MASTER OF BUSINESS ADMINISTRATION

SEMESTER 4

DHRM401

COMPENSATION AND BENEFITS

Unit 13

Rewards & Recognition

Table of Contents

SL No	Topic		Fig No / Table / Graph	SAQ / Activity	Page No
1	Introduction		-	-	3
	1.1	Objectives	-	-	3
2	Concept of Reward Management		-	1	4 - 6
3	Developing Reward Policies		1	2,	7 - 9
4	Reward Strategy		2	3 , I	10 - 12
5	Developing Total Reward Approach		3	4	13 - 14
6	Reward Management in Service Sector		4, 5	5	15 - 18
7	Total Reward Framework of Service Industries in India		6, 7	6	19 - 21
8	Factors affecting Reward Management Policies in Service Sector		-	7, II	22 - 25
9	Process of Designing a Successful Reward Strategy		8	8	26 - 28
10	Summary		-	-	29
11	Glossary		-	-	29
12	Terminal Questions		-	-	30
13	Answers		-	-	30 - 31
14	Case Study		-	-	32 - 34

1. INTRODUCTION

In the previous unit, you studied about pay structures. You learnt the difference between performance based and pay based structures, how to design pay structures, pay ranges and pay bands. You also examined comparison in evaluation of different types of pay structures, significance of factors affecting pay levels and economic determinants of pay. In this unit, you will study about reward management.

Now a days organisations are focusing more on the important role of Reward Programs which is created in order to achieve their objectives. The delivering and developing the programs related to reward are cost effective, build talent, drive performance improvement and avoid undue risks. Thus, in these challenging economic times, communicating total reward is regarded as more critical than ever.

In this unit you will be able to know about the concept of Reward Management and policy of the service sector Industries at Macro level and also the procedure of designing a successful reward strategy.

1.1 Objectives:

After studying this unit, you should be able to:

❖ Describe reward management and reward policies

❖ Elucidate reward strategy with respect to service sector

❖ Discuss and develop total reward approach

❖ Explain the framework of total reward of service industry in India

❖ Explain the factors affecting reward management policies in service sector

2. CONCEPT OF REWARD MANAGEMENT

Reward Management basically refers to the implementation, evaluation and formulation of processes, policies and strategies which are needed so as to ensure that the people’s contribution towards the form is recognised by both the monetary as well as non – monetary means. The basic purpose of Reward Management is to reward the employees equitably, consistently and fairly with respect with their value to the firm and also to help the firm to achieve is overall strategic objectives.

Reward Management is, thus, not only about benefits of the employees but also about the employee pay structure. It is equally concerned with the non-monetary rewards such as learning and development, recognition, increased job responsibilities and higher opportunities.

Aims of reward management: The basic objectives of the Reward Management are as follows:

1. It helps in winning the war for talent by attracting and retaining the highly qualified and talented employees.

2. It helps in developing and building the positive relationship as well as the psychological contract.

3. It helps in motivating the employees and obtaining their commitment and engagement.

4. It helps in developing a high performance culture in the organisation.

5. It helps in aligning the reward practices with the organisation’s objectives as well as with the employees’ needs and values.

Case Let

Financial Services – Regulations as a Fact of Life

While the financial services sector has been the focus of much of the increased regulation and scrutiny over reward practices in the wake of the financial crisis, many organizations in the sector are taking governance changes in their stride. They may be most heavily impacted by regulation, but they were some of the least concerned about it.

Most financial services organisations are changing their reward strategy to align with their business strategy and the changed regulatory and governance environment.

Many are concerned about their ability to attract and retain talent with increasing restrictions on reward. In an attempt to address these concerns many are intensifying their talent development programs or turning to other sectors in the search for skills. As a result organisations continue to watch their competitors’ reward strategies carefully and place great value on external benchmarks. Current performance management is seen as too complex, not aligned with overall corporate performance and weak in differentiating between high and poor performers. Many organisations are also struggling to find ways to address risk within the performance management process, and to incorporate non-financial measures in the assessment of performance.

The aim for many, ultimately, is a reward approach that achieves a better balance between short and long-term performance, between tangible and intangible benefits and between base and variable pay. There is a strong desire to involve line management in the process of reward and to improve transparency of communication for employees.

Source:

http://www.haygroup.com/downloads/ww/misc/cfr_global_report.pdf

3. DEVELOPING REWARD POLICIES

Reward policy must aim at rewarding the best and competent staff and their performance on the basis of merit, competitive and fair based criteria which are transparent and used in the process of review. The organisations develop their reward policy on the basis of certain elements:

1. Policy statement of reward: As the success of the organisation relies on the contribution of its talented staff, they are rewarded and valued on the basis of what they contribute and what they achieve.

2. Purpose of reward: The main objective of the reward policy is to support the planning done in the organisation in its key themes of sustainability and excellence. Also, it focuses on rewarding and recognising the employees’ contribution made to the organisation.

3. Principles of reward: The reward policies and practices must reflect the following principles:

❖ Clarity in the compensation structure, that is, what staff is paid for and why.

❖ To be transparent, consistent and systematic.

❖ Rewarding employees for their contribution made, knowledge and skills in the job they are performing.

❖ Focus is to recruit, attract, engage and retain the right candidate at all levels – local, national and international.

4. Designing various reward policies: Service sector recognises exceptional team as well as individual performance and also provides an opportunity for non-financial rewards for the high achievers. Staff can also nominate a colleague, supervisor or subordinate within their own organisation.

Table 13.1: Basis for Reward and Recognition of Employees

Employee Recognition	To ensure a consistent and fair approach within the organisation, the employees can be recognised for the following outstanding contributions: • completion of project • teamwork • safety • exemplary effort • customer service • productivity • excellent achievements • public service
NonMonetary Rewards	In order to ensure a fair and consistent approach, following are the examples of non-financial rewards: • desk items • theatre • recognition leave • concert • trips • meals • electronics • plaques • restaurant visit
Recognition Leave	The leave related to recognition must fall within 12 months from the date given. It will be treated as annual-off for the leave’s taxation and accounting purposes. The employees will be offered a lump sum for any annual leave balance when they leave due to death, retirement and redundancy.
Reward Amount	In service sector, organisations’ total value of non-monetary rewards will not exceed ` 50,000 per staff per calendar year. Thus, recognition leave will not exceed 3 days per staff per calendar year. Hence, you may find 2 levels of Reward and Recognition in Service Sector, which are as follows: Level 1: • approved by the head of the organisation • approximately ` 25,000 value in benefit or one day recognition leave • Includes examples such as suggestions made for the improvement of work flow, customer service or work process and an exceptional job on task, activity or project or any day-to-day business processes Level 2: • approved by senior management group based on the
	recommendations by the head of the organisation • approximately ` 50,000 value in benefit or up to 3 days recognition leave • Includes the examples such as to recognise the suggestion which may lead to improve the work flow, customer service and work process and to sustain excellent contribution or achievement.

On the basis of the above criteria, the organisation head will determine how to reward and recognise the employee within their respective specialisation as well as within their yearly budgets.

4. REWARD STRATEGY

Reward strategy is regarded as the heart of all the reward activities. It helps the organisations to appreciate the achievement of excellence by rewarding the high achievers for their contribution and performance as well as attract the best staff. Thus, it is the employees' expectations of financial rewards such as fringe benefits, stock options, bonuses and salary in return of their commitment.

The employees also seek the other form of rewards such as higher responsibility, achievement, personal development, competence, etc. Hence, reward strategy must be tailored in order to support various needs and requirements of the organisation that is the salary and incentive programs must be Specific, Measurable, Achievable, Relevant and Timely (SMART).

Therefore, the service industry can develop the reward strategy by:

• Conducting market analysis and competitor analysis

• Employer engagement, branding and communication.

• Design as well as implement incentives and bonus schemes.

• Internally benchmarking their employees with the help of a wide range of techniques and tools which includes performance management programs.

Now with the help of figure 13.1, you will be able to understand how many organisations link their reward strategy with the requirements of their talent investment strategies:

Source:http://www.sibson.com/publications/perspectives/Volume_12_Issue_ 1/e_article000242310.cfm_files/roi20304.gif

Figure 13.1: Linking Reward Strategy to Talent Requirements

Today, the opinion of many firms laid emphasis on aligning the rewards with their business. They define this with critical strategic imperative (such as grow profits by launching a new product) and then identify the capabilities of the organisation (such as through fast product development) and talent segments (such as product engineers) which are needed to execute and implement the strategy successfully. Therefore, this will help the organisation to decide where and how to invest rewards based on the value of each talent segment.

Hence, few segments of staff will make strategic competitive advantage while others will manage the strategic execution. The organisations which are serious in attaining high Return on Investment (ROI) on total rewards will distinguish their investments on reward and thus, create a total reward investment strategy which is based on directly aligning the reward of the employee with each segment’s impact on firm.

Benefits of total reward strategy in service industries: To be effective, the strategic package in service sector organisations must have the following features:

1. Support the “Employee Brand” as reward package related to total reward which must influence the employee attitudes and behaviour. Thus, in order to make changes in their behaviour, firms must bring out its brand message by effectively implementing its reward strategy. This can also be done by considering the requirements of both administration and communication so as to guide the “monitor progress and transformation process”.

2. Creates sustainable and affordable cost by helping the firms to better manage and evaluate the overall cost of total reward package and thus, make best choices about where to invest the reward budget.

3. Link with the strategy of the business so as to create a high performance culture within the organisation.

4. Generate higher returns on the investments made on reward programs. Most of the firms invest more than one third of their revenues in the people-related investments such as benefits, human capital programs, salary, training programmes etc.

5. DEVELOPING TOTAL REWARD APPROACH

In this competitive scenario, today’s organisations thrive and survive on the productivity and efficiency of their employees. The total reward approach services the needs and requirements of their employees to make sure that their team’s mind and efforts are on the job and not needlessly worrying about any controllable element of their environment, culture and work experience. Therefore, it becomes important for every employer to begin with the creation of various blends of reward packages for various workforce segments.

Due to the combination of rational and transactional awards, total reward approach offers flexibility as it allows awards to be mixed and remixed so as to meet the various motivational as well as emotional needs of their employees. Flexibility in total reward approach is considered as a “Two Way Street” where both employee and employers have a desire to get more and more.

Thus, you may find that compensation is the only component in the overall proposition to the people. The following figure 13.2 shows an organisation’s joined up approach to reward the best demonstrated in the wide ranging component which makes up the total reward offering in the organisation.

Thus, total reward approach includes the following:

• Competitive market basic pay.

• High levels of pay to the high achievers.

• Recognition of achievement by individuals and teams.

• Informal arrangements and flexible working programmes so as to promote flexibility in working.

• Promotion and salary progression to reward contribution.

Figure 13.2: Diagram of Total Reward Approach

Source: http://www.ey.com/Media/Images/

6. REWARD MANAGEMENT IN SERVICE SECTOR

An industry made up of companies that primarily earn revenue through providing intangible products and services. Service industry companies are involved in retail, transport, distribution, food services, as well as other service-dominated businesses. This sector is also called service sector, or tertiary sector of industry.

In most economies, investment per office worker now exceeds investment per factory worker. This is in line with the continuing trend towards a service economy. Service is part of the product. In the future, with greater customization and product variety, the service component of the product will increase.

In 1980, the service sector employed more than two thirds of the working population and accounted for more than 60 per cent of the gross national product. So, the importance of the service sector is now clear. This sector has a pressing need for an effective reward management system in place for its employees.

The service sector should communicate the value of the total reward management better to its employees so as to retain and motivate the high achievers within the organisation. The key drivers of total reward management in the service sector are:

• lack of skills and competencies

• wants of the employee: the consumer society

• pressure of cost

• workforce diversity

Thus, all the above key drivers of total reward management further result in desirable as well as undesirable outcomes which are shown in the following table 13.2

Table 13.2: Desirable and Undesirable Outcomes

Desirable Outcome

Undesirable Outcome

• • • •

•

Increased flexibility

Attractive and strong external brand

Cost effectiveness

Improved attendance, recruitment and retention

Employee engagement

• •

•

Problems in tax

Wrong choices

Administrative complexity

Lack of understanding

Total reward management thus gives comprehensive views of all financial and non – financial compensation – including both the employees and employer’s contribution – hence helping employees to see the overall worth of their contributions in the organisation. Therefore, service sector must design such total reward management programme which helps them in the following ways:

• Aligning the cost of people with that of business results.

• Aligning the total reward programme value with business performance, individual performance and work culture.

• Developing a cost effective reward programme so as to meet the retention and motivational needs of the organisation.

• Making sure that employees understand new programme very well which result in increase in the employee engagement and commitment.

• Providing differentiated and competitive reward packages.

The figure highlights the total reward derivation which basically depends on two important elements – intrinsic (which contributes to the internal value of firm) and extrinsic (which assigns monetary value). Reward elements such as engagement factors, active and passive incentives, long term and short term benefits, and basic compensation can be derived as follows:

Basic cash + Short term variable = Total Cash

Basic cash + Short term variable + Long term Benefits = Total Direct Compensation

Basic cash + Short term variable + Long term Benefits + Active Benefits

+ Passive Benefits = Total Remuneration

Basic cash + Short term variable + Long term Benefits + Active Benefits

+ Passive Benefits + Engagement Factors = Total Reward

Now you may see the derivation of total reward management for service sector Industries as shown in the following figure 13.3.

Source: http://www.employeebenefits.co.uk/download/781/B7-IGoulton-

.ppt#261,15,Total Reward in the economy as a whole)

Figure 13.3: Derivation for Total Reward Management for Service Sector

7. TOTAL REWARD FRAMEWORK OF SERVICE INDUSTRY IN INDIA

One of the important challenges faced by the service industry organisation is related to employee compensation. The service industry reward strategy must be linked with the business strategy and also with the needs and requirements of the employee as well as with the organisation. Therefore, total reward framework of service Industry helps you to optimise the reward, no matter how challenging the situations and conditions are.

Source: http://www.towerswatson.com/research/6913

Figure 13.4: Framework of Total Reward

The figure 13.4 depicts that the total reward framework takes strategy as the very first phase which focuses on total reward and may comprise of monetary as well as non – monetary components. It also considers the needs and requirements of the employee and organisation. Thus, the framework of total reward is tied to a strong implementation plan which translates into the bottom line result.

So, the above figure depicts three important things:

1. You may find 3 categories of rewards which mirror the employees’ own performance and help them to identify and recognise the worth of total reward package which are as follows:

❖ Foundation reward in service sector (the reward they get for the contribution and service rendered by them) such as base pay, perks, paid time off, voluntary benefits etc.

❖ Performance based reward in service sector (the reward they receive after delivering high quality and superior performance) such as well being programs, training and development programs, flexible work programs etc.

❖ Environment and career rewards in service sector (the rewards they get regarding managing their career and work life and also enhancing their work environment) such as recognition, profit sharing plans, promotions, long term and short term incentives etc.

2. Total reward framework represents the relationship between Employee Value Proposition (EVP) and total reward by recognising total reward as the programmatic element of EVP.

3. It highlights the significance of ‘aligning’ total reward with the human capital and organisation business strategy so that the employers can construct their programme in order to ‘optimise’ the overall worth of their investment and also ‘drive’ the behaviour of employees.

Total reward framework of service industry is a dynamic communication platform which is capable of giving and delivering high branded, quality and interactive content to total reward framework. For any programme, building and implementing a proper and effective strategy of communication and services is the key of success for any organisation.

Thus, each element in the total reward framework has the primary goal of engaging and committing employees in an appropriate manner to their pay, benefits, work life, performance recognition and career development.

With the help of the following table 13.3, you will be able to understand the total reward framework of service industry in India with respect to employment and performance based systems. These are in turn assessed with respect to monetary and non – monetary means:

Table 13.3: Employment and Performance Based Systems

	Employment-Based		Performance-Based
	Benefits & Services		Performance Rewards
Cash or Cash-Related	• Health & welfare • Tuition reimbursement • Child care / eldercare • Wellness programs	• • • • •	Base pay Variable pay Stock options Spot rewards Hiring bonuses
		•	Broad-based stock options
	Workplace Opportunities		Performance Recognition
Non-cash or Symbolic	• Specialised training • Flex hours • Informal dress • Company events / parties	• • • • •	Promotions Special assignments Recognition “stars” President’s Club Recognition trips / tickets

Thus as per the above table, in Indian service industry, you may find cash related and non – cash related benefits such as wellness programs, stock options, hiring bonuses, flex hours, career development, promotions, recognitions, vouchers etc.

8. FACTORS AFFECTING REWARD MANAGEMENT POLICIES IN SERVICE

Reward management policies and practices in the service sector are influenced by a number of factors. Some of these are contextual factors arising from external and internal environment and other are conceptual factors like total reward system, strategic management, human capital management, pay levels, engagement, commitment, motivation and psychological contracts in context of service sector.

1. Internal environment: It consists of the culture of firm providing services, its businesses, technology and the people.

2. External environment: It includes the competitive pressures existing in the service industry, globalisation, changes in employment and demographics etc

3. Strategic reward management: It is an aspect of strategic management whose purpose is to elicit the current actions for future and become a vehicle for action to institutionalise and integrate mechanisms for change. The service sector reward strategy has arisen with time and can be regarded as a pattern in steam of activities.

4. Total reward: Total reward policies provide a holistic view to be adopted in reward management for businesses engaged in service sector to ensure that all aspects of rewards are treated as coherent portfolio of practices and policies.

5. Human capital management (HCM): It is associated with procuring, analysing and reporting on data which provides information on the direction of value-adding people management strategies, investments and operational decisions taken at front-line management or at corporate level. HCM approach to reward management attempts to access the impact of policies of remuneration on people and businesses.

6. Motivation: Motivational theories also act as an important guide for use of contingent pay and the non-monetary elements in total reward system thus influencing the reward strategies and management of service sector firms.

7. Engagement and commitment: Job engagement and organisational commitment are one of the key guiding concepts that guide the total reward policies and variable pay in service sector industries.

8. Psychological contact: An understanding of psychological contracts and its significance at the time of formulating and implementing reward policies is important influential factor affecting service sector reward policies management.

9. Approach towards new/dynamic pay: New pay refers to identification of pay practices that aim at enhancing the organisation’s strategic effectiveness. The concept of dynamic pay suggests that nine following principles support a successful pay strategy which can be utilised in designing an effective reward strategy for service sector firms:

❖ Alignment of compensation with fair value, culture and business objectives.

❖ Linking compensation and other changes

❖ Integration of people processes and pay

❖ Result measurement

❖ Be selective in designing pay strategy

Therefore, you can say that a number of factors influence the reward management policies of service sector firms. Taking into consideration these factors a firm in order to achieve its desired objectives in the service industry must design its reward policies more realistically by making it bear the following characteristics:

1. Appreciating the fact that a good strategy always works and focus thus should be given on its implementation programmes

2. At the time of planning the reward strategies you must ensure that these plans have to be converted into actions.

3. Developing flexible approach for rewarding different individuals but within the framework providing for consistent treatment.

4. Being clear about goals of strategies and determined about evaluating its effectiveness.

Example: Canara Bank, one of the leading banking firm in Indian banking sector has designed out its reward components to include the following after taking into account various factors like its external and internal environment, the pay levels, the level of motivation needed and strategic reward management etc.

• Reimbursement of educational expenses

• Award for children of sub-staff employee

• Incentives for excellence in education

• Death relief schemes

• Reimbursement of hospitalisation expenses, medical checkups and Mediclaim

• Financial assistance to individual who are on loss of account of hospitalisation

• Incentives on promoting small family norms

Activity II

From your own working experience or by taking example of any service sector organisation, define the importance of considering its external and internal

environment in designing and managing reward systems.

9. PROCESS OF DESIGNING A SUCCESSFUL REWARD STRATEGY

The best reward strategy depicts the requirements of firms and its employees. Most of the firms stumble at the foremost obstacle when it comes to designing a reward strategy that will work for them. Thus, various reasons for designing an effective reward strategy are as follows:

• organisation branding and the corporate identity are not defined clearly

• due to established policy or collective agreements, there is lack of flexibility

• lesser understanding about what level of reward or what market rates will attract, retain and motivate the staff

• lack of clarity on the strategic direction of the organisation.

The Figure 13.5 highlights the steps that are essential in designing the effective reward strategy in the service sector organisations which are as follows:

Step 1: Review changes to the size and structure of job roles

As the firms finances are re – built and re – organised, the boundaries of many job roles are likely to be extended. Thus both the breadth and depth of the roles may modify and hence, evaluation techniques and effective job design will help the organisation to revalue these roles more clearly and fairly.

Step 2: Check the validity of pay and grading structure

The second step helps the organisation to find out and check whether the old compensation structure is suited to the new compensation structure and its impact on grades and levels and also its influence on the career and pay progression.

The process of designing a successful reward strategy in Service Sector is shown in Figure

13.5:

Source: http://www.smith.williamson.co.uk/uploads/default/review-rewrd-strat-flwchrt.gif

Figure 13.5: Steps in Reward Strategy

Step 3: Obtain accurate and current market data

The third step is to obtain accurate and current market data as the organisations must keep their eyes on the market trends when the economy begins to recover so as to reduce the risk of losing competent people when the job market ease.

Step 4: Review the cost effectiveness of the provisions made on benefit and incentive scheme

The next step focuses on the reviewing the cost effectiveness on the scheme of incentive and benefits so as to get the best rate. It also ensures that the organisation must get the real value of the money for both of its business as well as its employees.

Step 5: Re-communicate the value of total reward package

Most of the employees in the organisation are unaware of the worth of their benefits. So for this organisations have to work hard in order to communicate the total worth of the reward package in a more clear way to their staff.

Step 6: Ensure reward strategy is equal to pay compliant

In the last step, the organisation must ensure that their reward strategy must equal to the pay compliant. Thus, for large organisations equal pay analysis will help them to evaluate the effectiveness of any modifications made and hence provide benchmark for assessing future progress.

10. SUMMARY

Let us recapitulate the important concepts discussed in this unit:

• Reward Management is not only about benefits of the employees but also about the employee pay structure.

• The service sector should communicate the value of the total reward management better to its employees so as to retain and motivate the high achievers within the organisation.

• The total reward approach services the needs and requirements of their employees to make sure that their team’s mind and efforts are on the job and not needlessly worrying about any controllable element of their environment, culture and work experience.

• Total reward framework of service industry is a dynamic communication platform which is capable of giving and delivering high branded, quality and interactive content to total reward framework.

11. GLOSSARY

• Reward management: It consists of effective control and analysis of the employee compensation and covers the pay as well as all benefits.

• Reward strategy: It is a strategy made by the organisations to support the achievement of excellence by rewarding the high achievers for their contribution and performance as well as attract the best staff.

• Reward policy: Reward Policy must aim at rewarding the best and competent staff and their task on the basis of merit, competitive and fair based criteria which are transparent and used in the process of review.

• Reward package: These are the tools available with the employer to attract, retain and motivate employees.

12. TERMINAL QUESTIONS

1. “Reward Policy must aim at rewarding the best and competent staff.” Elucidate.

2. Discuss Reward Management in Service Sector.

3. Explain total reward framework of Service Industries.

4. Highlight the factors that affect the Reward Management Policies in Service sector.

5. Explain the process of designing a successful Reward Strategy.

6. State one reason for designing a reward strategy.

^‘13. ANSWERS

Self Assessment Questions

1. Pay Structure

2. (c) Developing a low performance

3. False

4. True

5. Non-financial

6. (d) Reward Policy

7. 1: b; 2:d; 3:a; 4: c

8. Employee Brand

9. Reward strategy

10. False

11. (d) Culture

12. Two Way Street

13. False

14. False

15. Tertiary Sector

16. (d) High Achievers

17. Compensation

18. True

19. (a) Human Capital Management

20. (d) Social Contact

21. Motivational

22. External Environment; Total Reward; Motivation; Psychological contact

23. True

24. (b) Obtain accurate and current market data

25. False

26. Pay compliant

27. Step 4: Review the cost effectiveness of the provisions made on benefit and incentive scheme; Step 5: Re-communicate the value of total reward package

Terminal Questions

1. Reward Policy must aim at rewarding the best and competent staff and their task on the basis of merit, competitive and fair based criteria which are transparent and used in the process of review. For more details refer to section 3.

2. An industry made up of companies that primarily earn revenue through providing intangible products and services. For more details refer to section 6.

3. The framework of total reward is tied to a strong implementation plan which translates into the bottom line result. For more details refer to section 7.

4. Reward management policies and practices in service sector are influenced by a number of factors. For more details refer to section 8.

5. A reward strategy is meant for motivating the employees and bringing out the best performance of them. In-order to achieve this there are certain steps that are essential in designing the effective reward strategy in the service sector organisations. For more details refer to section 9

6. Designing a proper reward strategy can help in organisation branding and defining corporate identity.

14. CASE STUDY

Team Reward for Customer Satisfaction at Sainsbury’s

Most bonus schemes are linked to sales or productivity but, occasionally, a scheme arises where the main measure used is one that is at the heart of the organisation’s mission and vision. Although management bonuses had been in place for several years, food retailer Sainsbury’s Supermarkets introduced its first bonus scheme for retail staff in March 2002 and it was not based on sales volume. It was designed to motivate and focus staff towards a key part of the company’s strategic agenda – delivering high levels of customer satisfaction.

Link to strategic agenda: For this novel scheme, it was decided to have just one measure in place so that employees were focused on what was considered to be most important. Retail employees have the most direct effect on customers and the way they behave and assist customers helps create the perception of Sainsbury’s as a brand.

How the scheme works: The bonus scheme used a measurement of customer satisfaction, known as a ‘mystery customer measure or MTM’, gathered through the company’s mystery shopper programme. Store targets for customer satisfaction were set in collaboration with the company’s marketing department, which used a model that maps how improvements in the mystery shopper scheme enhance sales and profitability.

To ensure sufficiently robust and consistent measures, the pool of mystery shoppers was large enough to rotate around more than 500 stores. Measures were taken every four weeks in all of the company’s stores. From these 13 ‘snapshots’ taken across the year, an average score emerged from each store. If stores met their targets, a bonus payment was made. The first year target average was a MCM (Mystery Customer Measure) figure of 77%. All retail colleagues and junior store managers (including supervisors and shift leaders) were eligible to receive the bonus, provided they had at least one year’s service.

The main measures of the mystery shopper were:

• Reducing queue lengths

• Offering to help customers – particularly at checkouts

• Product and promotional shelf availability

• Shop floor customer interaction.

Communication and consultation: Effective communication has been seen as a key feature of the scheme in ensuring its successful introduction and operation. A variety of methods have been used, including posters at stores and briefing packs. Soundings from staff (called colleagues) were also crucial to the development of the scheme. These were gleamed from discussions at the company’s staff council and from trials at three stores. As well as providing an opportunity to test different levels of targets and reward, opinions gained from focus groups and at the trial stores helped shape the scheme, including the decision over the length of service for scheme eligibility and what would motivate the desired behaviours.

Motivating for the future: Feedback from the colleagues, after the first year of operation, was positive about how the scheme functioned and with the level of payouts and it has continued to form a fundamental part of the total reward package.

In setting targets for the scheme, there was an awareness of the balance to be struck. Targets have to be challenging enough to motivate, but not so unattainable that they have a demotivating effect upon employees. An interesting aspect of the feedback from store managers was that those stores who did not achieve a bonus did not all see this as having a depressing effect. Many stores used this result as a catalyst to discuss with their staff why they did not achieve a result and to put in place a plan to ensure they improved the next year. There became much more evidence of stores competing to achieve their goals which was a good sign that they responded well to the incentive.

Questions:

1. State whether targets should be different for different types of store or whether the same target should apply for all stores. Take into account the complications of having different targets and how they could be calculated in practice.

2. Do you consider that the operation of the scheme would affect how the mystery shoppers see their job and would it influence their behaviour?

Source: IRS Employment Review 784 19 September 2003 p33-36.

References:

• B. D. Singh. (2007). Compensation and Reward Management. Excel Books Pvt. Ltd.

• Michael Armstrong. (2007). A Handbook of Employee Reward Management and Practice. Kogan Page Publishers.

• John Shields. (2007). Managing Employee Performance and Reward: Concepts, Practices, Strategies. Cambridge University Press.

• Angela Wright. (2004). Reward Management in Context. CIPD Publishing.

MBA semester IV Compensation and benefits -- rewards and recognition notes