Magazine article Management Review

More Than You Know, Pay Counts

Magazine article Management Review

More Than You Know, Pay Counts

Article excerpt

Rsearch on reward systems suggests that they influence a companys strategy implementation and overall effectiveness in six ways.

1. Attracting and retaining employees. Studies on job choice, career choice, and employee turnover clearly show that the types and level of rewards an organization offers influence the types of employees it attracts and retains. For example, high levels of risk compensation may attract entrepreneurial personalities, while extensive security-oriented benefits generally attract those who like to avoid risk.

To be effective, the reward systems must be designed to attract and retain those employees the strategy deems most important. People have to feel satisfied when they compare their rewards with those received by individuals doing similar jobs in other organizations. The emphasis here is on external comparisons, since turnover means employees have left for better situations elsewhere.

2. Motivating performance.

Employees must perceive that the company ties important rewards -- in a timely fashion -- to effective performance. People have their own mental maps of what the world is like, and they use these maps to choose the behaviors that will lead to outcomes that satlsfy their needs.

In general, an individual is most motivated to behave in a certain way when he or she believes that the performance will lead to certain outcomes, that these outcomes are attractive, and that it's possible to perform at the desired level. These conditions have clear implications for pay systems: To be motivational, the systems must create a clear and achievable line of sight between an employee's behavior and the receipt of important amounts of pay.

3. Promoting skills and knowledge development.

Just as pay systems can motivate performance, they can encourage employees to learn and develop new skills. The same motivational principles apply, since individuals will focus on learning the skills a company rewards. Some organizations have implemented skill-based pay, a relatively new compensation approach, to capitalize on this very point. With skill-based pay, they can strategically target the types of learning they want employees to acquire. By contrast, many job-based systems accomplish this indirectly by tying increased pay and perks to higher-level jobs. …

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