1. HR357 Employee Reward Nick Creaby-Attwood
Hi – welcome to the module, a very special module. Because we are going to bring together theory and practice in a way that we often aim for but don’t always deliver. Well here we are going to do it. By the end of this module you will not only have a thorough appreciation of cutting edge thinking about reward, but you will also have some quite special practical skills as well.
You will have designed a reward system – not in the back of a fag packet way that you might have come across – but a real reward system: the grade structure, the scales, the ranges, the allowances, the rules for pay progression, the range of benefits. You will have made due consideration of: its competitiveness against market rates, of the implications of your grading decisions in terms of red-circling and green circling, you will have a fully costed model with labour cost projections. So, in other words, you will have done more or less the lot – the full scope of a compensation and benefits manager’s remit.
We can do all of this because we have some very special materials – developed by George Milkovich from Cornell University – so we’re teaching Ivy League style in this module. We have a detailed case study, and software to do the analysis and the modelling. In short we can move away from limited or purely theoretical group problem-solving, away from dodgy case studies and get practical – to apply the best innovations in pay in a virtual company in order to achieve meaningful strategic objectives.
What is reward?

2. Directed study Independent study Assessment
Lecture-based, tutor led sessions
Lab-based, student led sessions
Week 1 – What is reward?
Week 2 – Introducing FastCat and reward strategy
Week 3 – Alignment
Week 4 – Job-based vs. person-based alignment
Week 5 – Enhancement Week: Internal alignment – job-based
Online quizzes, directed reading, consideration of reward practices within own organisation, familiarisation with software
Directed study
Week 6 – Internal alignment – person-based
Learning sets will provide an opportunity to develop skills and share knowledge. Learning sets will be able to ‘meet’ virtually via Blackboard.
Independent study
Week 7 – Competitiveness
Week 8 – External competitiveness for FastCat
Week 9 – Integrate internal and external structures
Week 10 – Employee contributions
So – to do all of this we are going to have a structure for the module that is a little different than normal. Firstly all of the sessions will be 2-hours long, which is not unusual, but we’re going to have two distinct types of sessions.  On the one hand we’ll have six sessions that are like this one – primarily lecture-based, where we cover all of the conceptual and theoretical stuff. Now these are going to be largely dominated by me – hopefully you won’t find that too awful. We won’t do any big group-work things here, but equally you won’t have to listen to me droning on without let up for two hours – I’ll try and break it up with short questions and mini-exercises, so you get a break from me and some space to think a bit. So, you can see the range of things that we cover here – the structure is based around Milkovich’s pay model – the clearest approach to reward that you will come across, we’ll deal with the model itself later in this session.
 We’ll also have six lab-based sessions of two hours. This will be where we get our hands on the software and get the opportunity to gain some real practical reward skills, and also to see how this theory stuff works in reality.
Now, this is the bit where we talk about directed and independent study. I know that you probably think that you’ve heard it all before – but this bit is crucial here. This module is so ambitious in its scope that independent study in particular becomes a central part of successfully completing it.  On the one hand we’ve got the normal bits of directed study – read the chapters in the text, check your understanding with the on-line quizzes, get familiar with how the software works before you get to the session – all of this will help enormously.
 But there’s also independent study. You might have noticed that the assignment is group-based…it needs to be because it is much more involved than most assignments that you will come across – there’s more detailed analysis required so you’re going to need to have a division of labour, and to start thinking about the various choices from a fairly early stage. So I want to get you into groups right from the start – groups of say We could call them learning sets, because I’d like you to use the groups as opportunities to develop your understanding of the module, and to work towards the assignment. Now in order to facilitate that I’ll set up two things: firstly, discussion boards on Blackboard, so that even if you can’t get together physically you can still have a discussion virtually – now these are your groups for you to manage, if you don’t mind I’ll check in on the discussion boards now and again just to see how you are getting on. The other thing that I’ll do is to suggest some areas for discussion in your groups throughout the module, you don’t have to accept them – it’s your group to consider whatever issues are important to you – but they’re there if you need them.
So – all of this leads to the assignment. I want everything that we do to be helpful – not just in broad terms, but specifically to help you produce a really good piece of work, something that you can be proud of.
Ok – so this is the structure of the module – any questions or concerns?
Week 11 – Recognising performance
Week 12 - Administration
Assessment
Group assignment – design a reward system
Proposals must be based upon the current state of knowledge about reward
Evidence of the practical implications of proposals will be required

3. Forms of reward Total returns Relational returns
Total compensation (transactional returns)
Recognition and status
Learning opportunities
Employment security
Challenging work
Benefits
Cash compensation
OK – so that’s the module – what about the topic? There is a case to be made for reward being the most important part of HRM – Mark Huselid reckons that the impact of reward practices on performance is equal to the rest of the HR system put together – it’s a big deal – compensation and benefits managers don’t get paid a third more than the average for HR managers for no reason!
It is almost certainly the most important part of the employment relationship: what is the key reason for people deciding to take up or leave employment? Reward. What is the principal cause of conflict at work? Reward.
Having said that there is a great deal of confusion about reward – mainly caused by the enormous changes that have taken place in respect of practice over the past years. Reward, used to be just pay – and when I say pay, I mean dull pay administration – calculating who had earned what bonus, what was the correct amount of National Insurance or tax? Mind numbing.
However, we now talk about reward. Why?
 Reward is seen as having a broader scope – not just simple cash pay, but a more sophisticated range of options involving variable elements, linking reward to desired behaviour, seeking to direct employee attitudes towards those that drive forward competitive advantage – so there is a strategic aspect to reward that wasn’t on the agenda of pay administration.
Reward also has a broader scope in terms of the range of rewards. We often talk about total reward, or compensation, to describe all of the so-called ‘transactional elements’ of the reward package – the remunerative bargain that we strike with our employers. But there is another element as well. Motivation theory has been telling us for some time that people are rather more sophisticated than trained monkeys that dance for cash. We have broader needs than that. The requirements of organisations in terms of our labour is increasingly complex and sophisticated – so the traditional effort reward-bargain that characterised most of our thinking about pay has had to change.
 In order to motivate people to engage in the complex and sophisticated tasks that we need form people, to encourage people to work beyond contract, to extend themselves and strive for excellence we need another aspect to our reward practices – so-called ‘relational returns’.
Now by and large we are going to focus on these transactional elements – because these still form the bread and butter of the reward function. But we need to remember that in order to achieve the whole package we will have to reach across into these relational areas – which are often seen as part of other HR functions, resourcing, development, but which we increasingly regard as part of an integrated approach to rewarding staff.

4. Forms of reward Total returns Relational returns
Total compensation (transactional returns)
Recognition and status
Learning opportunities
Employment security
Challenging work
Benefits
Cash compensation
So, what are the key elements of reward that we are going to focus on in this module – we’re looking at those transactional elements by and large – but what is the scope of what we mean by reward in this sense?
 Well, we start with base pay – for most people, despite the encouragement of some theorists to downgrade its importance, this remains the bedrock of their reward deal. This is the cash compensation that is paid for work performed. It reflects the value of the job to the organisation. This is an important point to make – it reflects the value of the job, or the general level of skills for that job – not the person doing the job. This issue of whether we should be focussing our reward on the jobs that people do, or on an individual’s level of performance, or their particular, individual skill sets. This is a recurring argument in reward.
There are also issues here which are becoming a bit historical now, but still have some resonance – is your base pay called salary or wages? What’s the difference? Salary has always been for white collar and professionals – and denotes trust and the fact that we aren’t rewarding how many hours you work (and that you don’t generally qualify for overtime), whereas wages have been for manual workers – and are usually paid on the basis of hours worked.
 The second element of cash compensation is merit pay, or alternatively – sometimes additionally – a cost of living increase. This is a general uplift on your base pay based on some retrospective evaluation of past service – whether that’s an evaluation of performance, or simply a recognition of the need for a general increase to keep up with inflation. Whichever approach is taken the key issue here is that the increase is permanent – it is consolidated into your base pay, the new figure representing how much the organisation values you in your job.
 By contrast, incentives are not consolidated. They have to be re-earned over and over again. They tend to focus on performance – but rather than taking some general view of past performance like merit pay, with incentives the performance objectives are established in advance, so there is a much clearer intention to influence the future behaviour of the employee. What level of performance is being rewarded is a matter of design – we can focus on individuals, on teams, on whole business units – we can also choose whatever measure of performance that we like – depending on what we would like to direct people’s behaviour towards.
Because these payments aren’t consolidated, they have a much less significant impact on overall labour costs, increases in one year aren’t compounded in subsequent years, they go up and down depending on performance – so they are often referred to as variable pay.
 The other kind of incentives that we find focus employees’ attention on long term success for the company. Most typically these take the form of share options – that by having a financial stake in the organisation, the employee is encouraged to behave in ways that would lead to the long term financial success of the organisation.
Long-term incentives
Base pay
Merit/cost of living
Short-term incentives

5. Forms of reward CHOICE ‘CAFETERIA STYLE’ ??? Total returns
Relational returns
Total compensation (transactional returns)
Recognition and status
Learning opportunities
CHOICE
‘CAFETERIA STYLE’
???
Employment security
Challenging work
CHOICE
‘CAFETERIA STYLE’
Benefits
Cash compensation
The benefits side of the equation deals with non-cash or deferred elements of reward. For example – income protection benefits are like insurance schemes, you don’t benefit from them all the time, but they pay out when you need them…things like pensions, sick pay, maternity pay.
Work/life balance schemes that are becoming increasingly important because of changes in the labour market, and the growing demands of highly skilled employees.
And allowances can be more or less anything that might be attractive and demanded by the labour market – company cars, gym membership, whatever is necessary to attract and retain the best employees.
The whole issue of benefits packages has become more interesting over recent years. As long as anyone cares to remember, organisations have been throwing vast amounts of money at benefits provision in general – and at pensions in particular with precious little understanding about why they are doing it, or what advantage the organisation accrues from it. (Taylor and Earnshaw, 1995; Terry and White 1997). One of the unfortunate implications of this lack of knowledge about the advantages that organisations might gain from benefits provision is that they only see the cost – so when the cost gets scary (like now with the pensions crisis) they run like hell away from it.
 A more measured response has been the trend towards cafeteria benefits schemes. This is based around the recognition that expensive benefits should be directed where they are most appreciated – so rather than everyone getting the standard package they can make some choices, take the things they value – leave those that they don’t, to get more bang for their buck. This is seen as increasingly important in a more diverse workforce.
 And there have been some suggestions that this might be a principle that could be extended across the entire reward package – that people could make choices across the board about the kind of rewards that suit them (more base, less risk for some – more variable, less security for others) (IOMA, 2000) – Though I’ve got to say I haven’t seen any example of this last one being done in practice.
Income protection
Allowances
Long-term incentives
Work/life balance
Base pay
Merit/cost of living
Short-term incentives
Adapted from Milkovich and Newman: 2002, 8

6. Aspects of the reward ‘deal’
HIGH PAY – LOW COMMITMENT
Hired Guns
(Stockbrokers)
HIGH PAY – HIGH COMMITMENT
Cult-like
(Microsoft)
LOW PAY – LOW COMMITMENT
Workers as Commodity
(Employers of low-skill immigrant labour)
LOW PAY – HIGH COMMITMENT
Family
(Starbucks)
TRANSACTIONAL
LOW TO HIGH
So – there are any number of permutations that we can come up with in terms of how we design the reward deal between ourselves and our employees. The kind of deal that we come up with says something very important about the nature of employment relationship that we want to develop. So how do we understand what is going on?
Milkovich and Newman have a handy little framework for analysing different reward deals. They take the transactional returns and relational returns, and look at the various combinations…
LOW TO HIGH
RELATIONAL
(Adapted from Milkovich and Newman, 2002: 49)

7. The pay model (Adapted from Milkovich and Newman, 2002: 13)
STRATEGIC POLICIES
TECHNIQUES
STRATEGIC OBJECTIVES
INTERNAL ALIGNMENT
Work analysis
Evaluation/ Certification
INTERNAL STRUCTURE
SUPPORTING THE WORKFLOW
Performance
Quality
Flexibility and change
Costs
FAIRNESS TO EMPLOYEES
COMPLIANCE
Descriptions
EXTERNAL COMPETITIVENESS
Market definitions
PAY STRUCTURE
Surveys
Policy lines
So – we have some idea about the kind of relationship that we might want with our employees, and how we might use different elements of reward to help us achieve it, but we want more detail than that – we need to know how to use choose and use particular reward practices in order to achieve particular strategic objectives.
So the first thing that we need to do is to establish a set of strategic objectives – now these might vary from organisation to organisation (or not depending on your position within the debate around strategic management) – but we can suggest a range of strategic objectives, like these… 
Our reward systems should complement the way that we want our organisation to work. It should attract retain and encourage the development of our workforce. It should encourage cooperation where we want to see cooperation, it should direct people’s behaviour in useful ways. It should develop attitudes and outcomes that delight our customers. It should facilitate change. It should minimise costs over the long term.
It also needs to be perceived as fair by employees – fairness is one of the cornerstones of any reward system – the perception of unfair allocation of rewards is the kiss of death to any hope of positive outcomes from a reward scheme.
The final objective must be compliance with laws and regulations.
Now in order to achieve these objectives we need to assess our armoury of reward policies. The strategic policy decisions that we build a reward system upon. Those policies are…
Internal alignment – how we make comparisons between the jobs or skills of our people in our organisation. We make decisions about the relative usefulness of those jobs or skills in meeting our strategic objectives – we attempt to establish some kind of internal structure. Now there are various inter-related techniques that we can make use of in order to establish this structure – principally, the analysis and description of jobs, and the evaluation of jobs against one another. Once we have a rank order of the importance of the various jobs in the organisation we can make sensible decisions about how much to pay for them relative to each other. What impact does this have on the achievement of the strategic objectives here…? (recruitment and retention, encouraging employee growth and development, fairness – equity, compliance in terms of discrimination)
External competitiveness shifts the focus from within the organisation to the external labour market, what do we pay compared to other employers? We need to be able to compare our set of jobs or skills with those in the outside world, to be able to gather market intelligence, and to make a judgement about how competitive we want to be out there. What impact does this have on the achievement of the strategic objectives here…? (Recruitment and retention, controlling labour costs)
Employee contributions is about the extent that we want to explicitly attempt to encourage performance – do we provide for pay increases, progression through the pay system based on high levels of performance, or do we link it to length of service? How do we incentivise the contribution of employees, through merit awards, short-term incentives, long-term incentives? What proportion of the rewards should be fixed and what proportion variable? What impact does this have on the achievement of the strategic objectives here…? (all sorts of questions about fairness, about the appropriate way to motivate and develop performance, about managing labour costs)
Administration is the last building block and effectively provides for the other plans to be implemented and managed effectively. Who makes the decisions about alignment and competitiveness? How are the values and philosophy of the system communicated to employees? Is the system working or is it dysfunctional and in need of reform? Are there feedback systems so that we know whether the system is regarded as fair? What are our costs, can we afford them?
EMPLOYEE CONTRIBUTIONS
Seniority based
Performance based
Merit guidelines
INCENTIVE PROGRAMMES
ADMINISTRATION
Planning
Budgeting
Communication
EVALUATION
(Adapted from Milkovich and Newman, 2002: 13)

8. How do we make reward strategic?
THE NEW PAY
HIGH
COMMITMENT
BEST-FIT (CONTINGENCY) APPROACHES
Ok – for the rest of the session I want to focus on these strategic questions. How can we make reward into something that is strategically useful for organisations?
Now there is a key argument going on – an argument which increasingly characterises broad choices in HR generally. This is about whether we design our HR systems and practices (including reward) on the basis of a strong and coherent fit with strategy, or whether we can identify some practices that should be effective in any situation.
So what we have is a choice between so-called best-fit (sometimes contingency theory) approaches, and best-practice approaches – of which we have two versions.
BEST-PRACTICE APPROACHES

9. Best-fit approach to reward
What business should we be in?
Corporate objectives
Business unit strategies
How do we win?
HR strategies
How should HR help us win?
How should reward help us win?
Environment
Strategic reward decisions
Reward systems
OK – let’s start off by thinking about the best-fit approach, because it’s the most common in practice.
The main questions here are about what should be in a reward system? What’s its focus? What is the reward system actually for? At one level it’s fairly obvious, we wouldn’t get people through the door unless we paid them – but once they are here, what next?
This is the starting point. We have reward systems in order to get work out of people - we have an exchange relationship, an effort-reward bargain. You do this, and I’ll pay you that.
But we don’t want any old work - we don’t want people to just turn up. We want effort that is focussed on the needs of the organisation, that meets its goals - we want performance. So the idea is that we focus our reward strategies on meeting broader organisational strategies. That the two are linked – reward supporting the strategic direction that the organisation has set.
Let’s see how this fits together. 
We know that strategy is about the fundamental directions that an organisation has chosen - it chooses what, and what not to do to succeed. At the corporate level it has to choose what business to be in
At the next level down (click) the choice becomes one of how to win - how to gain and sustain competitive advantage in those businesses.
Within the business units this should be reflected in operational decisions - as far as we are concerned in the HR strategies that help us win , and particularly in terms of reward - what can reward do to enable our success.
These decisions are reflected in the choice of specific reward practices and hopefully the expected changes in employee behaviour that leads to enhanced performance – and, if we were right about our strategic decisions, to competitive advantage.
Employee attitudes and behaviours
Competitive advantage
Milkovich and Newman: 2002, 30

10. Ideal type strategies
BUSINESS RESPONSE
HR ALIGNMENT
COMPENSATION SYSTEMS
STRATEGY
INNOVATOR: increase product complexity and shorten product life cycle
Product leadership
Shift to mass customisation and innovation
Cycle time
Committed to agile, risk taking, innovative people
Reward innovation in products and processes
Market based pay
Flexible – generic job descriptions
COST CUTTER: focus on efficiency
Operational excellence
Pursue cost-effective solutions
Do more with less
Focus on competitors’ labour costs
Increase variable pay
Emphasise productivity
Focus on system control and work specifications
OK – so what does that mean, ‘matching reward strategies to corporate strategies’ – lets take some examples and see if you can fill in the last bit…
CUSTOMER FOCUSSED: increase customer expectations
Customer intimacy
Deliver solutions to customers
Speed to market
Delight customer, exceed expectations
Customer satisfaction incentives
Value of job and skills based on customer contact
Milkovich and Newman: 2002, 31

11. Four steps to formulate a best-fit strategy
Assess total compensation implications
Competitive dynamics
Core culture and values
Social and political context
Employee/Union needs
Other HR systems
Ok – so lets go through how you make the link in practice – the questions that you need to ask and issues that you need to resolve in order to make this strategic link with strategy.
In the first instance we need to assess the implications of a reward system. Does it fit the organisation? There are various elements of this.
What are the competitive dynamics of the organisation? What does it need to do in order to compete and win? This is not always, or even usually obvious or straightforward. Different compensation strategies match different competitive strategies – but it’s not always clear what our strategy is or should be – it might be a combination of ideal types.
Does the reward system reflect, or support the culture or philosophy of the organisation? In a broad sense, what are the values that underpin our approach to employees, the way we do business and so on.
The environment of the business - the social, economic, and political context will have a powerful effect on the development of a reward system. What is the nature of the labour markets that we operates within? Its product markets. What demographic pressures are there? What are the changing expectations of the work force? What is the diversity of the work force? What are the statutory regulatory mechanisms? What is the taxation regime?
There are also key considerations about the requirements of employees. This can take two distinct forms. We looked last week at the motivational importance of rewarding individuals with the things that they value. So organisations will want to make some consideration of the extent of flexibility that they build into the system. The other aspect is less individual and more collective. The influence of unions upon the determination of pay. We’re going to look at this more closely towards the end of the module, but it’s worth noting that unions are still major players, particularly in some sectors - and pay is their main concern. Organisations need to take account of this when making decisions about reward.
The final element in this section is about the place of reward in the context of other HR processes. Is it congruent? is it integrated - are all HR policies working in the same direction? Does the reward approach fit the structure of the organisation?

12. Four steps to formulate a best-fit strategy
Assess total compensation implications
Competitive dynamics
Core culture and values
Social and political context
Employee/Union needs
Other HR systems
Fit policy decisions to strategy
Objectives
Alignment
Competitiveness
Contributions
Administration
The key question here is about what rewards will encourage employees to behave in ways that lead to competitive advantage – how can we generate the kinds of employee performance that the business needs?
This starts with having a clear view about the strategic objectives of the reward system – how can it support the broader strategies we were talking about a minute ago. Putting these objectives into practice means coherently translating them into specific reward policies.
The four key policy decisions that we need are these, the ones that we looked at in the pay model a minute ago: alignment – the basis of deciding different pay levels amongst staff; competitiveness – where we pay in relation to our rivals; contribution – what we reward people for, and administration – how the system runs..
So, we can see that there are all kinds of decisions, all kinds of permutations, an enormous variety of shapes that a reward strategy can end up in – the trick is to make sure that you match your reward objectives to corporate objectives, and then put in place the policies and the practices that can translate objectives into reality.

13. Four steps to formulate a best-fit strategy
Assess total compensation implications
Competitive dynamics
Core culture and values
Social and political context
Employee/Union needs
Other HR systems
Fit policy decisions to strategy
Objectives
Alignment
Competitiveness
Contributions
Administration
Reassess the fit
Realign as conditions change
Realign as strategy changes
Step 3 is about implementing the design of the reward system. About translating strategy into practice.
And the final stage is about keeping our options open. Reward systems should be stable of course, but they shouldn’t be preserved in aspic, nor set in stone. The point of the reward system was to respond to strategic pressures and to achieve strategic goals.
Organisations must regularly reassess the continuing validity of their systems as the turbulence of environmental conditions has its effect.
Conditions change, and strategies that respond to those conditions change.
Reward systems must also respond and change if they are to remain relevant and fresh.
So - four steps to heaven, simple as that! Except that the process contains hundreds of choices, decisions about the nature of the organisation, its culture, how people will respond and react.
So not four easy steps, more a guide to iteration, sensitivity and responsiveness, Reward design as art more than science.
This complexity tells us something about the nature of design and implementation. This isn’t going to be a process of sitting in a room with a blank piece of paper and as a result of individual brilliance coming up with the ideal plan.
Implement strategy
Design system to translate strategy into action
Choose techniques to fit strategy
Milkovich and Newman 2002, 34

14. How do we know what our objectives are?
Importance of consultation and communication
Senior managers don’t have all the answers
The debate of different viewpoints provides a balanced understanding of corporate objectives.
Management will learn about the variables that are associated with performance improvement
Click. Rather, it’s going to encompass and emphasise the importance of data-gathering, communication and consultation.
Click There is a gathering consensus that it is wrong to assume that senior managers within an organisation are sufficiently appraised, or even capable of knowing and articulating the implications of the priorities of the organisation in a meaningful and consistent way.
It is even realistic to say that manipulating information of this complexity is simply beyond the bounds of rationality.
Click People hold different views, they perceive organisational interests and information in different ways. A single viewpoint on these issues is insufficient, the key is the discussion, argumentation, the debate of different viewpoints that provides a balanced approach, a balanced understanding of corporate interests and objectives.
So organisations need to encourage participation. They need to expand the information base.
By doing so they can learn about what makes the organisation tick, about the things that really change performance
They can learn about the important issues in the organisation that will effect whether or not a reward system is going to meet the expectations of employees
And they can gain the commitment and understanding of people, and so make it much more likely that the new system will be successful.
Management will learn about what motivates employees
People will understand and become committed to the strategy

15. Best-fit or best practice?
Environment
Strategy
Reward system
Success
Environment
Reward system
Strategy
Success
Success is not derived from a clever strategy determined at the top – but by having rewards that attract and retain the best human resources available
It is the people that are the source of competitive advantage – and the basis of good strategies
OK – like I said a minute ago, that’s the best-fit approach, the kind that we tend to hear most about. But there is another way to design reward strategies. One that’s less concerned with the specific needs of organisations – less bothered by the aim of matching organisational and reward strategies.
There is a suggestion that what we should be doing is adopting reward practices not on the basis of a good match with strategy, but because they’re good regardless of the organisation – they represent best practice – they result in consistently good outcomes.
What we have been doing with the best-fit approach is this  we start with the environment, and the strategy, and derive an appropriate reward system from them – leading to success.
What we might do is to mess around with the sequence  – to put reward before strategy.
So, rather than a clever strategy setting the direction and success of the organisation, we simply develop rewards that attract and retain the best employees. Having the best people is seen as the real route to success, and also provides the capacity to develop better strategies.
We’ve all heard organisations talking the talk about people being their most important asset – well this is where they walk the walk.

16. High commitment management and reward
Emphasises the need for a ‘moral commitment’ to organisations
This is about the perceived mutuality of interests between employees and their employers
This can be achieved through adopting reward practices which foster high trust relationships and intrinsic work satisfaction – sharing success but protecting from failure
High commitment approaches to reward emphasise that it is insufficient for organisations to simply buy the ‘calculative commitment’ of employees through the use of rewards, to share the success of the organisation, but to protect employees from too much risk.
This theory suggests that the success of organisations in increasingly competitive environments will depend upon the extent to which they are able to engender the ‘moral commitment’ of their employees - that is the extent to which the commitment of employees to their organisations is not based upon narrow, economic self-interest, but rather upon an understanding of the mutuality of their own interests with that of the firm.
The aim is to emphasise the processes of reward design that promote high trust, high commitment and intrinsic satisfaction with work. That is, reward is seen as a significant factor in the development of a high trust, high commitment organisational culture.
So the design of reward systems should also be congruent with the needs and expectations of employees. Employees provide a crucial resource for organisations to learn from the design and implementation of reward systems. It’s not simply a question of matching reward systems with external contexts, but also with the internal social expectations of organisational members. This requires consultation, discussion and debate.

17. The New Pay
Pay levels driven by market forces rather than internal comparison
Pay rises driven by performance
Reward set in the context of a psychological contract characterised by ‘risk sharing’ between employer and employee:
More pay dependent on performance
More emphasis on ‘employability than ‘job security’
The new pay is a much harder approach – it’s main characteristic is its emphasis on the primacy of market forces as the driver behind reward. In fact some people suggest that this emphasis on the market means that this isn’t really a ‘best practice’ approach at all, but more about strategic-fit (Armstrong and Murlis 2004). I prefer to go with Milkovich and Newman’s (2002) take on this – they suggest that it is possible to identify a range of reward practices that are consistent with the New Pay.
So, the New Pay tends to look like this… the market determines pay levels, rather than comparison between colleagues within an organisation. Pay rises tend to be driven by performance rather than the idea of an annual incremental entitlement.
The reward package as a whole is located within an employment relationship, or even a psychological contract where risk for employees plays a much more substantial part. We all know that our jobs ultimately depend upon the health of the organisations that we work for, but it hasn’t traditionally been a feature of working life that our rewards will reflect that – that as employees we have to go out on the competitive front-line. So, the new pay puts a much greater proportion of our pay ‘at risk’, that it is dependent on performance at some level. Broader rewards that we might traditionally think of in terms of things like job security are re-envisaged to be about employability.
You’ll recognise how all of this fits in with ideas about lean and agile organisations, about the flexible firm and all of that…

18. What do we mean by ‘Best practice’ – and does it work?
Performance bonuses and share options are important (Becker and Huselid: 1997)
Bundles of high performance work systems (gainsharing, competitive pay levels, training, team working, and participation) are more effective than isolated initiatives (MacDuffie: 1995; Arthur: 1994; Ichniowski et al: 1998)
So how do we know what works best which version of best practice is best, should we be trying to achieve best-fit or not?
Choosing between these can sometimes be about deciding which rhetoric you like – but there is some evidence emerging to influence the decisions that we make.
 We now know that the form of reward matters – it effects organisational performance, performance bonuses and employee share options improve firms’ financial performance.
We also know that the development of coherent bundles of people management practices, bringing together gainsharing and competitive pay levels, along with training, team working, and participation have an impact on performance over and above any single reward practice on its own.
So if we’re choosing – the high commitment model seems to be better supported by research evidence, and also favours best-practice approaches generally over best-fit.