REWARD SCHEMES FOR EMPLOYEES AND MANAGEMENT
　　A major part of performance management involves managing employees and managers, as their performance will have a major effect on the performance of the organisation as a whole. This article looks at how reward schemes can be used to influence the * of employees
　　MEANING OF REWARD SCHEMES
　　A broad definition of reward schemes is provided by Bratton:
　　‘Reward system refers to all the monetary, non-monetary and psychological payments that an organisation provides for its employees in exchange for the work they perform.’
　　Rewards schemes may include extrinsic and intrinsic rewards. Extrinsic rewards are items such as financial payments and working conditions that the employee receives as part of the job. Intrinsic rewards relate to satisfaction that is derived from actually performing the job such as personal fulfilment, and a sense of contributing something to society. Many people who work for charities, for example, work for much lower salaries than they might achieve if they worked for commercial organisations. In doing so, they are exchanging extrinsic rewards for the intrinsic reward of doing something that they believe is good for society.
　　OBJECTIVES OF A REWARD SCHEME
　　What do organisations hope to achieve from a reward scheme? The following are among the most important objectives:
　　1. To support the goals of the organisation by aligning the goals of employees with these.
　　2. To ensure that the organisation is able to recruit and retain sufficient number of employees with the right skills.
　　3. To motivate employees.
　　4. To align the risk preferences of managers and employees with those of the organisation.
　　5. To comply with legal regulations.
　　6. To be ethical.
　　7. To be affordable and easy to administer.
　　ALIGNING THE GOALS OF THE ORGANISATION AND EMPLOYEES
　　The reward scheme should support the organisation’s goals. At the strategic level, the reward scheme must be consistent with the strategy of the organisation. If a strategy of differentiation is chosen, for example, staff may receive more generous benefits, and these may be linked to achieving certain skills or achieving pre determined targets. In an organisation that has a strategy of cost leadership, a simple reward scheme offering fairly low wages may be appropriate as less skilled staff are required, new staff are easy to recruit and need little training, so there is less incentive to offer generous rewards. The US supermarket group Walmart competes on low cost. It recruits employees with low skills, and pays low wages. It discourages staff from working overtime, as it wishes to avoid paying overtime rates.
　　TO RECRUIT AND RETAIN SUFFICIENT EMPLOYEES WITH THE RIGHT SKILLS
　　If rewards offered are not competitive, it will be difficult to recruit staff since potential employees can obtain better rewards from competitors. Existing staff may also be tempted to leave the organisation if they are aware that their reward system is uncompetitive.
　　High staff turnover can lead to higher costs of recruitment and training of new staff. Losing existing employees may also mean that some of the organisation’s accumulated knowledge is lost forever. For many knowledge-based organisations, the human capital may be one of the most valuable assets they have. High technology companies such as Microsoft are companies that trade on knowledge, so offer competitive remuneration to key staff.
　　TO MOTIVATE EMPLOYEES
　　Motivation of employees is clearly an important factor in the overall performance of an organisation. Organisations would like their employees to work harder, and be flexible. The link between reward schemes and motivation is a complex issue that is hotly debated in both accounting and human resource-related literature.
　　A well-known theory relating to motivation is Maslow’s hierarchy of needs. Maslow stated that people’s wants and needs follow a hierarchy. Once the needs of one level of the hierarchy are met, the individual will then focus on achieving the needs of the next level in the hierarchy. The lower levels of the hierarchy are physiological, relating to the need to survive （eg eating and being housed）； once these have been met, humans then desire safety, followed by love, followed by esteem, and finally at the top of the hierarchy, self actualisation, or self fulfilment.
　　Applying Maslow’s hierarchy of needs to reward schemes suggests that very junior staff, earning very low wages will be motivated by receiving higher monetary rewards, as this will enable them to meet their physiological needs. As employees become progressively more highly paid, however, monetary rewards become relatively less important as other needs in the hierarchy, such as job security, ability to achieve one’s potential, and feeling of being needed become more important.
　　Herzberg argued that increasing rewards only motivates employees temporarily. Once they become de-motivated again, it is necessary to ‘recharge their batteries’ with another increase. A far better way to motivate employees is to ‘install a generator in an employee’ so they can recharge their own batteries; in other words to find out what really motivates them. According to Herzberg, it is the intrinsic factors in a job that motivate employees, such as ‘achievement, recognition for achievement, the work itself, responsibility and growth or advancement.’ Giving greater responsibility to employees, for example, can increase motivation.
　　Perhaps the conclusion to be gained from this is that monetary rewards alone are insufficient to motivate employees. Other factors such as giving greater recognition and greater responsibility may be equally important, for example giving praise at company meetings, promoting staff, and involving staff more in decision making.
　　ALIGNING THE RISK PREFERENCES OF MANAGERS AND EMPLOYEES WITH THOSE OF THE ORGANISATION
　　Managers and senior employees make decisions on behalf of the company, acting as agents of the company. It is desirable that the risk preferences of these employees should match the risk preferences of the organisation and its stakeholders. One problem with many reward schemes is that managers are too risk averse, and will not make investments that may risk their targets not being met.
　　The events leading up to the financial crisis of 2008 are a good example of the opposite situation, where the risk appetites of employees at investment banks did not match the risk appetites of the owners. During this period, individuals working in the banks were paid large commissions for selling mortgage loans to customers. The problem was that the employees were selling loans to customers that posed a large risk to the banks, due to their low credit worthiness.
　　The problem was confounded by the fact that in many cases, the employees of the banks were paid commissions on the date that the loan agreements were signed, while the loans lasted for 25 years. In situations where the borrower defaulted, however, there was no claw back, so the employee would not be required to repay the commission.
　　Many countries have put in place new laws and codes to change this situation. In the UK for example, the financial services authority introduced a code whereby remuneration structures should be based on sound risk management practices,
　　incentive payments should be deferred over a number of years, and there should be claw back provisions whereby employees are required to repay bonuses in the event that the longer term results of their actions leads to similar problems experiences in the financial crisis.
　　Share options may also create a miss-match between the risks faced by the organisation and the risks faced by the holders of the options, since the holders benefit if share prices increase, but do not bear any losses if the share price falls. Share options are discussed in more detail later in this article.
　　COMPLYING WITH LEGAL REGULATIONS
　　Rewards should comply with legal regulations. Typically, employment laws include areas such as minimum pay, and equal pay legislation to ensure that no groups are prejudiced against. There have been high profile cases of female investment bankers winning legal cases against their employers because their bonuses were far less than those paid to male colleagues.ETHICS AND REWARD SCHEMES
　　In recent decades there has been a move away from fixed remuneration systems towards reward systems where at least part of an employee’s rewards are based on performance of the individual and the business as a whole. Some writers claim that this is unethical for two reasons. First, such systems tend to place increased business risk onto employees. Second, such systems undermine collective bargaining systems, and reduce the power of unions. This leads to a situation where employees as a collective have less bargaining power.
　　The size of total remunerations paid to directors of large public companies has also become a hot political issue, with a perception that the gap between top earners, and average earners is becoming larger. In the US, the average directors of S&P 500 companies earn 200 times more than the average household income in the US. Defenders of such large differences in pay point out that this difference has actually declined in recent years; in the year 2000, directors of S&P 500 companies earned 350 times the average household income. According to some research, such high packages are justified as they do reflect the performance of those directors.
　　THE PYRAMIDS AND PITFALLS OF PERFORMANCE MEASUREMENT
　　by Shane Johnson 01 Sep 2005
　　It has become increasingly important for organisations to develop systems of performance measurement which not only reflect the growing complexity of the business environment but also monitor their strategic response to this complexity. The need for good performance management is an ongoing issue which should be addressed by the management of all organisations.
　　This article considers issues which are central to the understanding and assessment of performance measurement within any organisation. The main issues requiring consideration by management are:
　　linking performance to strategy
　　setting performance standards and targets
　　linking rewards to performance
　　considering the potential benefits and problems of performance measures.
　　In attempting to establish a clear link between performance and strategy it is vital that management ensures that the performance measures target areas within the business where success is a critical factor. The performance measures chosen should:
　　measure the effectiveness of all processes including products and/or services that have reached the final customer
　　measure efficiency in terms of resource utilisation within the organisation
　　comprise an appropriate mix of both quantitative and qualitative methods
　　comprise an appropriate focus on both the long-term and short-term
　　be flexible and adaptable to an ever-changing business environment.
　　The last point stresses how important it is that performance measurement systems are dynamic so that they remain relevant and continue to reflect the issues important to any business. There are a number of models of performance measurement which can be used by management. This article considers the 'performance pyramid' of Lynch and Cross （1991）1. The model represents an acknowledgement by the writers that traditional performance measurement systems were falling short of meeting the needs of managers in a much changed business environment.
　　Lynch and Cross suggest a number of measures that go far beyond traditional financial measures such as profitability, cash flow and return on capital employed. The measures that they propose relate to business operating systems, and they address the driving forces that guide the strategic objectives of the organisation. Lynch and Cross propose that customer satisfaction, flexibility and productivity are the driving forces upon which company objectives are based. They suggest that the
　　status of these driving forces can be monitored by various indicators which can be derived from lower level （departmental） measures of waste, delivery, quality and cycle time. The performance pyramid derives from the idea that an organisation operates at different levels each of which has a different focus. However, it is vital that these different levels support each other. Thus the pyramid links the business strategy with day-to-day operations.
　　In proposing the use of the performance pyramid Lynch and Cross suggest measuring performance across nine dimensions. These are mapped onto the organisation - from corporate vision to individual objectives.
　　Within the pyramid the corporate vision is articulated by those responsible for the strategic direction of the organisation. The pyramid views a range of objectives for both external effectiveness and internal efficiency. These objectives can be achieved through measures at various levels as shown in the pyramid. These measures are seen to interact with each other both horizontally at each level, and vertically across the levels in the pyramid.
　　George Brown （1998）2 explains what Lynch and Cross refer to as 'getting it done in the middle' focuses on business operating systems where each system is geared to achieve specific objectives, and will cross departmental/functional boundaries, with one department possibly serving more than one operating system. For example, an operating system may have new product introduction as its objective, and is likely to involve a number of departments from design and development to marketing. At this level, performance focus will be on three needs. First, there will be a focus on the need to ensure customer satisfaction. Second, there will be a focus on the need for flexibility in order to accommodate changes in methods and customer requirements. Third, there will be a focus on the need to achieve productivity which necessitates looking for the most cost effective and timely means of achieving customer satisfaction and flexibility.
　　At the bottom level of the pyramid is what Lynch and Cross refer to as 'measuring in the trenches'. Here the objective is to enhance quality and delivery performance and reduce cycle time and waste. At this level a number of non-financial indicators will be used in order to measure the operations. The four levels of the pyramid are seen to fit into each other in the achievement of objectives. For example, reductions in cycle time and/or waste will increase productivity and hence profitability and cash flow
　　The strength of the performance pyramid model lies in the fact that it ties together the hierarchical view of business performance measurement with the business process review. It also makes explicit the difference between measures that are of interest to external parties - such as customer satisfaction, quality and delivery - and measures that are of interest within the business such as productivity, cycle time and waste.
　　Lynch and Cross concluded that it was essential that the performance measurement systems adopted by an organisation should fulfil the following functions:
　　The measures chosen should link operations to strategic goals. It is vital that departments are aware of the extent to which they are contributing - separately and together - in achieving strategic aims.
　　The measures chosen must make use of both financial and non-financial information in such a manner that is of value to departmental managers. In addition, the availability of the correct information as and when required is necessary to support decision-making at all levels within an organisation.
　　The real value of the system lies in its ability to focus all business activities on the requirements of its customers.
　　These conclusions helped to shape the performance pyramid which can be regarded as a modeling tool that assists in the design of new performance measurement systems, or alternatively the re-engineering of such systems that are already in operation. See Figure 1.
　　Figure 1: the performance pyramid （Lynch and Cross, 1991）
　　David Otley （2005）3 has observed that other related frameworks exist, such as the results and determinants framework by Fitzgerald et al （1991）， the balanced scorecard by Kaplan and Norton （1992） and Neely et al's performance prism. A common thread in all of them is that performance measures should:
　　be linked to corporate strategy
　　include external as well as internal measures
　　include non-financial as well as financial measures
　　make explicit the trade-offs between different dimensions of performance
　　include all important but difficult to measure factors as well as easily measurable ones
　　pay attention to how the selected measures will motivate managers and employees.
　　Setting standards and targets To set standards and targets, management could choose to make use of
　　benchmarking and/or target costing while being mindful of the critical need to link rewards to performance as appropriate.