Reward Systems

By Luthans, F.

Edited by Paul Ducham


Money has long been viewed as a reward and, at least for some people, it is more important than anything else their organization can give them. Some surveys of employees rank money at the top of their list of motivators6 and others rank it lower. It seems to vary widely with the individual and the industry. However, as the well-known scholar and consultant Manfred Kets de Vries recently declared, “It’s easy to say money isn’t everything as long as we have enough of it. Unfortunately, though, the typical scenario is that the more money we have, the more we want.” Also, commenting on money, Steven Kerr, the well-known organizational behavior scholar and executive at both GE and Goldman Sachs, noted that “Nobody refuses it, nobody returns it, and people who have more than they could ever use do dreadful things to get more.” By the same token, a large majority (82 percent) of employees in the United States and worldwide (76 percent) recently indicated they would take a pay cut to pursue their dream job.

Money Can Explain Behavior

Money provides a rich basis for studying behavior at work because it offers explanations for why people act as they do. For example, Mitchell and Mickel have noted that money is a prime factor in the foundation of commerce, that is, people organize and start businesses to make money. Money is also associated with four of the important symbolic attributes for which humans strive: achievement and recognition, status and respect, freedom and control, and power. In fact, in most of the management literature dealing with money, researchers have focused on money as pay and the ways in which pay affects motivation, job attitudes, and retention. In particular, money helps people attain both physical (clothing, automobiles, houses) and psychological (status, self-esteem, a feeling of achievement) objectives. As well-known moneymaker Donald Trump has said, “Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.” As a result of this perspective, money has been of interest to organizational behavior theorists and researchers who have studied the linkages between pay and performance by seeking answers to questions such as: How much of a motivator is money? How long lasting is its effects? What are some of the most useful strategies to employ in using money as a motivator?

        Money has also played an integral role in helping develop theories of organizational behavior. For example, if employees are interested in money, how much effort will they expend in order to earn it, and how much is “enough”? It is like the philosopher Arthur Schopenhauer once said, “Wealth is like seawater, the more we drink the thirstier we become.” Moreover, if people work very hard but do not receive the rewards they expect, how much of a dampening effect will this have on their future efforts? Answers to these types of questions have helped develop some of the most useful theories of motivation.

An Agency Theory Explanation
Another important perspective on money as a reward is provided by agency theory, a widely recognized finance and economics approach to understanding behavior by individuals and groups both inside and outside the corporation. Specifically, agency theory is concerned with the diverse interests and goals that are held by a corporation’s stakeholders (stockholders, managers, employees) and the methods by which the enterprise’s reward system is used to align these interests and goals. The theory draws its name from the fact that the people who are in control of large corporations are seldom the owners; rather, in almost every case, they are agents who are responsible for representing the interests of the owners.
    Agency theory seeks to explain how managers differ from owners in using pay and other forms of compensation to effectively run the organization. For example, the owners of a corporation might be very interested in increasing their own personal wealth, and so they would minimize costs and work to increase the stock value of the enterprise. In contrast, their agents, the managers, might be more interested in expending corporate resources on activities that do not directly contribute to owner wealth. Agency theory also examines the role of risk and how owners and managers may vary in their approach to risk taking. For example, owners may be risk aversive and prefer conservative courses of action that minimize their chances of loss. Managers may be greater risk takers who are willing to accept losses in return for the increased opportunity for greater profits and market share; when their decisions are incorrect, the impact may be less than it would be on the owners and thus not greatly diminish their willingness to take risks. Finally, agency theory examines the differences in time horizons between owners and managers. Owners may have longer time horizons because their goal is to maximize their value over time. Managers may have much shorter time horizons because their job tenure may require good short-term results, in addition to the fact that their bonuses or Merit Pay may be tied closely to how well they (or the corporation) performed in the last four quarters.
         This last point about managers trying to look good in the short run is given as one of the major reasons for the recent economic crisis. For example, Cascio and Cappelli conclude in their analysis, by noting that even one of the founding fathers of agency theory recognized that “Where questionable ethics intersect with company and individual incentives, managers may end up cheating on practices such as budgeting because it makes their lives easier.” They go on to note that “every scandal has involved executives pushing the financial and accounting envelope to the point of breaking to inflate profits, cover losses and make their own performances better.” There are also other analyses critical of agency theory predictions such as the spectacular rise and sudden fall of Nortel (the large multinational Canada-headquartered telecommunications company) that illustrates “excesses of actors within, and contradictions of the system of corporate governance implied by the agency model.” Despite these limitations, there is still considerable evidence that agency theory provides useful insights into pay as a reward. This becomes increasingly clear when research on the effectiveness of pay is examined.


Despite the tendency in recent years to downgrade the importance of pay as an organizational reward, there is ample evidence that money can be positively reinforcing for most people and, if the pay system is designed properly to fit the strategies, can have a positive impact on individual, team, and organizational performance. For example, many organizations use pay to motivate not just their upper-level executives but everyone throughout the organization. For example, recently in the oil industry where personnel are extremely well paid, the CEO of Exxon Mobil was compensated $16.7 million, new petroleum engineering graduates earned about $80,000, and experienced “roughnecks” out on the offshore rigs earned around $100,000. Moreover, these rewards may not always have to be immediately forthcoming. Many individuals will work extremely hard for rewards that may not be available for another 5 or 10 years. As Kerr has noted:

Such attractive rewards as large salaries, profit sharing, deferred compensation, stock grants and options, executive life and liability insurance, estate planning and financial counseling, invitations to meetings in attractive locations, and permission to fly first class or use the company plane, are typically made available only to those who reach the higher organizational levels. Do such reward practices achieve the desired results? In general, yes. Residents and interns work impossible hours to become M.D.s, junior lawyers and accountants do likewise to become partners, assistant professors publish so they won’t perish, and Ph.D. students perform many chores that are too depressing to recount here to obtain their doctorates.

Additionally, not only is money a motivator, but, as was said in the introductory comments, the more some people get, the more they seem to want. The idea here is that once money satisfies basic needs, people can use it to get ahead, a goal that is always just out of their reach, so they strive for more. Conversely, there is evidence that shows that if an organization reduces its pay, morale may suffer. So pay may need to continue to escalate. One researcher, for example, interviewed more than 330 businesspeople and found that employee morale can be hurt by pay cuts because the employees view this is an “insult” that impacts on their self-worth and value to the organization. There is recent basic research indicating that Reward Systems have a strong influence on employee trust in the workplace. In other words, employee morale and other psychological variables such as trust are very fragile, and when employees feel they are not being compensated fairly, this can impact on their performance and hurt the bottom line. Even in the midst of the recent financial crisis, a large sample of firms indicated they were taking deliberate measures to reward their people with special bonuses and stock awards to boost their morale and confidence.    
         There is also considerable evidence showing that money means different things to different people. Moreover, sometimes these “individual differences” end up affecting group efforts. For example, one study examined pay and performance information among baseball players. With statistical methods used to control for such things as total team payroll, team talent, and market size, the data were analyzed from 1,644 players on 29 teams over a nine-year period. It was found that, all other things being equal, the greater the pay spread on a team, the more poorly the players performed. These findings led to the conclusion that pay distributions have significant negative effects on player performance.
         Perhaps a better gauge of the effect of pay on performance of baseball teams may be total payroll. This reflects the overall salaries of the players; and if pay is indeed a motivator, would not a well-paid group outperform their less-well-paid counterparts? Again in application to baseball, for example, the New York Yankees have had the highest payroll in recent years, and their performance in these years has been very good. Compensation expert Edward Lawler echoes these sentiments, noting that there is a strong relationship between the total payroll of teams and how many games they win. “In a world of free agency, it takes a high payroll to attract and retain top talent. Thus, teams with the highest payrolls usually end up in the World Series.” Additionally, Lawler has argued that the rewarding of team performance is more important than the size of the pay differences among the individual players.
          The question of pay ranges and their impact on productivity is one that merits more consideration as organizations seek to determine the effectiveness of pay on performance. A case in point is the huge pay package most CEOs of large firms receive, but the performance of their firms certainly did not justify the millions of dollars of compensation. The result of such disparities is that a growing number of corporate shareholders are demanding that the chief executive officer pay be tied to a multiple of the lowest worker’s pay, thus controlling the range between the lowest and highest paid person in the organization. A public poll indicated that a vast majority (87 percent) believe that executives “had gotten rich at the expense of ordinary workers.”
     Although money was probably overemphasized in classical management theory and motivation techniques, the pendulum now may have swung too far in the opposite direction. Money remains a very important but admittedly complex potential motivator. In terms of Maslow’s well-known hierarchy of needs, money is often equated only with the most basic requirements of employees. It is viewed in the material sense of buying food, clothing, and shelter. Yet, money has a symbolic as well as an economic, material meaning. It can provide power and status and can be a means to measure achievement. In the latter sense, a recent meta-analysis of 72 studies found money to be a very effective positive reinforcement Intervention Strategy to improve performance.
     Beyond Maslow, more sophisticated analyses of the role of money are presented in cognitive terms. For example, a number of years ago some organizational psychologists concluded, based on their laboratory studies, that the use of extrinsic rewards such as money decreased the intrinsic motivation of subjects to perform a task. For now it is sufficient to know that the intrinsic motivation was usually measured in the laboratory by time spent on a task following the removal of the reward. However, through the years, there have been many criticisms of these studies, and a meta-analysis of 96 experimental studies concluded that “overall, reward does not decrease intrinsic motivation.” Although these studies used other rewards besides money, and the controversy still continues between the behavioral and cognitive schools of thought, it is becoming clear that the real key in assessing the use of monetary rewards is not necessarily whether they satisfy inner needs but rather how they are administered.
        In order for money to be effective in the organizational reward system, the system must be as objective and fair as possible and be administered contingently on the employee’s exhibiting critical Performance Behaviors. This has been made particularly clear by Kerr, who notes that an effective pay system for rewarding people has to address three considerations. First, the organization must ask itself what outcomes it is seeking. Examples include higher profits, increased sales, and greater market share. Second, the enterprise must be able to measure these results. Third, the organization must tie its rewards to these outcomes. The problem for many of today’s organizations is that they do still not know what they want to achieve or are unable to measure the results.


Traditionally, organizations have used two methods of administering pay: base pay and merit pay. These methods are then sometimes supplemented by pay-for-Performance Plans and “new pay” programs that extend, and in some cases radically revise, the traditional approaches. Base Pay Approach Base wages and salary is the amount of money that an individual is paid on an hourly, weekly, monthly, or annual basis. For example, a person working on a part-time basis may earn $12.00 an hour. This is the hourly wage for that position. Most managers are paid on an annual salary basis, and the sum is broken down into weekly, biweekly, or monthly amounts. As another example, a new college graduate may be offered $36,000, which comes to just over $692 a week before taxes and other deductions. Base pay is often determined by market conditions. For example, graduating engineers may be paid $55,000 annually whereas engineering managers with 10 years of experience earn $110,000. If base pay is not in line with the market rate, organizations may find that they are unable to hire and retain many of their personnel. At the same time, one of the major problems with base pay forms of compensation is that they tend to be most competitive at the entry level and are often less competitive thereafter. So an engineering manager who is making $105,000 may be $5,000 off the market when compared to what other engineering managers within the same region and similar job requirements are making, but the individual may also find that firms paying higher salaries prefer to develop their own management talent internally and do not hire from outside. In any event, most organizations have some form of merit pay system that is used to give annual salary increases, thus raising the base pay and preventing personnel from getting too far out of step with the market. Merit Pay Approach Merit pay is typically tied to some predetermined criteria. For example, a company may give all of its employees a cost-of-living allowance and then allocate additional funds for those who are judged “meritorious.” The amount of merit pay can take one of two forms: a flat sum, such as $3,000, or a percentage of the Base Salary, such as 6 percent. In some cases companies use a combination of the two, such as giving everyone who qualifies for merit pay an additional 6 percent up to a maximum amount of $5,000. This approach ensures that those who are making lower salaries get larger percentage increases, whereas those earning higher salaries get a flat merit raise. For example, under the combination merit pay just described, a lower-level manager with a base salary of $50,000 will get an additional $3,000 (6 percent of $50,000), whereas a top-level manager with a base salary of $150,000 will get $5,000.

The intent of merit pay is to reward and thus motivate and retain the star performers. One seasoned compensation expert describes the process as follows:

Differentiation is the name of the game now when it comes to rewards. By differentiating, companies are increasingly willing to pay more money to employees who are accomplishing the most for the organization—at all levels in their companies. We believe that in any organization there are three kinds of employees: the middle group, which is the largest and gets the job done; those that truly make a difference; and some small percentage at the bottom that are not getting the job done for a variety of reasons. Make sure you take care of those that make a difference. Make sure you take care of the middle group—pay them fairly. The bottom group is the group you should constantly keep trading so, hopefully, you can hire more stars.

  Unfortunately, merit pay also has a number of major shortcomings. One of the problems is that the criteria for determining merit are often nebulous because the organization does not clearly spell out the conditions for earning this pay. An example is a firm that decides to give merit to its best employees as described above. Unless the criteria for “best” are objectively spelled out, most of those who do not get merit money will feel left out because they believe they are among the best. A second, and related, problem is that it can often be difficult to quantify merit pay criteria. In particular, the work output of some people, production-line and salespeople being good examples, is easily measured, but the work output of others, such as accountants, engineers, and other staff specialists, office personnel, and managers/supervisors, may be quite difficult to objectively measure. Recent Web-enabled employee software may help the measurement of performance. For example, British Airways installed software that ensures a customer service rep’s time in the break room or on personal calls doesn’t count, but customer complaint resolutions and sales revenue are measured for merit pay.
      A second major problem is that merit pay can end up being “catch-up” pay. For example, everyone may be given a 2 percent across-the-board raise and then those whose pay is extremely low are given merit to get them closer to market value. This approach is common in enterprises that suffer salary compression brought on by the need to pay higher salaries to hire new personnel at the lower levels. Over time, the salary range between new hires and those who have been with the organization for, say, five years may be totally eliminated. So unless the longer-tenured employees are given more money, there is the likelihood that they will look for jobs at companies that are willing to pay them more based on their job experience.

          In a way, merit pay is supposed to be a form of “pay for performance.” Individuals who do superior work are given increases greater than the rest of their colleagues. However, because of the problems of linking merit pay directly with performance, many organizations have created specific pay-for-performance plans.


There are two basic types of “pay-for-performance” plans: Individual Incentive Plans and group incentive plans. Individual incentive plans have been around for many years. They were particularly popular during the height of the scientific management movement over a hundred years ago in the form of piece rate incentive plans. For example, in those early days a person loading iron ingots in a steel mill could earn as much as 7 cents per long ton (2,200 pounds) under an incentive plan. As a result, a highly skilled loader could make 50 percent more money per day than an individual who was being paid a basic day rate. So individuals who were willing to work hard and had the necessary stamina could opt for incentive pay that was determined by the amount of iron ore they were able to load each day.

Individual Incentive Pay Plans

Like the piece rate incentive plan of the pioneering scientific managers, today’s individual incentive plans also pay people based on output or even quality. For example, at Woolverton Inn’s hotels, housekeepers are given a 40-item checklist for each room. Those who meet 95 percent of the criteria over six months of random checks receive an extra week’s salary. Most salespeople work under an individual incentive pay plan earning, for example, 10 percent commission on all sales. At Lincoln Electric in Cleveland, Ohio, there is an individual incentive plan in effect that, over the years, has helped some factory workers earn more than $100,000 annually.
Pay for some jobs is based entirely on individual incentives. However, because of the risk factor, in the very turbulent economy of recent years many companies have instituted a combination payment plan in which the individual receives a guaranteed amount of money, regardless of how the person performs. So a salesperson might be paid 10 percent of all sales with a minimum guarantee of $2,000 per month. Another popular approach is to give the person a combination salary/incentive such as $26,000 plus 5 percent of all sales. A third approach is to give the person a “drawing account” against which the individual can take money and then repay it out of commissions. An example would be a salesperson who is paid a flat 10 percent of all sales and can draw against a $25,000 account. If the first couple of months of the year are slow ones, the individual will draw on the account, and then as sales pick up the person will repay the draw from the 10 percent commissions received.

The Use of Bonuses
Another common form of individual incentive pay is bonuses. The signing bonus is one of the biggest incentives for athletes and upper-level managers. For example, Conseco Inc., an insurance company, paid Gary Wendt, a former executive at General Electric, a $45 million bonus for agreeing to join the company for at least five years as its chairman and chief executive officer. Additionally, Conseco also paid Wendt a multimillon dollar bonus at the end of his second year based on the firm’s performance, and a minimum bonus of $2.8 million was to be paid at the end of the fifth year. Although this bonus package is extremely large, successful managers and individuals who can generate large accounts for a firm can also expect sizable bonuses. For example, the PaineWebber Group recruited a top-producing brokerage team from one of its competitors by offering the group a signing bonus of $5.25 million and an additional $2 million if they bring more customers to PaineWebber. In the roller-coaster economy, most companies are moving to bonus pay based on performance rather than fixed pay increases. A survey of a wide array of firms found that 10.8 percent use bonuses compared to only 3.8 percent ten years before, but The Wall Street Journal report at the end of 2008 indicated that pay raises of any kind were likely to sink in the coming years.

The Use of Stock Options
Another form of individual incentive pay is the stock-option plan. This plan is typically used with senior-level managers and gives them the opportunity to buy company stock in the future at a predetermined fixed price. The basic idea behind the plan is that if the executives are successful in their efforts to increase organizational performance, the value of the company’s stock will also rise. During the boom period several years ago, many firms depended greatly on stock options to lure in and keep top talented managers and entrepreneurs. However, if these lucrative options were not exercised, when the economy had a meltdown, these stock values in many cases were halved or less. For example, Oracle’s stock was off 57 percent from its high when CEO Lawrence J. Ellison exercised his option and lost more than $2 billion, but he still made $706 million, more than the economy of Grenada and one of the biggest single year payoffs in history. More recently, there are reports of increasing numbers of firms trying to counteract unprofitable stock options held by top managers by exchanging the options for cash and/or issuing new options with a better chance of becoming profitable. The organizations doing this feel it is necessary to keep and motivate top talent, but of course the stockholders (and general public) object because nobody makes good their losses when stocks decline.

Potential Limitations
Although bonuses and stock options remain popular forms of individual pay, there are potential problems yet to be overcome. A general problem inherent in these pay plans may have led to the excesses and ethical breakdowns experienced by too many firms in recent years. For example, as an editor for the Financial Times observed, “If we treat managers as financially self-interested automatons who must be lured by the carrot of stock options and beaten with the stick of corporate governance, that attitude will become self-fulfilling.” There is recent research evidence supporting such observations. A study found that the heads (CEOs) of corporations holding stock options leads to high levels of investment outlays and brings about extreme corporate performance (big gains and big losses). The results thus indicate that stock options prompt CEOs to take high-variance risks (not simply larger risks), but importantly it was also found that option-loaded CEOs deliver more big losses than big gains.
      In addition to these underlying problems, another obstacle is that reward systems such as pay for performance are practical only when performance can be easily and objectively measured. In the case of sales, commissions can work well. In more subjective areas such as most staff support jobs and general supervision, they are of limited, if any, value. A second problem is that individual incentive rewards may encourage only a narrow range of behaviors. For example, a salesperson seeking to increase his or her commission may spend less time listening to the needs of the customer and more time trying to convince the individual to buy the product or service, regardless of how well it meets the buyer’s needs. Also, there may be considerable differences along customer and industry lines with salespeople operating under the same incentive plan. For example, the New York Times sales force had considerable heterogeneity among clients that resulted in substantial earnings inequity and failure to pay for performance. When the plan was restructured and customized for each area, the sales force perceived the new plan as fairer and more motivational.
   Finally, especially in light of the ethical issues brought out in the recent economic crisis, the pay for performance, unfortunately, does not add the qualifier, pay for performance with integrity. As explained by a recent analysis of executive compensation:

The omission—evident from compensation committee reports in top companies’ proxy statements—is striking. Corporations, after all, face unceasing pressures to make the numbers by bending the rules, and an integrity miss can have catastrophic consequences, including indictments, fines, dismissals, and collapse of market capitalization. Furthermore, performance with integrity creates the fundamental trust—inside and outside the company— on which corporate power is based. A board should explicitly base a defined portion of the CEO’s cash compensation and equity grants on his or her success in handling the foundational task of fusing high performance with high integrity at all levels of the company.

   Bonuses are also proving unpopular in some situations such as educational compensation. Delegates to the National Education Association convention, for example, recently rejected the idea of linking job performance to bonuses. One reason is that the association believes that a bonus system will discourage people from teaching lower-ability students or those who have trouble on standardized tests, as bonuses would be tied to how well students perform on these tests. Finally, individual incentive plans may pit employees against one another that may promote healthy competition, or it may erode trust and teamwork. One way around this potential problem is to use group incentive plans.

Group Incentive Pay Plans
There has been a growing trend toward the use of teams. There is increasing evidence that teams and teamwork can lead to higher productivity, better quality, and higher satisfaction than do individuals working on their own. As a result, group incentive pay plans have become increasingly popular. One of the most common forms of group pay is gain-sharing plans. These plans are designed to share with the group or team the net gains from productivity improvements. The logic behind these plans is that if everyone works to reduce cost and increase productivity, the organization will become more efficient and have more money to reward its personnel.
      The first step in putting a gain-sharing plan into effect is to determine the costs associated with producing the current output. For example, if a computer manufacturer finds that it costs $30 million to produce 240,000 printers, the cost per printer is $125, and these data will be used as the base for determining productivity improvements. Costs and output are then monitored, while both the workers and the managers are encouraged to generate costsaving ideas and put more effort into producing more with better quality. Then, at some predetermined point, such as six months, costs and output are measured and productivity savings are determined. For example, if the firm now finds that it costs $14 million to produce 125,000 printers, the cost per unit is $112. There has been a savings of $13 per printer or $1,625,000. These gain-sharing savings are then passed on to the employees, say, on a 75:25 basis.
    A number of organizations use gain-sharing in one form or another. At Owens Corning, for example, the company has instituted a gain-sharing plan designed to reduce costs and increase productivity in the production of fiberglass. Savings in the manufacturing cost per pound are then shared with the employees. In another example, Weyerhaeuser, the giant forest and paper products company, employs what it calls “goalsharing” in its container board packaging and recycling plants. The company’s objective is to enlist the workforce in a major performance improvement initiative designed to achieve world-class performance by reducing waste and controllable costs and increasing plant safety and product quality. Although the research evidence to date is somewhat mixed and complex, there is definitive evidence that Gain-Sharing Plans can have a significant impact on employee suggestions for improvement.
    Another common group incentive plan is profit sharing. Although these plans can take a number of different forms, typically some portion of the company’s profits is paid into a profit-sharing pool, and this is then distributed to all employees. Sometimes this is given to them immediately or at year-end. Some plans defer the profit share, put it into an escrow account, and invest it for the employee until retirement. To date, research on the impact of profit sharing on performance via improved employee attitudes has been mixed. However, one study of engineering employees did find that favorable perceptions of profit sharing served to increase their organizational commitment (loyalty).
   A third type of group incentive plan is the employee stock ownership plan or ESOP. Under an ESOP the employees gradually gain a major stake in the ownership of the firm. The process typically involves the company taking out a loan to buy a portion of its own stock in the open market. Over time, profits are then used to pay off this loan. Meanwhile the employees, based on seniority and/or performance, are given shares of the stock, a key component of their retirement plan. As a result, they eventually become owners of the company. However, because new accounting rules require more oversight, many companies such as Kodak, Aetna, and Time Warner are reducing the number of employees who are eligible to receive ownership in their firm as part of the incentives package. Also, when the media company Tribune recently filed for bankruptcy, it exposed the risks to employees who had bought into the ESOP, especially retirees and those who were promised deferred compensation.

Potential Limitations
Group incentives plans are becoming increasingly popular. However, they may have a number of shortcomings. One is that they often distribute rewards equally, even though everyone in the group may not be contributing to the same degree. So all of a team or defined group may get a gain-sharing bonus of $2,700, regardless of how much each did to help bring about the productivity increases and/or reduced costs. A second shortcoming is that these rewards may be realized decades later as in the case of an employee’s profit sharing or ESOP that is placed in a retirement account. So their motivational effect on dayto- day performance may, at best, be minimal. A third shortcoming is that if group rewards are distributed regularly, such as quarterly or annually, employees may regard the payments as part of their base salary and come to expect them every year. If the group or firm fails to earn them, as has been the case in recent years, motivation and productivity may suffer because the employees feel they are not being paid a fair compensation.
       Realizing that base pay, merit pay, and both individual and group forms of incentive pay all have limitations, organizations are now beginning to rethink their approach to pay as an organizational reward and formulate new approaches that address some of the challenges they are facing in today’s environment. For example, especially labor-intensive firms such as Marriott Hotels, which annually pays billions to their people, have undergone an examination of their reward systems to align with associates’ needs, improve attraction and retention, enhance productivity, and in general increase the return invested in people. The result has been the emergence of what are sometimes called “new pay” techniques.


The standard base-pay technique provides for minimum compensation for a particular job. It does not reward above-average performance nor penalize below-average performance. Pay-for-performance plans correct this problem. In fact, in many cases, such as those in which pay is tied directly (i.e., contingently) to measured performance, pay-for-performance plans not only reward high performance but also punish low performance. Sometimes, of course, these plans are unfair in the sense that some jobs may be easy to do or carry very high incentives, thus allowing employees to easily earn high rates of pay, whereas in other cases the reverse is true. Similarly, in a group incentive arrangement in which all members are highly productive, the personnel will maximize their earnings, but in groups where some individuals are poor performers, everyone in the group ends up being punished.
        Despite the downside to some of these pay-for-performance plans and the fact that they have been around for many years, they have become quite popular and can be considered new pay techniques. Examples include especially the group or team incentives such as gain-sharing, profit sharing, employee stock-ownership plans, and stock-option plans. Although recently the extremely high incentive pay packages are under attack by unions, shareholders, and the general public (e.g., there have been resolutions banning stock options for senior executives at firms such as American Express and AOL Time Warner), surveys have found that a large majority of Fortune 1000 firms are using them. Additionally, as organizations undergo continual changes brought about by technology, globalization, legislation, and the economic crisis, many enterprises are rethinking and redesigning their pay plans to reflect the demands of the new environment. For example, attention has been given to the role that reward systems play in both knowledge management and globalization. What is emerging are the so-called new pay approaches. The following is a brief summary of some of these.

1. Commissions beyond sales to customers. As with all of these new pay plans, the commissions paid to sales personnel are aligned with the organization’s strategy and Core Competencies. As a result, besides sales volume, the commission is determined by customer satisfaction and sales team outcomes such as meeting revenue or profit goals.

2. Rewarding leadership effectiveness. This pay approach is based on factors beyond just the financial success of the organization. It also includes an employee-satisfaction measure to recognize a manager’s people-management skills. For example, at Nationwide Insurance, management bonuses are tied to their people’s satisfaction scores.

3. Rewarding new goals. In addition to being based on the traditional profit, sales, and productivity goals, rewards under this approach are aimed at all relevant employees (top to bottom) contributing to goals such as customer satisfaction, cycle time, or quality measures.

4. Pay for knowledge workers in teams. With the increasing use of teams, pay is being linked to the performance of knowledge workers or professional employees who are organized into virtual, product development, interfunctional, or Self-Managed Teams. In some cases, part of this pay is initially given to individuals who have taken additional training, the assumption being that their performance will increase in the future as a result of their newly acquired knowledge or skills.

5. Skill pay. This approach recognizes the need for flexibility and change by paying employees based on their demonstrated skills rather than the job they perform. Although it is currently used with procedural production or service skills, the challenge is to apply this concept to the more varied, abstract skills needed in new paradigm organizations (e.g., design of information systems, cross-cultural communication skills).

6. Competency pay. This approach goes beyond skill pay by rewarding the more abstract knowledge or competencies of employees, such as those related to technology, the international business context, customer service, or social skills.

7. Broadbanding. This approach has more to do with the design of the pay plan than do the others. Formally defined as a compensation strategy, broadbanding “is the practice of collapsing the traditional large number of salary levels into a small number of salary grades with broad pay ranges.” So, for example, rather than having three levels of supervisors whose salary ranges are $25,000 to $40,000, $35,000 to $55,000, and $50,000 to $80,000, the company will have one supervisory salary grade that extends from $25,000 to $80,000. This allows a manager to give a salary increase to a supervisor without having to first get approval from higher management because the supervisor’s salary puts the individual in the next highest salary level. Broadbanding sends a strong message that the organization is serious about change and flexibility, not only in the structural and operational processes but also in its reward system. Simply put, with broadbanding the organization puts its money where its mouth is.

      These new pay techniques are certainly needed to meet new paradigm challenges. If organizations expect customer satisfaction, leadership, satisfied employees, quality, teamwork, knowledge sharing, skill development, new competencies (e.g., technical, crosscultural, and social), and employee growth without promotions, then they must reward these as suggested by the new pay techniques. Once again, you get what you reward.


There are a number of reasons why recognition may be as important as, or even more important than, money as a reward for today’s employees. One of the most obvious is that enterprises typically have pay systems that are designed to review performance and give incentive payments only once or twice a year. So if someone does an outstanding good job in July, the manager may be unable to give the person a financial reward until after the annual performance review in December. Nonfinancial rewards, on the other hand, such as genuine social recognition, can be given at any time. It is these more frequent nonfinancial rewards that have a big impact on employee productivity and quality service behaviors.
      Recognition rewards can take many different forms, can be given in small or large amounts, and in many instances are controllable by the manager. For example, in addition to Social Recognition and formal awards, a manager can give an employee increased responsibility. The human resource manager for Orient-Express Hotels, Inc. notes, “I’m a big believer in empowerment. I always tell employees, ‘I’m the HR expert; you’re the expert at what you do.’ I put the power in their hands and say ‘I trust you.’ That pays off.” The employee may find this form of recognition motivational, and the result is greater productivity and quality service to customers. As a follow-up, the manager can then give this employee even greater responsibility. Unlike many financial forms of reward, there is no limit to the number of people who can receive this type of reward or how often it is given. One expert on rewards puts it this way:

You can, if you choose, make all your employees . . . eligible for nonfinancial rewards. You can also make these rewards visible if you like, and performance-contingent, and you needn’t wait for high level sign-offs and anniversary dates, because nonfinancial rewards don’t derive from the budget or the boss, and are seldom mentioned in employment contracts and collective bargaining agreements. Furthermore . . . if you inadvertently give someone more freedom or challenge than he can handle, you can take it back. Therefore, organizations can be bold and innovative in their use of nonmonetary rewards because they don’t have to live with their mistakes.

   Research shows that there are many types of recognition that can lead to enhanced performance and loyalty. One of these that is receiving increased attention is recognition of the fact that many employees have work and family responsibilities and when the organization helps them deal with these obligations, loyalty increases. This finding is particularly important in light of findings such as a survey that found 25 percent of the most sought after employees (highly educated, high-income professionals) reported they would change jobs for a 10 percent increase in salary and 50 percent would move for a 20 percent raise.
     These data are not an isolated example. Another survey of the attitudes and experiences of a large number of employees in business, government, and nonprofit organizations around the United States revealed the following: (1) only 30 percent feel an obligation to stay with their current employer; (2) individuals who are highly committed to their organization tend to do the best work; (3) workers who are discontent with their jobs are least likely to be productive; (4) employees in large organizations (100 or more people) tend to be less satisfied than their peers in small enterprises; (5) lower-level employees are less satisfied than those in higher-level positions; and (6) the things that the respondents would like their companies to focus on more include being fair to employees, caring about them, and exhibiting trust in them.
Recognizing creativity is becoming increasingly necessary for competitive advantage. One recent estimate is that professionals (e.g., software developers and other knowledge workers) whose primary responsibilities include innovating, designing, and problem solving (i.e., the creative class), make up an increasing percentage of the U.S. workforce. To get peak performance from its creative workforce, the widely respected and successful software company SAS rewards excellence with challenges, values the work over the tools, and minimizes hassles.

    It is interesting to note here that groups such as the National Association for Employee Recognition have concluded that practicing human resource professionals and managers still seem to underestimate how useful recognition can be in motivating employees to achieve goals. Moreover, recognition as a reward does not have to be sophisticated or time consuming. In fact, many firms that are now working to improve their recognition systems all use fairly basic and easy-toimplement programs. Steps such as the following need to be set up to effectively manage a formal and informal recognition program:

1. When introducing new recognition procedures and programs, take advantage of all communication tools including Intranet and other knowledge-sharing networks—let everyone know what is going on.

2. Educate the managers so that they use recognition as part of the total compensation package.

3. Make recognition part of the performance management process, so that everyone begins to use it.

4. Have site-specific recognition ceremonies that are featured in the company’s communication outlets such as the weekly newsletter and the bimonthly magazine.

5. Publicize the best practices of employees, so that everyone knows some of the things they can do in order to earn recognition.

6. Let everyone know the steps that the best managers are taking to use recognition effectively.

7. Continually review the recognition process in order to introduce new procedures and programs and scrap those that are not working well.

8. Solicit recognition ideas from both employees and managers, as they are the ones who are most likely to know what works well—and what does not.


Examples of Effective Formal Recognition Systems on behavioral performance management focuses on social recognition as an effective contingent reinforcer that supervisors/managers can use as a style in interpersonal relations. Research has clearly demonstrated that this improves employee performance. In this chapter on the role rewards play in the organizational context, formal recognition programs implemented by organizations are the primary focus, along with money and benefits. Formal recognition is a vital part of the reward system that makes up the environmental component of the social cognitive framework for understanding and effectively managing organizational behavior.
           Today there are a wide number of formal recognition systems that are being effectively used by organizations nationwide. Many of these are the result of continual modification, as organizations have altered and refined their reward systems to meet the changing needs of their workforce. However, all effective programs seem to have two things in common. First, they are designed to reward effective employee performance behavior and enhance employees’ satisfaction and commitment. In other words, effective recognition systems lead to improved employee performance and retention. Second, they are designed to meet the specific and changing needs of the employees. Simply put, a recognition system that worked in the past or in one enterprise may have little value in another. This is why many firms have gone through a trial-and-error approach before they have settled into a unique system that works best today for their employees. Thus, recognition programs often vary widely from company to company—and many of them are highly creative. For example, one expert on implementing recognition systems offers the following creative, but practical, suggestions:

1. Select a pad of Post-it Notes in a color that nobody uses and make it your “praising pad.” Acknowledge your employees for work well done by writing your kudos on your praising pad.

2. Hire a caterer to bring in lunch once a week. Besides showing your respect and appreciation, this encourages mingling and the sharing of information, knowledge, ideas, and innovative solutions.

3. To get a team motivated during an important project, have them design a simple logo for the assignment. This will give the team not only a sense of camaraderie and cohesion, but also group identification and focus.

    These tidbits represent useful suggestions, but many companies have gone much further by designing formal recognition systems that align their overall objectives (increased productivity, reduced cost, better-quality products and customer service, and even higher profitability) and employee performance behaviors. For example, at Dierbergs Family Market, a supermarket chain in Missouri, the firm has created what it calls the “Extra Step” program. This formal recognition program is designed to reward employees who are proactive in meeting customer needs. The objective of the program is twofold: make the company a place where employees love to work and keep customers coming back. In achieving this, the company rewards workers who go out of their way to do things for customers. For example, in one case, a customer left some of her purchases at one of the stores during a snowstorm. The store manager did not want any of the employees going out in the inclement weather, so he called a cab and paid the driver to deliver the packages she had left behind. In another case, an employee on his way to work recognized a good customer trying to change a flat tire. He went over, introduced himself as working for Dierbergs, and changed the tire for the customer.
           These “extra steps” are rewarded by Dierbergs in a number of ways, including gift certificates, movie passes, and even lunch with the chief executive officer. They also help the company achieve its objectives of increased revenues through word-of-mouth advertising (the best form, at no cost) and repeat business, customer satisfaction, and employee productivity and retention. Customer feedback has been overwhelmingly complimentary, and the firm’s turnover rate has rapidly declined, in an industry where labor turnover is extremely high. For its efforts, Dierbergs was given an Award for Best Business Practices for Motivating and Retaining Employees.
       Dierbergs is not alone. A growing number of firms are finding that well-structured and implemented employee recognition reward systems yield very positive cost-benefit results. In particular, formal recognition systems have become important in the hotel and restaurant industry, where annual turnover rates of 100 percent are typical. Firms that have implemented recognition systems have experienced dramatic improvement in retention of their best employees. For example, at the Hotel Sofitel Minneapolis the director of human resources has reported that thanks to the organization’s recognition system, annual turnover has declined significantly. One of the most successful plans in its system is called the Sofitel Service Champions. This program is inexpensive to monitor and all employees participate. It works this way: When employees do something noteworthy, they are given a little slip of paper by a customer or a manager. This resembles a French franc (that goes with the Hotel’s French theme), and when an employee gets three of these francs, he or she receives a $35 gift certificate that can be redeemed at one of the hotel’s restaurants. Seven francs can be exchanged for dinner at one of the restaurants or a $35 gift certificate redeemable at any area store or restaurant. Ten francs entitles the person to a day off with pay or a $50 gift certificate that can be used in any store or restaurant in the area.
       Another successful component in the Sofitel recognition system is the Team Member of the Month program. These members are chosen from one of the department teams within the hotel (e.g., housekeeping, receiving, room service, accounting, front office, etc). Each department director fills out a nomination form with the name of the team member who is believed to have done something outstanding that month. If chosen, the employee receives a $50 check, a special luncheon honoring the recipient in the employee cafeteria, a picture taken with the general manager and the direct report manager, which is placed in a display case, and a specially designated parking spot. If a person is nominated but does not win, the individual still remains eligible for the next three months. All monthly winners and nominees are tracked throughout the year and are eligible for the Team Member of the Year Award. This winner is given either $500 or a trip to one of the other Sofitel Hotels in North America.
       A key success factor in such public recognition plans is that it is viewed as being fair, and those not recognized agree that recipients are deserving. At Sofitel the recognition programs are continually changed based on input from the employees. One of the additions to the recognition system at Sofitel is a recognition program called Department Appreciation Days. Each month, one department is chosen to be recognized by another. The recognition is typically something small and inexpensive, such as a jar of cookies, and has proven to be very popular with the personnel and departments and has led to constructive, friendly competition to win this award.
        Other organizations use similar approaches to recognizing and praising their people. (See the accompanying OB in Action: Some Easy Ways to Recognize Employees.) For example, at the Fremont Hotel & Casino in Las Vegas, a large portion of the human resource budget is set aside for recognition programs. One of these is called “Personality with a Hustle” and is designed to encourage employees to do everything they can to proactively help customers stay and play at the Fremont. Personnel who do so can end up being nominated as employee of the month. Winners are given $100, dinner for two at any of the company’s restaurants, two tickets to a show, a special parking spot, and an Employee of the Month jacket. They are also eligible to win the Employee of the Year Award, which entitles them to an extra week’s vacation, an all-expense-paid trip to Hawaii with $250 spending money, and a dinner for two with the company’s chief executive officer.
       In addition to these representative types of recognition systems, there are many other innovative, fun recognition awards in today’s firms. At First Chicago, for example, there are Felix and Oscar awards (based on the characters in The Odd Couple) given to employees with the neatest and messiest work areas. At Chevron USA in San Francisco, an employee who is recognized for an outstanding accomplishment is immediately brought to a large treasure chest and is allowed to choose an item from the box: a coffee mug, pen-and-pencil set, gift certificate, or movie tickets. At Goodmeasure, a management consulting firm in Cambridge, Massachusetts, a person who does something outstanding is given an “Atta Person” award. At Mary Kay Cosmetics, pink Cadillacs, mink coats, and diamond rings are given to their leading sellers. At Hewlett-Packard, marketers send pistachio nuts to salespeople who excel or who close an important sale. Salespeople at Octocom Systems in Chelmsford, Massachusetts, receive a place setting of china each month for meeting their quota. In a different, and for the long run perhaps questionable, approach, at Microage Computer in Tempe, Arizona, employees who come to work late are fined, and this money is passed out to people who arrive on time. The Commander of the Tactical Air Command of the U.S. Air Force rewards individuals whose suggestions are implemented with bronze, silver, and gold buttons to wear on their uniforms.

       In some cases, recognition awards are delivered on the spot for a job well done. For example, at Kimley-Horn, a big engineering firm in North Carolina, at any time, for any reason, without permission, any employee can award a $55 recognition check ($50 plus $5 for tax payment) paid by the company to any other employee. As the HR director notes, “Any employee who does something exceptional receives recognition from peers within minutes.” In a recent year, 6,174 such awards ($339,570) were made with very little oversight and virtually no abuses. In another example, at Tricon, a spin-off of PepsiCo that has become the world’s largest restaurant company in units and second behind McDonald’s in sales, the chief executive officer gave a Pizza Hut general manager a foam cheesehead for achieving a crew turnover rate of 56 percent in an industry where 200 percent is the norm. Commenting on the event, the CEO noted, “I wondered why anyone would be moved by getting a cheesehead, but I’ve seen people cry. People love recognition.” Yet, as pointed out at the beginning of this section, this powerful reward is still being underutilized, as seen by the results of a survey in which 96 percent of the respondents said that they had an unfulfilled need to be recognized for their work contributions. As the now deceased head of the Gallup Organization Don Clifton used to say, “I’ve never met an employee who was suffering from too much recognition.” A more visible and much more costly form of organizational reward system involves the benefits that are provided to employees.

OB in Action: Some Easy Ways to Recognize Employees

Employees never seem to tire of recognition. In psychological terms, they do not seem to become satiated, or filled up with recognition as they do, say, with food or even money. For some, in fact, the more recognition they get, the more they want. Fortunately, it is not difficult to recognize people, and there are many ways in which it can be done. Some of the easiest and representative ways are the following:

1. Practice giving concentrated, focused recognition by calling deserving employees into your office and thanking them for doing an outstanding job. During this interaction, focus is only on the detailed recognition and nothing else, so that the effect is not diluted by the discussion of other matters.

2. Buy a trophy and give it to the most deserving employee in the unit or department. Inscribe the individual’s name on the trophy, but leave room for additional names. To help ensure fairness and acceptance, at the end of a month, have this recipient choose the next member of the unit to be recognized and explain why this individual was chosen.

3. Recognize an employee who is located in another locale and does not get a chance to visit the home office very often. Deal with this “out of sight, out of mind” problem by faxing, e-mailing, or leaving a voice mail for the person that says “thank you for a job well done.”

4. Write a note that recognizes an individual’s contributions during the last pay period and attach this note to the person’s paycheck.

5. When you get a raise or a promotion, acknowledge the role that was played by your support staff by taking all of them out to lunch. In sports, a smart quarterback who receives all the attention for a win will always recognize especially his line in front of him and may even take these “unsung heroes” out for dinner or buy them something.

6. Take a picture of someone who is being congratulated by his or her manager. Give a copy of the photo to the employee and put another copy in a prominent location for everyone to see.

7. Have a senior manager come by and attend one of your team meetings during which you recognize people for their accomplishments.

8. Invite your work team or department to your house on a Saturday evening to celebrate their completion of a project or attainment of a particularly important work milestone.

9. Recognize the outstanding skill or expertise of an individual by assigning the person an employee to mentor, thus demonstrating both your trust and your respect.

10. The next time you hear a positive remark made about someone, repeat it to that person as soon as possible.

11. Stay alert to the types of praise and recognition that employees seem to like the best and use these as often as possible.

12. Catch people doing things right—and let them know!


Commonly offered benefits are of two types: those that must be offered because they are required by law and those that most organizations typically have given to their personnel. When benefits are used as part of the organizational reward system, these are standard offerings and, for the most part, differ very little from one organization to another. Federal Government–Mandated Benefits One traditional government-mandated benefit is Social Security. The initial purpose of Social Security, officially known as the Old Age Survivors and Disability Insurance Program, was to provide limited income to retired people to supplement such things as their personal savings, private pensions, and part-time work earnings. Both employees and employers are required to pay a Social Security tax. Additionally, both employees and their employer pay Medicare taxes. In turn, this federal government–mandated program pays both a retirement benefit and Medicare benefits, although payments will vary depending on a number of factors such as the age at which the person elects to start receiving payments. Another mandated benefit is workers’ compensation. This is insurance that covers individuals who suffer a job-related illness or accident. Employers pay the cost of this insurance. Other mandated programs that are offered to employees do not specify a particular benefit, but they do require the employer to take specific types of actions. For example, the Family and Medical Leave Act of 1993 requires all organizations with 50 or more employees to grant any worker who has been employed there for at least one year an unpaid leave of up to 12 weeks for childbirth, the adoption of a child, to care for a family member with a serious health problem, or because of a personal health problem. During this period, all of the employee’s existing health benefits must remain intact, and the individual must be allowed to return to the same or an equivalent job after the leave. Another mandated program is the Employee Retirement Income Security Act of 1974, which requires that if an employer sets up a pension fund for employees and deducts contributions to that fund, the company must follow certain guidelines. These guidelines restrict the firm’s freedom to take money out of the fund and provides formulas for employee vesting (when the employee has a right to the employer’s contributions to the fund) and portability (the employee’s ability to transfer funds to a different retirement account). A third mandated program is the result of the pregnancy discrimination act of 1978, which protects a woman from being fired because she is pregnant. A fourth program is a result of the Economic Recovery Act of 1981, which allows employees to make taxdeductible contributions to a pension, savings, or an individual retirement account (IRA). All of these programs provide government-mandated benefits to employees. Life, Disability, and Health Insurance Another major category of traditional benefits consists of insurance coverage. Virtually all large (but less than half of those with 10 or fewer employees) companies offer health insurance to their employees and pay a major portion of the premiums for this coverage. However, about three-quarters (and growing) of U.S. employers do require employee participants to share the health costs via deductibles, coinsurance, copayments, and other means. Life insurance is often based on the individual’s annual salary so that the premium provides protection, for example, for two times the person’s yearly salary. Additionally, employers often make disability insurance available for a minimum premium fee. In recent years, even though health coverage costs are rapidly escalating, they have become an expected benefit. Thus, firms are trying to manage for cost containment through copayment and preferred providers in order to compete for top employees and retain the best. In fact, many employers are expanding coverage to encompass a variety of health care including prescription drugs, vision care products, mental health services, and dental care. Over half of employees are enrolled in preferred provider organization (PPO) plans and less than half have the option to join a health maintenance organization (HMO) that offers medical and health services on a prepaid basis. This HMO approach has seemed to run its course and now an increasing number of firms are implementing what are sometimes called “disease management programs.” As explained: Disease management programs are a sophisticated version of old-style preventative medicine. Rather than rationing services through managed care, employers throw lots of early medical attention at chronically ill workers, who absorb about 60 percent of all health dollars. Another example would be the growing recognition by companies of the costs of obesity (now estimated by the Centers for Disease Control and Prevention to affect one of three adults). Having overweight employees not only affects a firm’s health care costs, but also lost productivity due to absenteeism. One report estimated that obesity costs a company with a thousand employees an extra $395,000 per year and, for private employers in general, obesity-related costs stemming from medical expenditures and work loss amount to $45 billion annually. An increasing number of firms are trying to combat this increasing problem through preventative programs. For example, VSM Abrasives, a sandpaper manufacturer in Missouri, offers cash and time-off incentives for employees who maintain or lose weight and have saved 10–15 percent on annual insurance claims. Pension Benefits In addition to the pension benefits that are provided by Social Security, most organizations today have also established private pension plans. Contributions are generally made by both the employer and employee, and there are a variety of plans available. Two of the most popular are individual retirement accounts (IRAs) and 401(k) plans that allow employees to save money on a tax-deferred basis by entering into salary-deferral agreements with the employer. These built-up funds are then available to the employee in retirement and typically provide far more money than the monthly Social Security checks from the federal government. Many of these plans are invested in stock and when the market goes up these Pension Plans do very well, but of course when the stock values go down, as they did at the end of 2008, the pensions of many people take a big hit. Time-Off Benefit Another common benefit, often taken for granted by many, is paid time off. In the accompanying OB in Action: You Can’t Make More Time, Randy Pausch, the college professor who gave the famous “last Lecture” while he was dying of cancer, passionately points out that time is indeed a precious gift. Increasingly, this message of the importance of more free time is being taken to heart by employers as an effective benefit for their employees. For example, retailer Eddie Bauer focuses on making sure its benefit programs give time back to employees, help employees save time, and equate the saving of time with money. One such benefit at Eddie Bauer was to have employees save time by having services on the corporate campus such as dry cleaning and film developing pick-up and delivery, an ATM machine, a gym, will preparation, and flu shots. This firm believes that employee time saving results in productivity and retention. An innovative way to meet Corporate Social Responsibility objectives would be to give employees paid time off to do charitable and volunteer work in the community. There is evidence that such a benefit helps in recruiting and retaining top talent. The more traditional time benefit is vacation time. In most organizations employees are entitled to at least one week of vacation with pay after being with the firm for one year, and by the end of five years, most are given at least two weeks and, in some cases, as many as four. Moreover, some firms will pay, say, 1.5 times the person’s weekly salary for every week of vacation that the individual forgoes, and some employers allow people to accumulate vacation time and, at some point, pay them for any unused time. Another form of time off is paid religious holidays. Still another is paid sick leave. In many organizations individuals are given a predetermined number of sick days per year, such as six, whereas in others there is no limit. Finally, many firms give paid personal leave such as a day to attend the funeral of a friend or relative or for simply any personal reasons.


In recent years, a number of newer types of benefits have emerged and are gaining in popularity. One example of these is Wellness Programs, and another is assistance with family-related responsibilities. These, in addition to others, are emerging as an important part of today’s organizational reward system.

Wellness Programs

Wellness programs are a special type of benefit program that focuses on keeping employees from becoming physically and/or mentally ill. There is considerable evidence that employees who exercise regularly and maintain or lose excess weight are less likely to take sick days and thus reduce health insurance premiums and lost productive time. As a result, more and more firms are now encouraging their people to work out regularly by installing a gymnasium or workout center on the premises or offering to finance at least part of the cost of joining a local health club. Another wellness practice is to encourage employees to exercise by giving them a financial payment such as $1 for every mile they jog during the year. So a person who jogs three miles a day at the company gym will earn $15 a week. As indicated in the chapter, some also encourage their people to keep their weight under control, and individuals who are too heavy are paid to lose the extra weight. For example, a firm may pay $10 for every pound an employee loses. Of course, once the individual has reached the weight recommended by the doctor, this weight must stay off. If the person gains it back, the individual may have to pay the firm $10 for every pound above the doctor’s recommended limit. Many firms find that these are small sums to pay when contrasted with the cost of having someone, for example, out of work six days a year due to poor health. In fact, in order to encourage everyone to stay healthy, some organizations pay people for unused sick days. So those who are in good health have an incentive to maintain this status. Finally, a growing number of large firms have on-site health care services that primarily focus on prevention rather than treatment.

Life Cycle Benefits

Another popular group of new benefits comes under the heading of what collectively are being called “life cycle” benefits. These are based on a person’s stage of life and include such things as Child care and elder care.
        Child care benefits are extremely popular and many of the “best places to work” such as the software development firm SAS have on-site day care. Employees can drop off their child at the day care center, come by and have lunch with the child, and then pick up the youngster after work and drive home together. In a few instances, firms have even installed TV cameras so employees can view and keep track of their child throughout the day in the center. One of the primary benefits of this program is the elimination of day care costs, which can run well over $100 a week, as well as spending quality time with the child before, during, and after work, or, in the case of the TV-monitored systems, during the workday.
          Elder care takes a number of different forms. One of the most common is referral services, which can be used by an employee who has a disabled parent or one who needs constant care. Another form is long-term health care insurance, which provides for nursing homes or at-home care.
         Another popular benefit is Employee Assistance Programs (EAPs for short), which were originally designed to assist employees who had problems with alcohol. In recent times, EAPs deal with drug abuse and now have generally expanded into marital problems and financial planning. The purpose of these programs is to provide help to employees in dealing with personal problems that can negatively impact their lives and their job performance. The use of EAPs should be kept confidential so that employees are not hesitant to use the services for fear of career repercussions.

Other Benefits

In recent years a number of other benefits have begun to appear, many of them offered by especially innovative companies. One is concierge services that help employees choose gifts for presents, get tickets to concerts, schedule home or auto repairs, and so forth. Another is the use of tuition assistance to help employees obtain a college education or advanced degree. A third is the use of noninsured benefit programs that help low-wage and part-time workers purchase medicines and medical assistance at a discount. Still another example is prepaid legal plans that offer a variety of services such as legal advice, wills and estate planning, and investment counseling. Finally, some firms just come up with relatively small, but still effective benefits for their employees. For example, at the accounting firm KPMG, employees received a hot summer surprise: six pints of gourmet ice cream, toppings, and a scooper; the L.A. law firm DLA Piper recently whisked 400 employees and their families off to Disneyland for the day; in Dallas the PR firm Weber Shandwick encourages employees to use their expense account to pay for cab rides after drinking alcohol; and Safeco, Microsoft, and IBM offer employees work-from-home opportunities and subsidies for alternative transportation.

Flexible, Cafeteria-Style Benefits

Every organization has its own way of providing/administering the benefit package, but in recent years a growing number have begun offering flexible, cafeteria-style benefit plans. Just like most firms today offer their employees flexible times for arriving and departing work, they also offer plans that allow employees self-control and choice over the benefits received. Employees are allowed to put together their own package by choosing those benefits that best meet their personal needs. Under this arrangement, the organization will establish a budgeted amount that it is willing to spend per employee, and the individual is then allowed to decide how to spend this money. For example, some employees may want more life insurance because they have a young family, whereas others may prefer to spend more on Health Insurance Coverage because they have a spouse with a debilitating illness.
        There is evidence that these cafeteria-style programs can lead to increased satisfaction and reduced turnover. However, organizations have also found that these plans can be somewhat expensive to administer because there are many different types of benefit packages, and someone has to keep track of what each person has chosen. Additionally, employees are usually allowed to make changes in their package on an annual basis, further complicating the problem of administering the benefits and the accompanying tax implications. Finally, even though employees seem to like cafeteria-style benefit plans, there is no assurance that they always make rational decisions. For example, young employees with families may opt to deal only with more immediate concerns such as better hospital coverage for their spouse and children and completely ignore the benefits of contributing to a retirement program for their future.
        In summary, benefits are clearly an important component of the organizational reward system. Unfortunately, because they are so common and everyone gets them, their value as a reward often goes unnoticed. Benefits are too often taken for granted and are considered to be an entitlement and thus become a hollow reward for employee performance and retention.