The aim of this report is to advice to, the Director of human resources at Midland Credit Management (MCM) a US based debt collection company, on the effectiveness of total rewards strategy in context to organisational performance though attracting, retaining and motivating intellectual capital. This is achieved through the analysis of a total rewards function which is broken-up in to six segments total rewards defined, element of total rewards, model of total rewards, its organisational advantages and its linkage with organisational performance. Firstly, this report explains the meaning and objectives of total rewards and then describes the elements i.e. transactional and relational rewards. A model of total rewards is followed which portrays financial and non-financial tenets as well as individual and communal aspects of strategic reward.
Further it covers the advantages provided to an organisation for the purpose of attaining competitive advantage on recruitment, development of performance management and integration between human resource strategies and business goals. Lastly, the impact of total rewards strategy is evaluated in terms of physiological contract with an employee. It includes the theory of motivation, employee commitment and engagement that culminates a sense of responsibility, respect, trust and personal growth, which increased individual performance and business goals are achieved by creating a performance culture. Thus, a successful total rewards strategy pays for the value individuals bring in an organisation with a wide range of financial and non-financial rewards which helps them to perform effectively and achieve competitive edge for the organisation. Total rewards defined
1.1. Introduction: In the era of globalisation/internationalisation people management has become a significant task for human resource (HR) unit. At present, in rapidly changing and competitive business environment, the role of self-motivated, engaged, skilled and committed employees is increasingly remarkable to achieve business goals and competitive advantage. Performance management and reward strategy are the key element to directly influence individual’s performance and ultimately organisational effectiveness within the industry. In recent year several internal and external factors, competitive business environment and developments in the field of reward management has introduced a different and most influential term called total reward.
1.2. Meaning: Strategic reward can be considered as an approach to the improvement and execution of reward schemes that validates their incorporation and clutch with the business strategy and other HR strategies and that they are in connection with other reward strategies for the benefit of both employees as well as organisation. According to Armstrong and Murlis (1998) the essence of this notion of total reward is to manage reward policies in a way that considers the various components together to support one another to maximise employment satisfaction with the result of their performance. Brown (2001) suggests that strategic reward is a way of thinking and can be applied to any reward matter occurring in organisation to make out how one can create value from it. A reward scheme directly influences the level of motivation, satisfaction that leads to employee engagement and commitment towards organisational goals.
1.3. Objectives/aims: The aim of reward strategy is to produce a sensible purpose and guidance and foundation of improving reward policies, experiences and process. It is considered as a base to acknowledge and satisfy employees’ as well as organisation’s needs. According to Sibson Consulting (2009) the aims of a total rewards strategy can be determined as follows:- coerce business success by attracting talent, engagement and retention; Guide investment decisions for the employer while enabling informed choices for the employee; Clarify the employer-employee relationship;
Build a distinctive employment brand;
Increase the return on rewards and create value for the enterprise; Integrate reward and HR policies and processes;
Align reward processes to business needs;
Provide guidance for reward system design and implementation.
2. Elements of total rewards
Total reward is an effective section of a reward system and emphasises to think about all facets of employment experience of value to employees instead of remuneration and employee benefits. The concept of total rewards identifies the necessity of getting paid appropriately in terms of pay and benefits and also encourages the significance of rewarding people for the work they performed, managed and developed in their work environment. It further adds to the performance of an employee value intention that provides an obvious, gripping cause that attracts capable workforce to remain with the organisation. The components of total rewards are shown in Figure 1.0.
Figure 1.0 Elements of total rewards.
The principle of total rewards mingles with two effective categories of reward as discussed below (Armstrong, 2007): 2.1. Transactional rewards: These are tangible rewards and more of financial offerings and occur from transactions between employer and employees in relation to remuneration and pay-out. Such rewards can be imitable by competitors and offered to individual employees in form of base pay, contingent pay and other employee benefits. These rewards are of extrinsic nature. 2.2. Relational rewards: Such rewards intangible (non-financial) and are related to work conditions i.e. quality of working life, the work, work-life balance, recognition, performance management and learning and development. These rewards are necessary to enhance transactional rewards and differ in different organisations as they can’t be easily copies.
As described above total rewards system is a blend of monetary and non-monetary rewards offered to employees that can result in valuable business success in long term. Total rewards approach is a holistic insight of entire reward system to establish incorporation of reward elements in order to drive them so that they jointly support to achieve overall efficiency of reward system. Each component of rewards is sough in a way so that they integrate each other in all ways so that employees can be rewarded and have a sense of satisfaction from their work. A total rewards strategy is structured and joint together so that it can maximise the associated effect of various reward projects for employee motivation, commitment and job engagement. 3. Model of total rewards: Towers Perrin
The effective component of total rewards can be concisely presented in the Towers Perrin model of total rewards shown in Figure 2.0. This is commonly used as foundation for the purpose of planning a total rewards approach. It includes of an environment with four quadrants. The upper two quadrants- pay and benefits those represent transactional or tangible (financial) rewards. These are financial rewards are mandatory recruitment and retain employees and can be copied by competitors. On the other hand, other two quadrants which are based on non-financial (intangible) or relational cannot be easily imitated and build both human assets and human development advantage in an organisation. These lower two quadrants are essential to boost the worth of the upper two. When organisations integrate both transactional and relational rewards strategically it empowers the overall effectiveness to achieve business success. The model makes an important difference between individual and communal rewards precisely in the later case which are result of work situation. Figure 2.0 Model of total rewards by Towers Perrin.
As mentioned above that a total rewards concept integrates between financial and non-financial rewards to enhance a reward system, the importance of both considerations is described below: 3.1. Financial rewards: All monetary rewards those are offered in terms of money and are added up in total remuneration are the financial rewards. Base pay, contingent pay for performance, contribution, competency or skill, pay concerning to service, financial appreciation programs, and benefits like pensions, medical pay and health insurance are the core elements.
3.2. Non-financial rewards: Such rewards focus on the relational or intangible rewards those are related to people needs for various recognition, accomplishment, accountability, autonomy, influence and personal development. Such rewards are directly influenced by work environment i.e. quality of work life, the work, work-life balance, recognition, performance management and learning and development for personal growth within the organisation. Non-financial rewards can be extrinsic, such as praise or recognition as well as intrinsic if they are incorporated with job performance and attention and feelings that the work is valuable. 4. Organisational advantages of total rewards
In current competitive business environment it must for an organisation to treat their employees with a sense of respect, fairness and ethically. Success of a business lies in the core value of its intellectual and it is necessary to enhance, develop and retain the same to achieve competitive advantage. Kaplan (2005) suggests the following advantages of total rewards strategy: 4.1. Congruency: The aim of total rewards strategy is that all rewards, including financial and non-financial must complement the business goals and strategies. It provides an incorporated, comprehensive sight of rewards to endorse equivalence and effectiveness of plan and implements, in alliance of business and people strategy. 4.2. Road map for HR specialists: An on paper total rewards strategy gives out as a reference guide to human resource managers to develop and compile new programs. An evaluation helps business executives to get suggestions from HR managers to execute business strategies.
4.3. Competitive edge for recruitment: In order to attract talent a total rewards strategy helps organisation to differentiate it in a competitive talent pool by attaining competitive edge in terms of recruiting people. 4.4. Improved retention: Employment offerings focuses on people value, enhanced commitment and engagement and reduce turnover. They highlight the emotional bond between employee and employer to motivate and retain people. A strategic reward can increase engagement of work force and produce positive results. 4.5. Moderate labour costs: A reward policy may enable an organisation to moderate its labour costs by trading off several segments of employment package. This can promote flexible employ arrangements which would reduce cost of employment. 4.6. Enhanced organisational performance: Within a performance culture, a total rewards strategy can influence employees’ behaviours which lead to organisational success. A total rewards strategy that satisfies the employee needs increases productivity, employee commitment and engagement.
5. Strategic rewards versus organisation performance
An effective reward strategy attracts people, develops human capital, motivates employee, gains employee commitment and at last increases employee’s performance which ultimately results in organisational performance. So far it is covered that a total reward strategy is an important factor in terms of employee recruitment, retention, development of human capital and performance management. It establishes a performance culture and enhances individual performance. Thus total rewards can be directly incorporated to organisation performance though following: 5.1. Motivation: it an element of physiological contract which encourages, directs and energises a sense to perform extra-ordinarily in want of financial or non-financial interests. Hunter et al (1990) researched that high performance is achieved by well-motivated people who are prepared to practice flexible effort.
Total rewards those are practical in deciding the several motivators of employees in an organisation are expected to result to increased employee satisfaction and trigger the desired behaviour which would ignite employees to accomplishment of positive goals by taking exact behaviour which are attractive performance. Further research by Namasivayam et al (2007) through online survey of 1223 US hotels suggested that there is affirmative association between pay and individual benefits and organisational performance. According to Pink (2005) an extrinsic motivation is required in today’s work culture. Employees have a hectic schedule and the only motivation is the needs they have to fulfil which makes a monotonous work-life balance. 5.2. Commitment: Commitment can be considered at an attachment and loyalty that employees have for their company.
Mowday et al (1982) there are 3 characteristics of commitment- 1) A strong desire to stay in the organisation, 2) A strong belief in and acceptance of the values and goals of the organisation, 3) A readiness to exert considerable efforts on behalf of the organisation. According to Walton (1985) traditional control-oriented style of employee management should be replaced by a commitment strategy which enables employees to respond best and most creatively. This is possible when they are given higher responsibilities, encouraged and helped to achieve satisfaction from their jobs. 5.3. Engagement: Performance of an organisation also influenced by the employee engagement towards the organisational design to obtain desired results though intellectual assets. Reilly and Brown (2008) suggest that a strategic reward process, including both extrinsic and extrinsic reward combination, may help to develop and increase employee’s engagement. Influence of total rewards strategy on performance by engagement can better demonstrated as modelled below in Figure 3.0. Figure 3.0 How reward policies influence performance through engagement.
Concluding the importance of total rewards strategy in context to individual performance and consequently organisational performance, it is necessary for an organisation to introduce a clear and achievable reward scheme. The reward functions like base pay, benefits, learning and development and work environment must be described in a way those can produce benefits to employees as well as organisation. A successful total rewards strategy is the one which is integrated with business strategies and designed considering each element of rewards in reference to employee needs. It must contain proper balance of intrinsic and extrinsic rewards to recruit, employee development, motivate, engaged and committed man power.