Reward: an introduction | Factsheets

Introduction

Pay and benefits are important in attracting, retaining and engaging employees. There's a range of options available for organisations to reward their staff and recognise their contribution, each with their own opportunities and risks. The most effective reward packages will be aligned with the needs of the business, staff wants, and reflect the organisation’s purpose and performance.

This factsheet explores the purpose of reward and how employee responses may vary depending on different contexts. It introduces pay structures and levels, considerations surrounding pay awards and the factors affecting pay progression. It also describes variable pay – from cash bonuses to incentives. Finally, it outlines the role of employee benefits, non-financial rewards and total reward.

What is reward?

The term ‘reward’ generally covers all financial provisions made to employees, including cash pay, and the wider benefits package (such as pensions, paid leave). It can also include wider provisions for employees, with the term ‘total reward’ sometimes used to encompass non-pay benefits.

Pay may be divided into two categories:

Base (or fixed) pay is a guaranteed cash wage or salary paid to employees for doing their work for a contracted time period, such as a 37-hour week. This can include location allowances and other associated guaranteed payments.
Variable pay is not guaranteed. It can include bonus, incentives and overtime payments.

Pay definitions vary. For example, some employers might treat location allowances as part of base pay, while others may see it as variable.

Other terms may also be used. ‘Compensation’ for example is usually taken to mean just financial rewards (fixed and variable pay) while ‘remuneration’ might be used interchangeably with ‘reward’ to mean the wider benefits package, such as the value of employer pension contributions.

Reward is an area of specialist knowledge in our Profession Map.

Reward in the time of coronavirus

During the COVID-19 pandemic, pay and benefit professionals should consider whether their employers’ reward approach is fit for purpose by exploring questions such as:

Is the organisation paying its essential and key workers enough?
Should top management receive more paid sick leave than those on the shop floor?
Are the measures currently used to assess employee performance and bonus, incentives and pay awards still appropriate?
Is the amount of paid bereavement leave appropriate?
How can employee performance be improved to reduce the cost base?
What’s happened to employee financial security?
Does the organisation need to invest in HR technology to ensure that people are being paid fairly?
What can employers do to protect staff from financial scams, such as around pensions?

The answers to these and other questions will help ensure that the total reward budget is being spent wisely.

There’s more on what employers should be doing in our Responding to the coronavirus hub.

Managing reward

The main reason for offering pay and benefits is to influence behaviour so employees want to join and stay with an employer and aspire to do their best. Traditionally, salaries were used to attract people to an organisation, while benefits helped retain them, and bonus and incentive schemes motivated them in their work. However, thinking about which parts of reward are best suited for recruitment, retention and motivation has changed.

Individuals are attracted, retained and engaged by a whole range of financial and non-financial rewards, and these can change over time depending on personal circumstances. In certain situations, individuals may not consider the financial elements of a package particularly important. For instance, people at the beginning of their career may be more interested in gaining access to training and career development. Similarly, individuals may be willing to work for lower pay rates (or even volunteer) if they have a strong attachment to the organisation’s mission.

Employers should find out what attracts, retains and inspires their people and explore how best they can meet these needs - as well as meeting the requirements of the business within the appropriate legal and regulatory environment. When creating a reward package, it’s also important that organisations integrate the various elements so that they support, rather than contradict, one another.

Recently, behavioural science has offered up useful insights about how individuals may respond to various financial and non-financial rewards. Employers should use the lessons from behavioural science when designing, implementing and communicating its reward package. Find out more in our report Show me the money! The behavioural science of reward.

Because there are various elements to reward, it’s important to think about the appropriate mix of base to variable pay, fixed to flexible benefits, financial and non-financial rewards to meet the needs of both the organisation and its employees.

When making decisions about how to reward and recognise people’s contribution, it’s important to recognise the people risks involved. Employers operating overseas should also consider whether to set reward centrally or allow each region or subsidiary develop its own approach.

Organisations should establish a reward strategy that clearly articulates the aims of the various reward elements and how they are integrated. A reward strategy reflects the organisation’s values, so it’s important that appropriate communications explain to staff what behaviours and performances the organisation is rewarding, how, why and when. This may include employee education so that staff understand the benefits on offer, especially if the level of coverage varies. Employers also need to have measures in place to assess the impact of their reward strategy on people and performance.

Determining base pay and total earnings

Pay structures

Pay structures provide a framework for valuing jobs and understanding how they relate to one another within the organisation and to the external labour market.

Our Reward management surveys show that a wide range of pay structures exist linked to varying organisational needs and objectives, including:

individual pay rates, ranges or ‘spot’ salaries
narrow graded pay structures
broadbands.

Pay structures may also need to allow for certain additional elements other than basic pay rates, for example location allowances. Find out more in our pay structures factsheet.

Pay levels

There are various approaches to setting pay levels or ranges for jobs. For example, job evaluation is an important tool for setting pay rates among public sector employers, whereas market pricing tends to be more influential in the private sector. Where market rates are used, employers need to determine where to pitch in-house rates (for example, at the median or upper quartile). See more in our factsheet on job evaluation and market pricing.

Pay awards

Key factors when setting the overall pay review budget for annual pay increases - which often includes performance-based pay rises as well as general pay structure movement (commonly known as the annual pay award or cost of living uplift) - include:

ability to pay
inflation
market rate changes.

There are variations by sector. For instance, in the public sector the government’s pay policy is key, sometimes together with union pressure, whereas the latter is rarely an issue for many private sector companies.

Pay progression

Individual performance, competency and skills are commonly used factors for moving individuals along salary bands or ranges. A hybrid approach that bases progression on more than one factor is typical. It might involve assessing individual employee’s achievements against the backdrop of the wider labour market. Find out more in our factsheet on pay progression.

Many organisations expect ‘satisfactory’ performers to progress to a target point in their pay range. Among private sector service employers, the target is often the mid-point in the range, while in the public sector it tends to be close to the top of the salary scale. In the voluntary, manufacturing and production sectors, employers tend to be more split on where the target is. Read more in our performance-related pay factsheet.

Variable pay: cash bonuses and incentives

Our Reward management surveys show widespread use of bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonuses). However, there are again variations by industry, with such schemes more widespread in the private sector. Employers often have more than one bonus or incentive scheme with, senior staff on a different scheme.

Among those employers offering a performance-related reward scheme, the most common individual performance-related variable schemes are individual bonuses and sales commission, while profit-sharing and gain-sharing are the most common group performance-related plans. See more in our factsheet on bonuses and incentives.

The advantage of variable pay schemes is that they can link earnings closely to desired performance and, in theory, only pay out when there is reason to do so. Variable elements of pay do not generally feed through into other elements, such as overtime or pension contributions, and so create no additional on-costs.

The role of employee benefits

Many employers offer a wide range of benefits, from traditional items such as paid leave and occupational pensions, to newer elements such as paid leave to adopt a pet.

Benefits are provided for a variety of reasons including to match market practice, give some measure of health or disability security, or retain employees. Some benefits are required by law or are tax efficient.

There are various ways of offering benefits. For instance, flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') allow employees to vary their benefits package to meet their individual needs.

Other issues to consider include how the benefits offered support the needs of the organisation and its employees, and how to communicate what benefits are on offer.

Read more in our employee benefits factsheet.

Non-financial rewards and total reward

While pay and benefits are important, and getting them wrong can have adverse consequences, and they are not the only rewards that employers should consider. Research shows that non-financial rewards can be just as important. These include:

Good performance management.
Opportunities for personal and career development.
Flexible working.
Being involved in decisions that affect how and when people do their work.
Recognition, such as through an ‘employee of the month’ award or team-based events.

Reward strategies that mix non-financial provisions with pay and benefits are often known as total reward approaches. Read more in our factsheet on strategic reward and total reward.

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