Reward Management in HRM: Strategy, Total Reward & Systems
What is Reward Management? (Concept & Definition)
Reward Management is the process of formulating and implementing strategies and policies to reward employees fairly, equitably, and consistently in accordance with their value to the organization.
It is much more than just “payroll.” It is a strategic approach to managing people. It deals with the design, implementation, and maintenance of reward systems (pay, benefits, and non-financial rewards) that meet the needs of both the organization and its employees.
In simple terms: It is about deciding how much to pay, why to pay it, and what else to offer besides money to keep employees happy and productive.
The Aims & Philosophy of Reward Management
Why do companies have a reward system? It’s not just because they have to. A good system achieves specific goals:
Reward Value: To pay people according to the value they create. If an employee brings in high revenue, they should be rewarded accordingly.
Motivation & Commitment: To encourage employees to work harder (engagement) and stay loyal to the company (commitment).
Attraction & Retention: To offer a package good enough to hire the best talent and stop them from leaving for a competitor.
Alignment: To ensure that what the company pays for (e.g., sales targets) aligns with the company’s business goals.
Performance Culture: To create an environment where high performance is recognized and celebrated.
The Philosophy (Guiding Principles): A reward system is built on certain beliefs:
Fairness (The “Felt-Fair” Principle): Employees must feel that they are treated justly.
Equity:
Internal Equity: Is my pay fair compared to my colleague’s?
External Equity: Is my pay fair compared to the market rate?
Transparency: Employees should understand how their pay is calculated. Nothing should be hidden.
Consistency: Decisions on pay shouldn’t vary arbitrarily between different managers.
Economic Theories: How are Pay Levels Determined?
Have you ever wondered why a software engineer earns more than a clerk? Or why salaries go up in some years and down in others? Economists have different theories to explain this.
The Elements of a Reward System
A complete reward system is made up of several interconnected parts. It acts like a machine where every gear serves a purpose.
Reward Strategy: The “Big Picture” plan. It defines the long-term direction of how the company will pay and reward staff.
Reward Policies: The rules of the game.
Market Stance: Do we want to pay above the market (market leaders) or just the average (market matchers)?
Base Pay: The fixed salary or wage (hourly/monthly) for doing the job. This is guaranteed pay.
Job Evaluation: A systematic process to determine the “size” or “worth” of a job compared to others in the company. This ensures Internal Equity.
Market Rate Analysis: Checking what competitors are paying for similar jobs. This ensures External Competitiveness.
Contingent Pay: “Pay at Risk” or variable pay. This is extra money paid for performance, skill, or competence (e.g., Sales Commission, Annual Bonus).
Employee Benefits: Indirect rewards like pensions, sick pay, health insurance, and company cars. These provide security.
Non-Financial Rewards: Rewards that don’t involve money but provide satisfaction, such as recognition, praise, better job titles, or career growth.
Total Reward: The Holistic Approach
Modern HR doesn’t just focus on salary. It focuses on Total Reward. Total Reward combines financial (tangible) and non-financial (intangible) rewards to create a complete package for the employee.
Definition: “Total reward includes all types of rewards – indirect as well as direct, and intrinsic as well as extrinsic.” — Manus & Graham
(Note: While this tag was in context history, a specific “Total Reward Model” diagram would be better here if available, but we will describe it conceptually below).
The Two Main Components of Total Reward
1. Transactional Rewards (Tangible / Financial)
These are rewards you can touch or see in your bank account. They arise from the financial transaction between employer and employee.
Base Pay: Salary.
Contingent Pay: Bonuses, incentives, shares.
Benefits: Pensions, holidays, insurance.
Nature: Essential to recruit and retain people, but competitors can easily copy them. (If you pay ₹50k, a competitor can offer ₹55k).
2. Relational Rewards (Intangible / Non-Financial)
These are psychological rewards related to the work environment and learning. They touch the heart and mind.
Learning & Development: Training, mentoring, career progression.
Work Environment: Leadership style, company culture, recognition, work-life balance.
Nature: Essential for motivation and engagement. These are very hard for competitors to copy. You cannot easily “copy” a great company culture.
Why is Total Reward Important?
Greater Impact: Money motivates to an extent, but recognition and growth sustain that motivation.
Talent Magnet: It helps the company become an “Employer of Choice.”
Cost-Effective: You can motivate employees through recognition (free) rather than just increasing salaries (expensive).
Developing a Reward Strategy
How does a company decide its reward system? It creates a Reward Strategy. This is a declaration of intent—a roadmap showing where the company wants to go with its rewards.
The 3 Components of an Effective Strategy (Brown, 2001)
Clear Goals: The strategy must support the business. (e.g., If the business goal is “Innovation,” the reward strategy should be “Bonus for new ideas”).
Well-Designed Programs: The pay structure must fit the company’s specific needs.
Supportive Processes: HR must have good systems to manage payroll and performance.
The Development Process (4 Phases)
Diagnosis Phase: Look at the current situation. Are employees happy with pay? Are we losing staff? What is the business goal?
Detailed Design Phase: Create the new plan. Test it. (e.g., Designing a new bonus scheme).
Final Testing: Run a pilot program to see if it works.
Implementation: Launch the new system and train managers on how to use it.
The Role of Line Managers: In modern companies, HR designs the system, but Line Managers (Team Leaders) implement it. They are the ones who decide the performance ratings and communicate pay raises. Therefore, HR must train managers to be fair and consistent.
You may also refer to Performance Appraisal to see how employee performance affects pay. Click here to read the full article.