Introduction
Employees are valuable resource and source of competitive advantage in many organizations. Companies that have highly motivated workforce are some of the most successful in the world. The model of human resource management used by companies like Google demonstrates that corporations are increasingly appreciating the important role played by employees in the success of their companies (Aslam, Ghaffar, Talha, & Mushtaq, 2015 p. 323). Labor productivity is a big concern for most organizations in the modern corporate world. The success of companies depends on how far the employees are willing to go to make their organizations successful. Through proper Human Resource Management, organizations can get the best out of their employees. Most organizations use compensation and reward systems to get the best out of their employees and motivate them to work harder. However, the question that remains controversial is the impact of compensation on the overall performance of an organization. This paper seeks to analyze the impact that a compensation and reward system would have on the overall performance of a corporate organization.
The basic principle behind the reward system in modern corporate organizations is to ensure employee motivation, increase productivity and guarantee a competitive advantage over the competitors while keeping the cost of operations low. Even though many corporations are only just adopting the compensation and reward system, the concept has been practiced throughout the centuries, especially during the scientific management era, the period spanning between 1800s and early 1920s (Wrege & Perroni, 1974 p. 13).
Delegate your assignment to our experts and they will do the rest.
Literature Review
Reward Systems used During the Scientific Management Era
The reward system used during the scientific management era as well as the philosophies of employee compensation can be applied in the today’s corporate world. According to xxx, the scientific management era is attributed to the true meaning of the concept of management. During this time, the concept of management was developed to create efficiency and systemization. Five people have been attributed to the development of the old reward system. According to Holton and Naquin (2005 p. 4), the five contributors include Frederick Taylor, Gilbreth Lillian, Emerson Harrington and Gant Henry. Frederick Taylor proposed a new system that he thought would strike a balance between high wages for the working employees and low labor cost for the organization.
According to Gupta and Shaw (2014 p. 32), the development of reward and compensation system was done to ensure that the interests of both the employers and the employees are served equally (p. 3). From history, the reward systems have always favored individual as opposed to group reward systems. The argument, according to Wrege and Perroni (1974 p. 13), was that personal ambition will always be stronger than the desire for general welfare of the group. Based on this argument, majority of the employers preferred to have reward systems that only emphasize on individual reward and individual motivation.
The motivation from the reward systems was only effective when the employees got them promptly. According to Holton and Naquin (2005 p. 3) average workers would not prefer to look forward to profits or compensation of any nature that is six months or even a year away. It means that employee performance appraisal has to be frequently done to ensure that better-performing employees are rewarded as quickly as possible. The proposal by Gantt was that proper compensation of workers was a better way of ensuring good relations between the employees and the employers. However, Gantt introduced another system of compensation where foremen would be given bonuses for every bonus earned by the employees under their supervision. The approach by Gantt motivated the supervisors to get the best out of their employees because that would guarantee their bonuses and other forms of compensation (Katou, 2008 p. 123).
Modern Reward Systems
In most organizations today, reward systems have been established to ensure that the best talents are attracted and retained within the workforce. The approach has been informed by the fact that human resource is considered one of the most important sources of competitive advantage by most organizations. The modern approaches used in the compensation and reward of employees were suggested by Taylor, Gantt, and others a century ago. According to Katou (2008 p. 123), the only thing that has changed in the new reward systems are the names given to them.
The knowledge-based pay is one of the most commonly used approached in the modern corporate organizations. Like most compensation and reward system, a knowledge-based system is an individual form of incentive that is used to motivate employees to work harder. Under this model, employees are rewarded based on their skills and levels of competencies and not based on the positions they hold. Many scholars have favored this approach to reward system because it encourages employees to learn continuously and allows employees to improve their earning potential even without having to be promoted (Aslam, Ghaffar, Talha, & Mushtaq, 2015 p. 321). The knowledge-based reward system is closer to what was suggested by Taylor and other philosophers who suggested the use of individual incentives. As a way of justifying the new method, Moriarty (2014) argued that employees who possess better skills and knowledge should be paid more because they can do work within a shorter period compared to employees without enough skills and knowledge.
Merit-based pay
The merit-based pay system is a reward system that is used in some modern organizations to reward individual employees or a group of employees. The merit-based approach was developed based on the concept of the equity theory. According to the theory, employees’ contribution should be rewarded in an equitable manner compared to the other employees’ contributions. The argument is that employees who feel less rewarded for their work are likely to reduce their contribution, hence negatively affecting the entire organization. Downes and Choi (2014) argue that organizations must always try to balance between the need to reward top performers without making the other workforce feel alienated.
The philosophers of the scientific management era did not foresee any concern over the possible revolt from the non-performing employees when they are not rewarded (Downes & Choi, 2014 p. 57). Instead, they thought that reward system would encourage the non-performers to work harder in anticipation for the reward. The reality, according to Larkin et al. (2012), is that rewarding others, while leaving behind others can bring the feeling of disenfranchisement and possible revolt within the work.
Theories of Compensation and Reward System
The relationship between employee compensation and reward on performance can be explained using a number of theories, as applied by researchers on the topic of human resource management. The commonly used theories include the resource-based view theory, the human capital theory, the ability, motivation and opportunity theory (AMO theory), and expectancy theory, among others.
Resource-based view theory
The resource-based view theory posits that an organization can gain a competitive advantage over its rivals by attracting and retaining the best human resources. Issues such as training and employability of are some of the parameters used to assess the human resources.
Human Capital Theory
Human capital refers to the combination of academic qualification and experience of the staff working for an organization. Most organizations consider human capital as an important source of competitive advantage (Gupta & Shaw, 2014 p. 3). The human capital theory has however been criticized for its overemphasis on the individual knowledge and experience of the staff without considering other factors that may make an employee useful to an organization.
Ability, Motivation, Opportunity (AMO Theory)
The AMO theory posits that performance of individual employees depends on the level of motivation, the possession of necessary knowledge and skills, as well proper role matching. Based on the theory, employees can only do their best when their skills have been matched with the right job specification (Musah 2008 p. 69). According to the AMO theory, employees can only have enhanced performance when they are given the best working environment befitting their talents. For instance, the performance of an employee can greatly be enhanced when they are given the right technology. The AMO theory further posits that human resource departments should always take the opportunity whenever they arise to motivate and speed up the development of employees. The argument by Armstrong (2010) is that employees with better abilities and high level of motivation should be given top priority over those with a low level of motivation.
Expectancy Theory
Expectancy theory posits that there is a relationship between work put by employees and the perceived outcome arising from such work. The theory considers outcomes as means of satisfying needs. According to Armstrong (2010), there is a connection between a certain reward and what is done to achieve that reward.
Discussion and Conclusion
The use of reward system in corporate organizations has been adopted as a way of motivating employees to work harder and promote performance. However, employers must make sure that the compensation and reward system yield productive results for the company rather than just increasing the cost of labor. For example, one way of improving the use of the compensation is to have a system that reflects the situation at hand. In other words, a right pay mechanism should be used to reward employees for their work done. The reward system has been criticized by others that it could lead to a decline in the quality of services. Some employees may only concern themselves with the quantity of work done with little regard to the quality of the work (Moriarty, 2014 p. 36). In order to maintain competitiveness, companies must not compromise on the quality of services. According to Armstrong (2010), some organizations have opaque reward system where employees do not understand the compensation process. In order to ensure transparency and foster trust between employees and employers, corporate organizations must have transparent reward system that is understood by all the stakeholders.
References
Armstrong, M., & Taylor, S. (2014). Armstrong's handbook of human resource management practice . Kogan Page Publishers.
Aslam, A., Ghaffar, A., Talha, T., & Mushtaq, H. (2015). Impact of compensation and reward system on the performance of an organization: an empirical study on banking sector of Pakistan. European Journal of Business and Social Sciences . 4(8): 319-325
Caudill, H., & Porter, C. (2014). An Historical Perspective of Reward Systems: Lessons Learned from the Scientific Management Era. International Journal of Human Resource Studies. 4(4).
Downes, P. E., & Choi, D. (2014). Employee reactions to pay dispersion: A typology of existing research. Human Resource Management Review , 24: 53-66
Holton, E. F. III, & Naquin, S. (2005). A critical analysis of HRD evaluation models from a decision-making perspective. Human Resource Development Quarterly , 16(2), 257-280
Gupta, N., & Shaw, J. D. (2014). Employee compensation: The neglected area of HRM research. Human Resource Management Review , 24: 1-4.
Katou. A. A., (2008). Measuring the impact of HRM on organizational performance. Journal of Industrial Engineering and Management. 01(02):119-142
Larkin, I., Pierce, L., & Gino, F. (2012). The psychological costs of pay-for-performance: Implications for the strategic compensation of employees. Strategic Management Journal , 33: 1194-1214.
Moriarty, J. (2014). Compensation ethics and organizational commitment. Business Ethics Quarterly , 24 (1): 31-53.
Musah, S. (2008). Evaluating The Extent to Which People and Performance AMO Model has Contributed to the Strategic Human Resource Debate. Journal of Management , 15 (1), 67-79.
Wrege, C. D., & Perroni, A. G. (1974). Taylor’s pig-tale: A historical analysis of Frederick W. Taylor’s pig-iron experiments. Academy of Management Journal, 17(1): 6-27.
