establishing the right reward system

The choice of reward system and pay structure sends a powerful message to employees about how they are valued, and the behaviour and performance the organisation is trying to encourage.

Most organisations review employee pay on an annual basis, with almost half of all employers using individual arrangements or spot salaries to manage base pay. Other forms of base pay structures include narrow-graded pay grades, pay spines and broad-banded pay structures. Self-financing rewards, where employers offer a basic salary plus a ‘top up’ or bonus based on the organisation’s performance, is another example.

aligning rewards

Harmonisation or single status agreements are becoming increasingly important. After decades of mergers and takeovers, many organisations now have several different sets of terms and conditions – which may include reward – in operation at any one time. This can be a difficult inheritance to manage and may be seen by employees on the less advantageous terms as inequitable.

pay structures

Traditionally, pay structures consist of a sequence of grades into which jobs were fitted. These are increasingly being replaced by ‘broad-banding’ and ‘job families’ more appropriate for less hierarchical, more flexible organisations. Job family structures remain rare in the public sector, with the preference of the certainty of pay spines (an extended series of pay points that creates a scale) with senior managers on individual pay rates.

The private sector generally adopts a semi-analytical approach to pay structures. This is a combination of non-analytical approaches (where jobs are viewed as a whole and placed in a framework) and a traditional analytical approach, where key elements in each job are identified, broken down into components and awarded points.

These semi-analytical approaches involve creating a banded framework, defining the skills, competencies and work requirements for each role, and slotting them into the general framework. Not only does this provide sufficient detail to provide a basis for fair reward – including the ability to defend against any equal pay actions – it also provides a flexible solution for organisation design.

Pay structures can be distinguished by two key characteristics: the number of grades, levels or bands; and the width or span of each grade. For example:

  • narrow-graded pay structures, often found in the public sector, typically comprise ten or more grades, with jobs of broadly equivalent worth in each grade. Progression is by service increments, although due to narrow grades employees can reach the top of the pay range relatively quickly, potentially leading to ‘grade drift’ and jobs ranked more highly than justified
  • broad-graded structures have fewer grades, perhaps six to nine, and greater scope for progression that can counter ‘grade drift’ problems
  • broad-banding involves the use of an even smaller number of pay bands (four or five). Designed to allow for greater pay flexibility, typical broad-banding would place no limits on pay progression within each band, although some employers have introduced a greater degree of structure
  • job families group jobs within similar functions or occupations, with separate pay structures for different ‘families’ (e.g. sales or IT staff). With around six to eight levels, similar to broad-grading, job family structures allow for higher rates of pay for sought-after specialist staff
  • career families extend the metaphor with a common pay structure across all ‘job families’ rather than separate pay structures for each family. Career families tend to emphasise career paths and progression rather than the greater focus on pay of job families.

effective, fair and realistic

The chosen reward system must be seen as fair and realistic. If performance targets seem unrealistic, employees will quickly become demotivated and unproductive. If there is a question mark over the fairness of the rewards allocation, individuals are likely to become disengaged if their contribution in relation to others is not adequately rewarded. In both cases, the employer risks losing employees and damaging its reputation as an employer of choice. 

Effective reward systems should be transparent and communicated effectively so employees know what is expected of them, and how their targets affect their rewards. If customer satisfaction is one of your stated values, a system that rewards immediate sales, but does not encourage good customer or post-sales service, will not work.

While most Australian employees understand the basics of their organisation’s reward strategy, just 35% understood their eligibility for specific reward programs and only 15% understood the rationale for the mix of reward elements, according to a research by Loyola University. This would suggest two-thirds of organisations may not see the full benefit of their reward system as a motivational tool.

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