our argument is that building a common understanding of what the relationship is between

actions and results is not such an easy thing to obtain”. (Kaplan & Henderson, 2005). The

main problem for most reward systems in organizations is not related to the measurement of

performance, but rather to the distortions introduced by those which are being measured

(Austin, 1996). Aligned to this way of thinking, Baker (Baker et al., 1994) states that the

reason for any dysfunction caused by changing behaviour is not related to pay-for-

performance systems in themselves itself, but by inappropriate measures of performance on

which these systems are based. He assumes that objective measures of performance are

imperfect. Therefore, reward contracts based solely on these measures create distorted

systems.

8. Impact on Employee Motivation

Many managers believe that using positive motivation techniques encourages employees to

produce more and better quality work. Now Companies were using both positive

reinforcement and negative reinforcement to motivate employees. For example, some

companies select an employee as "Employee of the Week." This technique praises the

winning employee, while positively encouraging other employees to keep trying to do well.

Other managers believe negative reinforcement motivates employees to stop bad behaviour.

For example, a company may issue a written-warning system, or threaten employees with

termination to get them to perform a certain way.

8.1. Rewards

Companies reward their employees with both tangible goods, as well as praise. For example,

a sales department may offer a monthly bonus to the highest earner. Not all tangible rewards

come in the form of money. Some companies host free lunches, or give away company gear

to good workers. Many managers choose to reward their best employees by simply praising

them for a job well done, or by recognizing the hard work they put in to a project.

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8.2. Advantages

By using positive reinforcement to motivate employees, a manager may build a good

relationship with his employee that fosters a sense of trust. In a good manager-subordinate

relationship, employees may feel respected and comfortable in their working environment.

Providing rewards, both tangible and in the form of praise, can make employees happier.

Happier employees often perform better at work place.

9. Conclusion

The study attempts theoretically to examine an effective reward system and the relationship

between extrinsic and intrinsic rewards with motivation among employees performance on

how the reward should be distributed among people. Employers should continuously try to

develop such a pay policies and procedures that will enable them to attract, motivate, retain

and satisfy their employees. Rewards systems could motivate employees to give their

maximum efforts towards assigned work. Therefore, it seen as a sense of commitment to put

in place appropriate incentive plans that will encourage employee to improve their

performance and organizational productivity.

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