PENSION SCHEMES

Defined benefit pension schemes used to be a popular form of reward. Under such schemes, the employee pays a pension to former employees based on their final salary, and the number of years that the employee worked for the organisation. A typical example is that the former employee receives 1/60ths of their final salary for every year of service. An employee who works for 40 years for the same organisation would therefore receive a pension equal to 40/60ths of their final salary from the date of retirement to the date of death.

Defined benefit schemes leave organisations with an uncertain, often large liability, and for this reason, many organisations have now discontinued such schemes.

Defined contribution schemes are another form of pension scheme where the employer pays a certain percentage of the employee’s salary into an account for the employee in a pension ‘pot.’ The employee may also have the option of making additional voluntary contributions into this pension pot. The pension pot is then invested, and the employee receives whatever is in their account on retirement. In some countries, employees may be required to use what is in the pot to buy an annuity, which pays them a fixed income for the rest of their lives.

Many countries offer tax incentives for such pension schemes, such as allowing employees to reduce their taxable income by the value of contributions made to the schemes.

BENEFITS IN KIND

Benefits in kind (or indirect pay) are paid to employees in addition to their base salary and performance-related pay. Benefits in kind include items such as health insurance and meal vouchers. They are usually provided to more junior staff in order to provide additional incentives at a lower cost. They are often used as a form of recognition, so the employee of the month for example will be given a benefit rather than a cash payment.

The advantage of benefits in kind is that greater flexibility can be given in designing a reward scheme for an individual.

‘Cafeteria’ schemes have also become popular, whereby employees are told that they may select benefits from a menu up to a certain value. The advantage of this is that employees will select the benefits that they value most. Benefits from which the employees can choose typically include such items as health insurance, holiday vouchers, company cars or sports vouchers.

Cafeteria schemes may be difficult to administer. Staff may also find them complex to understand, as they will have to select a number of benefits that have a value that is within the agreed limit.

ESTABLISHING THE LEVEL OF BENEFITS

How much should employees be paid? Two factors need to be taken into account here. First, competitiveness, and second internal equity.

As already mentioned above, unless the level of pay is competitive, it will be difficult to recruit and retain the right number of skilled employees. If it is too much, the cost to the organisation will be too high. Here the organisation will compare its pay levels with competitors. Such information may be available from job adverts in newspapers or on the Internet, or from recruitment consultants.

Internal equity relates to the pay differentials within the organisation itself. Staff will become demotivated if they feel that the remuneration system is ‘unfair’ and that other people are being paid more generously. Job evaluation techniques are used that try to determine the value of a specific job to the organisation. Based on this, the level of rewards for that particular position will be determined.

THE ROLE OF APPRAISAL IN REWARD SYSTEMS

Many of the performance-related reward schemes depend on the performance of the employees. As such, the employees’ performance has to be assessed. This usually takes place during the appraisal process. Staff will be assessed on a regular basis, for example twice a year. During the appraisal, targets will be set for the next period, and rewards agreed if the targets are met.

CONCLUSION

A good reward system aims to motivate employees to work harder, and align their goals with those of the organisation they work for. The current trend towards performance-related reward systems is designed to lead to greater rewards and motivation for those who contribute the most. However, designing such reward systems is complex, as they aim to influence human behaviour. As the human resources director of Flowpack Engineering said (quoted in Bratton) ‘There is no such thing as a good pay system; there is only a series of bad ones. The trick is to choose the least bad one.’

Nick Ryan is a freelance lecturer and writer

References

Bratton and Gold, Human Resource Management Theory and Practice, 4th edition chapter 10, Palgrave Macmillan, 2007

Hope and Fraser, Beyond Budgeting, Harvard Business School Press, 2003 Frederick Herzberg, 'One More Time: How Do You Motivate Employees?' Harvard Business Review, Sept/Oct 1987

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