HR911 - Employee Reward

Contents Overview

  • Introduction to Employee Rewards
  • Reward Management: Theory and Legal
  • Motivation and Variable Pay
  • Foundations of Pay: Fairness and Equity
  • Skills, Responsibilities and Job Analysis

Assessment Questions

Essay 1

Discuss factors (internal and external to the organisation) which influence the level of pay for different occupations and organisations. How do these factors influence the application of employee reward in practice? Use relevant theories, research and evidence in your answer.

Essay 2

What contribution can psychological theories make to our understanding of motivation and reward in the workplace? Consider these theories in relation to variable pay and incentives. Draw on theory, evidence, and examples of reward management in practice.

Essay 3

Drawing on examples from academic literature, critically evaluate the rationale and effectiveness of fair and equitable reward strategies. What theoretical and practical factors should be taken into consideration when establishing and maintaining “fair pay systems” that adhere to the principles of the law? Illustrate your essay with examples of organisational attempts at fair and equitable

Introduction to Employee Rewards

The purpose of reward is to secure, retain and motivate employees.

Total rewards can be split into intrinsic and extrinsic components.

  • Intrinsic: reward derived from work and employment. Sourced from the job and the employee themselves, a sense of achievement or pride.

  • Extrinsic: Tangible, financial/transactional reward. Sourced from outside the employee, the employer or customer.

Example of Virgin's extrinsic rewards:

  • Pay and reward
  • Annual performance bonus
  • Pension and group risk
  • Pension plan
  • Income protection up to 70% salary
  • Life assurance for four-times salary
  • Critical illness insurance
  • Healthcare and wellbeing
  • Dental
  • Eyecare
  • Gym membership
  • Running club
  • On-site yoga
  • Mindfulness training
  • Flu vaccinations
  • EAP
  • Work-life balance
  • Flexible-working arrangements
  • Unlimited holiday
  • Enhanced maternity and paternity leave
  • Childcare vouchers
  • Other benefits
  • Staff recognition scheme
  • Group-wide annual party
  • Voluntary benefits scheme
  • Birthday off
  • Free lunch on-site
  • £100 retail voucher for first aiders and fire wardens
  • Two free flights a year using VirginAtlantic
  • Bikes-for-work scheme
  • Long-service awards
  • Employee referral programme
  • Mortgage advice
  • Financial education

'Tips' in the UK are property of the employer unless given directly to the employee, its distribution to employees depend on their contract terms

Reward Management: Theoretical Approaches and Legal Frameworks


Labour Market Theory

Competition for labour behaves in the same way as goods and services are traded in a 'market'.

Human Capital Theory

Supply of labour depends on the expected ROI of acquiring worker skills of knowledge, skills and abilities.

Women traditionally have lower levels of human capital compared to men on two accounts

  • entering the labour market with less education
  • less experience due to career interruptions (eg. maternity leave)

Psycho-social Perspectives

The employment relationship is guided significantly by the psychological contract. Which is composed of what the employee expects in terms of rewards for their time and effort as well as what outputs employers can expect from employees. The contract is subjective and individualistic, dynamic and future-focused. A violation of the contract can be due to perceptions of inequity or injustice.

An example of the psychological contract applied to the employment relationship can be outlined as follows:

Contextual and background factors

  • Individual
  • Age
  • Gender
  • Education
  • Position in organisation
  • Employment contract
  • Organisational
  • Sector
  • Size
  • Business strategy
  • Union recognition

Which determines Policy and Practice

  • HR policy and practices
  • Direct participation
  • Employment relations
  • Organisational culture/climate

Which can be integrated into the Psychological Contract

  • Reciprocal promises, inducements and obligations

Of which the efficacy is determined by the State of the Psychological Contract

-Delivery of the deal + fairness = trust

Which defines the employees' Attitudinal Consequences

  • Organisational commitment
  • Work satisfaction
  • Work-life balance
  • Job security
  • Motivation
  • Stress

and Behavioural Consequences

  • Attendance
  • Intention to stay/quit
  • Job performance
  • OCB

The psychological contract provides an individualised and more intimate connection with the employee. This relational contract can be contrasted with the transactional contract's implications.

Equality vs Equity

Equality promotes fairness and aims to give everyone the same thing, which only works if everyone starts from the same place. Equity aims to give everyone access to the same opportunities, this takes into account each individual's differences and history.

Justice Theories

Procedural Justice

  • Decisions are just if they have been reached by just terms
  • Transparent processes
  • Performance appraisals, pay satisfaction, selection

Distributive Justice

  • Decisions are just if they are fair compared to others in the same position
    • Based on distribution of outcomes
    • Promotion, bonus, training

Procedural justice theory is a better predictor of reward satisfaction. However, outcomes of pay decisions must not be unfair or inequitable.

On an equity breach of the psycho-social contract, the victim seeks to restore equity by either correcting the unfair outcome or moving to a position where they perceive equity.

Implications of Legal Regulations on the Employment Relationship

Examples of employment legislation include

  • National Minimum Wage 1998
  • Employment Relations Act 1999
  • Employment Equality (Sexual Orientation) Regulations 2003
  • Creation of Equality and Human Rights Commission 2007
  • Equality Act 2010

Legal Regulation Regarding Reward Systems

Rewards should comply with regulations of fairness and equity

Significant areas of employment law cover

  • Contracts of employment
  • Unlawful deductions
  • National Minimum Wage
  • Hours of work, holidays, paid time off
  • Equal pay for work of equal value
  • Anti-discriminatory legislation
  • Pension schemes

Motivation and Variable Pay



The cognitive decision-making process through which goal-directed behaviour is intiated, energised, directed and maintained (Huczynski and Buchanan, 2007)

Can be

  • Intrinsic: personal aspirations, dreams and ambitions etc
  • Extrinsic: external incentives; money, legislation, position

Since motivation can not be directly observed, it can only be inferred (thus a % error is included). The same applies for satisfaction. Motivation can be based on subconscious or involuntary thought.

Psychological Models

Content Theories

Maslow's Hierarchy of Needs

  • Widely recognised and practised by managers
  • Purely theoretical and not as rigid as implied
  • Not empirically validated (too much individual differences)
  • Not directly relevant to work motivation

Motivation-Hygiene Theory

Hertzberg (1959)

Satisfaction and dissatisfaction treated as two separate gauges, where the lack of one does not imply the presence of the other. (eg. Lack of factors for satisfaction does not imply dissatisfaction, only the lack of satisfaction)

Factors for each gauge can include the following


  • Achievement
  • Recognition
  • Responsibility
  • Advancement
  • Growth


  • Company policies
  • Supervision
  • Work conditions
  • Salary
  • Security

Mullins representation of Herzberg's two-factor theory: first eliminate factors of dissatisfaction, then optimise factors of satisfaction = motivation


  • Methodology of the study often questioned: no specific measure of satisfaction used
  • Results can also be explained by attribution theory - nothing new
  • Sample may be biased

This model is not currently considered a viable theory of motivation, but helped to increase worker motivation known as job enrichment. (Riggio, 2000)

Process Theories

Expectancy Theory

People create probable futures about events and strive to meet them. (Vroom, 1964)

Choices influenced by three attributes:

  • Doesn't account for reflexive or impulsive actions nor innate needs
  • High levels of rational calculation not empirically evidenced
  • Highly subjective intuitive appeal

Goal Setting Theories

Workers' commitment to performance goals that they set is the key determinant of motivation. (Locke, 1968; Locke and Latham, 1984, 1990, 2002)

Individuals are motivated and perform better when:

  • Goals are challenging (focuses attention, energiser)

  • Goals are specific (provides direction, purpose)

  • They are involved in the process of setting the goal (commitment and persistence)

  • Feedback and results of the attempt is available (adapt strategies, improve and measure progress)

  • Most consistently supported theory in work psychology

  • Goals -> Performance reproducible in many studies
    (References from Week 3 page 25)

Variable Pay

Reward systems where payments are made based on employee performance. (ACCA, 2013)

Can also be split into intrinsic and extrinsic components

  • Intrinsic: recognition, feedback and improvement, trust, empowerment
  • Extrinsic: bonuses, salary rise, promotion

Variable pay results in good pay satisfaction only among workers at the top of the earnings distribution (McCausland et al, 2005). For the rest of the workers, a partly variable pay results in better satisfaction than either a completely fixed or completely variable pay scheme (Cloutier and Morin, 2013; meta-analysis Cerasoli et al. 2014, 2016; Kuvaas et al. 2016)

Skills, Responsibilities and Job Analysis

Job Analysis

The comparison of jobs by the use of formal and systematic procedures after analysis to determine the relative position of one job to another in a wage salary hierarchy. (National Board for Prices and Incomes, 1968; Job Evaluation Report No 83 HMSO.1)

Contents of a job is defined in terms of

  • Tasks, responsibilities and duties to be undertaken
  • Knowledge, skills and abilities required to perform well
  • Technology and equipment used; working conditions, physical environment, position of the job within organisation structure

Worker-orientated analysis focuses on the knowledge, skills and abilities required to perform the tasks

Task-orientated analysis identifies the tasks required to complete the job


Payment and rewards should reflect demands of the role and correlate with the required KSA as well as position and responsibilities.

  • Analysis of all tasks within a role is time consuming and critical and essential tasks should be identified and focused upon (Perkins and White, 2011)
  • However, other small or mundane tasks cannot be ignored due to accumulation
  • All criteria should be capable of being tested objectively (very difficult in practice)
  • KSA should not be unnecessarily restrictive

Hierarchical Task Analysis (HTA)

Describes task in terms of

  • Goals (What needs to be done)
  • Operations (What is being done to progress towards the goal)
  • Plans (When absolutely and relatively will progress be made)

Analyst needs to share the area of expertise of the task

Critical Incident Technique (CIT)

  • Retrospective
  • Also subjective
  • Subject is asked to recall incidents that had a pivotal impact on the task
  • Analysis can be done to mitigate or reproduce such incidents
  • Useful for problems with unknown causes

Position Analysis Questionnaire (PAQ, McCormick 2971)

  • Worker-orientated questionnaire
  • 194 items organised into six divisions
  • Information input (knowledge required)
  • Mental process (thinking and decision making required)
  • Physical activities (activities and equipment required)
  • Relations with other people (colleagues and supervisors etc)
  • Job context (physical and social context and work environment)
  • Other characteristics (eg. pace and structure)
  • Each division rated on six scales
  • Extent of use
  • Importance
  • Time
  • Possibility of occurence
  • Applicability
  • Special code for certain jobs

Reliability coefficient of 0.79 (McCormick & Jeanneret, 1988)