1.4 Outcomes of Total Rewards

So why should organizations worry about their Total Rewards? What do they hope to gain? The answer to these questions lies in the outcomes that organizations seek to obtain. These outcomes represent the goals or the criteria by which a rewards system can be judged. They are also the guides that direct the design and revision of these systems. Some of these outcomes are short term (e.g., quarterly performance) and others are more long-term (e.g., market positioning), some are at the individual level (e.g., employee performance) and others are at the organizational level (e.g., organizational performance). Some outcomes are terminal (e.g., financial profit) and others are instrumental (e.g., employee fairness). Organizations use their compensation systems in the joint pursuit of these objectives, and those organizations that do so efficiently, and strategically will have an advantage in the labor market and their competitive markets as well.

Performance

The first and most prominent objective of a Total Rewards System is to direct organizational activities toward higher performance. While that sounds simple, there are actually several different ways to think about performance. These various ways are important because there may be some Total Reward Systems that have a positive impact on one form of performance but not on others. The best reward systems will consider the impact on each form. These forms of performance are shown in Figure 1-2 to illustrate how employees are nested into teams, and teams are nested into organizations.

Employee Performance

Employee Performance represents the quality and quantity of the work that individual employees produce in the organization. This can be defined in terms of the behaviors that employees exhibit, the results that they produce, or some combination thereof. Any Total Rewards System should be expected to shape and direct employee performance in a positive way and minimize detractions from their performance.

Team or Unit Performance

Team Performance comprises the joint or collective actions of groups of employees. Often organizations rely upon teams of employees to accomplish the work and to deal with the interdependence among tasks. Total Reward Systems should be evaluated based on how they impact the performance of work teams in the organization.

Many times, employees help the organization accomplish its goals by helping out in areas outside of their personal jobs. Organizational Citizenship Behaviors (OCB) represent those value-creating activities in which employees engage but which are not part of their job. Employees who go beyond their defined responsibilities to help a colleague at work contribute significantly to an organization's success. Total Reward Systems should be reviewed to ensure that they are not penalizing such OCBs and instead provide a degree of encouragement for those helpful behaviors.

Organizational Performance

Employee performance, team performance, and OCBs each contribute to the overall performance of the firm. Organizational Performance can include effectiveness at meeting customer needs, new product creation, and gains in market share, profits, and other measures of financial return on the firm's assets. Therefore, one of the primary objectives of a total rewards system is to enable the organization to achieve these performance outcomes.

Sustainability of all Performance Types

One additional objective of a total rewards system is to sustain quality performance in each area over time. Achieving one result only in the short term is not as effective as achieving the outcome in such a way as to also enable high performance in the long-term. For example, it may be possible to put in place a reward system that would lead to higher short-term sales for a retail store. However, the pressure tactics that the system encourages might also reduce the likelihood of customers returning to the store, thus hurting long-term performance. The goal for each of these performance metrics is to achieve results that can be sustained over time.

Attraction & Retention

The second category of outcomes by which Total Reward Systems are evaluated is Attraction and Retention. A primary function of organizational rewards is to attract the employees that the organization needs to do business. The rewards offered have a large impact on both the number of people interested in working at a given company and the types of people with such interest. When a reward system attracts a large number of highly qualified potential employees who apply for work at the organization, the organization can be very selective and hire only the most qualified of employees. This in turn makes the individual, team, and organizational outcomes more achievable.

In addition to increasing the chances of highly qualified people being attracted to and accepting job offers from an organization, the Total Rewards System plays a significant role in inducing employees to remain with the firm. Rewards help with this retention through competing effectively in the labor market and increasing the switching costs of moving to a different employer. By doing so, the firm retains the capabilities and knowledge possessed by its current employees and prevents them from joining competing firms.

Satisfaction and Fairness

The third category of results deals with the employees' reactions to the Total Rewards System, namely perceptions of Fairness and Satisfaction. These perceptions are important because when employees perceive that the reward system is fair and are satisfied with it, they are less likely to leave the organization. Conversely, employees who perceive that they are not fairly treated and are not satisfied with their pay are more likely to leave. This employee turnover not only creates additional recruiting, hiring, and training costs, but also represents a knowledge and capability drain on the organization as the employees' expertise is lost.

Employee Pay Satisfaction

Pay Satisfaction represents the extent to which employees are happy with the Total Rewards System they receive from the organization. Progressive companies monitor the satisfaction of their employees very precisely, measuring satisfaction with each type of reward received as well as the process by which pay decisions are made. This satisfaction is typically measured at least annually through employee surveys. This information helps organizations avoid costly turnover and enables OCBs and other intangible rewards.

Rewards System Fairness

Employees' perception that the rewards system is just and fair is another type of employee attitude that has implications both for satisfaction, turnover, and performance. People naturally desire fairness in social relations and are motivated to take steps to increase the fairness of the employment exchange. This fairness is important in its own right but also because it is connected to important employment outcomes such as absenteeism and turnover. There are three different types of fairness perceptions that should be considered in developing a Total Rewards system: Distributive, Procedural, and Interactional. These three types will be dealt with in depth in a later topic.

Cost and Efficiency

An additional area of critical outcomes relates to the cost of the rewards system and its cost relative to the results that it produces, or efficiency. Because people-related expenses make up a significant portion of the expenditures for many organizations, the levels of these expenditures have a big impact on the bottom line. In that sense, reward systems must be monitored to keep these costs under control. At the same time, however, it is important to remember that the reward costs are an investment in an asset (Human Capital) and a product or service (Performance), and simply reducing the cost without consideration for its impact on performance or future performance capabilities would be misguided.

Legal Compliance

One final metric for assessing the effectiveness of a rewards system is the extent to which the system complies with legal regulations, or Compliance. Some of these laws include the Civil Rights Act and the Equal Pay and Age Discrimination in Employment Act, which specify that organizational rewards should not discriminate against protected groups. This means that pay should be the same for equally-tenured and equally-performing employees regardless of their gender, ethnicity, age, or other characteristics. Full treatment of this legislation is covered in the legal course, but managers should always be aware of how strategic reward decisions comply with local, state, and national law.

As organizations strive for compliance with the multiple layers of local, state, and federal laws, they should be aware that these laws do not always provide equivalent requirements. In cases where reward regulations are not in agreement, the general rule is to follow the regulation that is most advantageous to the employee. For example, a state law may require a higher minimum wage than the federal law. Organizations would be advised, in this situation, to pay the wage required by the state regulations.

It should be noted that, for organizations operating in multiple states, these inconsistent regulations create a situation where employees in one state may be compensated at different levels or in different ways than employees in other states. In these situations, organizations can choose to adjust the reward strategy for the entire organization to comply with the most stringent state regulations in order to better meet its fairness objectives and to simplify administrative complexity. Of course, this decision would also sacrifice the cost benefits of creating a strategy that adapts to regulations on a state-by-state basis.