Effective Reward Systems in Organizations: Pre-Conditions and Checklist

In the 1980s, business culture in the USA and internationally placed great emphasis on personal rewards as a motivator for individuals to transform organizations and societies. However, the 1990s saw companies traumatized and bankrupted by the inappropriate use of remuneration as a motivator. Despite this, major corporate successes have been built on reward-based remuneration systems, such as Phones4U and Allied Dunbar.

Barings Bank had individual traders on bonuses in the millions, yet these motivated individuals were not fulfilling the company’s objectives in the long term. Even when an individual’s reward system is based on appropriate performance indicators, resulting in the organization’s success, there may still be problems arising from a large differential between salaries of senior people and those of middle management. A payment system that depresses or demotivates 10 people for every one it motivates may not be the best for the organization.

Wise organizations try to reward and motivate all staff so that they act energetically to further the corporation’s interests, both short and long term, and feel they have been treated fairly. However, there must be a proper link between the items on which they are being rewarded and the actions they can take to influence the desired outcome.

Therefore, an organization should lay some groundwork before relying on a remuneration structure to change performance and behavior. In other words, the management and organization system must be in balance with the remuneration system.

There are five major pre-conditions to the installation of an effective reward structure:

1. Measurement: There are various measurement systems, such as the Balanced Scorecard, which sets multiple objectives and is used by Tesco.
2. Monitoring: Performance measures must be monitored properly; failure must not be acceptable.
3. Control of the tools for the job: The organization must ensure that the individual is not over-dependent on factors outside their control to achieve the performance measures set out.
4. Consistency: The organization must ensure that short-term factors do not over-influence managers or drive them from their real objective. The organization must also ensure that its own design is appropriate to what is being asked of managers.
5. Reward and strategy in line: A remuneration system can be put into an organization even when it has a relatively muddled strategy, providing that organizational and management disputes are resolved by reference to strategy and the “balanced score card.”

Based on these pre-conditions, there is a checklist of 10 factors that the effective remuneration and reward structure must achieve:

1. Support the business strategy
2. Encourage the desired behavior
3. Reward relevant performance
4. Be fair
5. Be substantial
6. Be tax-efficient
7. Be timely
8. Incorporate non-financial rewards
9. Be firm
10. Be crystal clear.