Managing Reward – A Step by Step Guide

Written by Andrew Johnson, Founder and CEO HRGuide - Thu 10th Oct 2024

Introduction

Pay and benefits are important in attracting, retaining and engaging employees. A range of options is available to reward workers and recognise their contribution. The most effective reward packages meet the needs of:

  • the business, and
  • its team members
  • the organisation’s purpose, culture and performance – i.e. what behaviours do you want to reward that exemplify the culture of the business. All this should be done in a fair and responsible way.

When developing a reward strategy one should explore the following elements:

  • structure and levels of your pay scheme
  • factors affecting pay progression
  • variable pay and bonuses
  • the role of employee benefits
  • non-financial rewards
  • total reward

What is reward?

The term ‘reward’ generally covers all financial provisions made to employees. It can include cash pay, and the wider benefits package (such as private medical insurance). It can also include wider provisions for employees, with the term ‘total reward’ sometimes used to encompass non-pay benefits, such as flexible working opportunities.

Pay may be divided into two categories:

  • Fixed (or base) pay is a guaranteed cash wage or salary paid to employees for doing their work for a contracted period, such as a 37-hour week. This can include location allowances and other associated guaranteed payments.
  • Variable pay is not guaranteed. It can include bonuses, incentives and overtime payments.

Managing Reward

The main reason for offering pay and benefits is to influence employee behaviour so they want to join and stay with an employer, and do their best in the job. Traditionally, organisations used:

  • salaries to attract people
  • benefits to help keep them, and
  • bonus and incentive schemes motivate them.

However, thinking has changed about which parts of reward are best suited for recruitment, retention and motivation. Individuals come, stay and perform for a range of financial and non-financial reasons, which can change over time depending on personal circumstances. In some situations, individuals may not consider the financial elements of a package that important. For instance, people at the beginning of their career may be more interested in career development whilst older employees may be interested in the amount of holiday available to them.

Employers should find out what attracts, keeps and inspires their current and future people, and explore how best they can meet these needs – as well as meeting the requirements of the business within the appropriate legal and regulatory environment. When creating a reward package, it’s also important that organisations integrate the various reward elements so that they support, rather than contradict, one another, such as the factors used to increase pay and give bonuses.

Because there are various elements to reward, it’s important to think about the appropriate mix of base to variable pay, fixed to flexible benefits, and financial to non-financial rewards to meet both employer and employee needs. When making decisions about how to reward and recognise contribution, it’s crucial to recognise the people risks involved.

Organisations should establish a reward strategy spelling out the aims of the various reward elements and how they are integrated. Because a reward strategy reflects the organisation’s purpose and values, it’s critical the organisation explains to employees what behaviours and performances it is rewarding, how, why, and when. This may include employee education, so that employees understand the benefits on offer.

Pay structures - Pay structures provide a framework for valuing jobs and understanding how these jobs relate to one another both within the organisation and to the external labour market.

Pay levels - There are several approaches to setting pay levels or ranges for jobs. Market rates are largely used in the private sector. Where market rates are used, employers need to decide where to pitch in-house rates (for example, at the median or the upper quartile). For example do you want to paying in the upper quartile (in the 25% of employers in your local market sector? Obviously you will attract the best talent to your business but it will cost you more money).

Pay awards - When setting the overall pay review budget for annual pay increases – which often includes performance-based pay rises as well as general pay structure movement (often known as the annual pay award or cost of living uplift) – key factors include:

  • ability to pay
  • inflation
  • the going rate of pay awards
  • market rate changes

Pay progression - Some businesses just provide an inflation-based pay award to Individuals. However, when everybody gets the same pay rise every year, this does not encourage performance beyond the norm.  A performance based pay award system  based on performance, competency and skills are common factors used to move individuals along salary bands or ranges. This rewards high performers and punishes non performance and can generate the necessary behaviours to drive growth and success in an organization.

Variable pay: Cash bonuses and incentives - Use of bonus and incentive awards can encourage future performance (incentives) or to recognise past performance (bonuses). Employers often have more than one bonus or incentive scheme with senior staff often treated differently.

Among those offering a performance-related reward scheme, common individual performance-related variable schemes include individual bonuses and sales commission. Profit-sharing and gain-sharing are common group performance-related plans.

The advantage of variable pay schemes is that they can link earnings closely to desired performance and, in theory, only pay out when there is reason to do so. However, the success of variable pay schemes depends on such factors as:

  • how performance goals are set;
  • the type of tasks being encouraged;
  • how fairly employees view the process and outcomes to be; and
  • the approaches used to allocate rewards.

Employee Benefits - Many employers offer a wide range of benefits. From traditional perks such as paid leave and pensions, to newer benefits such as unpaid leave or additional healthcare benefits.

Benefits are provided for a variety of reasons, including:

  • to match market practice,
  • to give some measure of health or disability security,
  • to retain employees.

There are various ways of offering benefits. For instance, flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') allow employees to vary their benefits package to meet their individual needs.

Other issues to consider include how the benefits on offer support the needs of the organisation and its employees, and how to communicate the benefits package, such as through Total Reward Statements.

Common benefits include:

  • Pension Schemes
  • Health Care Schemes
  • Welfare Helplines
  • Cycle to work schemes
  • Discounted benefits from local retailers
  • Life Insurance
  • Long Term Sickness Benefits

Many of these benefits can be at a relatively low cost to the employer but seen as a high value to employee.

Get expert advice on managing reward from HRGuide

Having a robust, transparent reward strategy is a powerful tool to attract, reward and retain your talent. 

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