Reward Systems in Strategic HRM

One of the important attributes of work organisation is its ability to give rewards to their members. Pay, promotions, fringe benefits, and status symbols are perhaps the most important rewards. Because these rewards are important, the way they are distributed have a profound effect on the quality of work life as well as on the effectiveness of organisations.

Organizations typically rely on reward systems to do four things:

1) motivate employees to perform effectively,
2) motivate employees to join the organisation,
3) motivate employees to come to work, and
4) motivate individuals by indicating their position in the organisation structure.

There are several principles for setting up an effective reward system in an organisation:

– Give value to the reward system. Employees must have a preference for the types of  rewards being offered. Many employees prefer cash awards and plaques. Some employees like to see their name in the company newsletter. Others like the public recognition surrounding award ceremonies.

– Make the reward system simple to understand. Elaborate procedures for evaluating performance, filling out forms, and review by several levels of management lead to confusion. The system must be easy to understand if it is to be used effectively.

– Lay down performance standards within the control of the team.

– Make the reward system fair and effective.

– Ensure participation in the reward system.

– Involve people in the reward process and empower them to do the needful.

reward system


Most organisations use different types of rewards. Examples of recognition and rewards include money, plaques, trophies, certificates or citations, public recognition, official perquisites, special assignments, parties or celebrations or other meaningful considerations. The most common are wages or salary, incentive systems, benefits and perquisites, and awards. For majority of people, the most important reward for work is the pay they receive. For one thing, an effectively planned and administered pay system can improve motivation and performance.

Money may not actually motivate people. Surprisingly, there is no clear evidence that increased earnings will necessarily lead to higher performance. A great deal of research has been done on what determines whether an individual will be satisfied with the rewards he or she receives from a situation.

The following five conclusions can be reached about what determines satisfaction with rewards:

1) Satisfaction with reward is a function of both how much is received and how much the individual feels should be received. When individuals receive less than they feel they should receive, they are dissatisfied. When they receive more than they feel they should, they tend to feel guilty and uncomfortable.

2) People’s feelings of satisfaction are influenced by comparisons with what happens to others. These comparisons are made both inside and outside the organisations they work in, and are usually made with similar people. Individuals tend to rate their inputs higher than others.

3) In addition to obvious extrinsic rewards individuals receive (e.g., pay, promotion, status symbols), they also may experience internal feelings that are rewarding to them. These include feelings of competence, achievement, personal growth, and self-esteem. The overall job satisfaction of most people is determined both by how they feel about their intrinsic rewards and how they feel about their extrinsic rewards.

4) People differ widely in the rewards they desire and how much important the different rewards are to them. One group feels money is the most important, while another group feels interesting work and job content is. Both groups, of course, are able to find examples to support their point of view.

5) Many extrinsic rewards are important and satisfying only because they lead to other rewards, or because of their symbolic value.

An effective reward system should link reward to performance. Workers who work hard and produce more or give better quality results should receive greater rewards than poor performers. Also, criteria for receiving rewards should be clear and employees should know whether they are going to receive rewards for quality performance, innovation, effort or attendance. Management must ensure that workers perceive distribution of rewards as equitable. Furthermore, for organisations to attract, motivate and retain qualified and competent employees, they must offer
rewards comparable to their competitors.

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