Advantages and disadvantages of reward systems

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Advantages and disadvantages of reward systems

This article explores some of the advantages and disadvantages of reward systems for employees in organisations. Employees need to be motivated to carry out the responsibilities they are entrusted with. However, different people are motivated by different stimuli, and therefore, organisations need to implement different reward systems to motivate them and recognise their contribution.

What is reward system in organisations?

According to CIPD (2021) the term ‘reward’ refers to financial provisions such as pay, and wider benefits such as paid leave and pensions that organisations offer to their employees. The term ‘total reward’ is used when organisation offer their employees both financial and non-financial benefits.

Reward system refers to all the monetary, non-monetary and psychological payments that an organisation provides for its employees in exchange for the work they perform (Bratton and Gold, 2007).

Organisations need to develop and implement their reward systems well to motivate people for various purposes. Therefore, effective management of the systems is very important. According to Armstrong (2010) reward management is defined as the strategies, policies, and processes required to ensure that the value of people and the contribution they make to achieving organization, departmental and team goals is recognized and rewarded.

Types of employee rewards

There are two broad types of employee rewards i.e. financial rewards and non-financial rewards. Financial rewards include but not limited to time-rate pay, piece-rate pay, commission, bonuses, shares, and pensions. On the other hand, non-financial rewards include but not limited to security of service, recognition, and training. To discuss the advantages and disadvantages of reward systems, this article has explored a variety of motivational factors.  

Importance of reward systems

According to a research by McKinsey in 2021, cited in Smet et el. (2021) a record number of employees are quitting their jobs or thinking about doing so in the United States. Many organisations are struggling to address the problem.

Therefore, it is extremely important for employers to devise a total reward program that would entice employees not to leave their jobs but stay for long-time with commitment and enthusiasm. It means they need to go beyond certain financial and non-financial incentives and strengthen the relational ties people have with them.

Advantages of financial reward systems

The discussion on the advantages of reward systems requires an investigation into both the financial and the non-financial rewards. Financial rewards are usually straightforward to influence specific behaviours, while the non-financial ones are cost-effective ways to engage with people at workplace.

Time-rate pay is the most common method of staff payment in the UK and perhaps all other countries in the world. As employees are paid for the amount of time they spend at work, they clearly know how much they are going to earn by the end of the month which helps them plan their monthly spending accordingly. For businesses, it is also beneficial as it is a simple method to calculate the staff payment.

Commission is also a good financial reward. When paid in addition to time-rate pay, it motivates employees to work harder to achieve the expected results. Likewise, it is very cost effective for businesses as well if they paid their employees commission only.

Some companies pay their employees shares which is an increasingly popular part of pay packages. This payment method also encourages employees to commit to the business in the longer-term. Receiving dividends on shares is something many people look forward to very eagerly.

Disadvantages of financial reward systems

One of the problems with time-rate pay is that it does little to encourage greater productivity of employees. If the salary is fixed, there is no incentive for them to achieve greater output. Likewise, commission alone does not motivate employees that much either. They have no certainty as to what amount they are going to earn by the end of the month as everything depends on how much/many sales they make.

Shares are useful for long-term commitment of employees; however, may not address their short-term needs. Similarly, not many organisations are willing to award their employees free shares.

Advantages of non-financial reward systems

Not all people are motivated by just money. Therefore, making use of non-financial rewards enable employers to reach and reward all types of employees.

The praise or recognition is a non-financial incentive which satisfies the ego needs of the employees. It sometimes becomes more effective than any other incentive. When a manager praises a team member, it is a recognition of the contribution the latter has made to the team efforts. Some companies come up with ‘employee of the month’ ‘employee of the year’ awards etc. which are formal recognition of the winner’s performance.

Training is another non-financial reward method. Many employees love it as it helps them develop continuously. Likewise, it is good for organisations as well as it increases the productivity of the employees and prevents manpower obsolescence.

Disadvantages of non-financial reward systems

Verbal recognition is not enough to motivate employees unless their financial needs are met appropriately. Likewise, many training sessions run for long hours making employees bored resulting in no benefits for them or the employers. Employers also need to spend a lot of money to offer training events, which is nothing but a waste of time and money if the desired outcome are not achieved.

We hope the article ‘Advantages and disadvantages of reward systems’ has been helpful for you. You may also like reading Maslow’s hierarchy of needs theory. Other relevant articles for you are:

Advantages and disadvantages of trade unions

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Last update: 08 December 2021

References:

Armstrong, M. (2010) Armstrong’s Handbook of Reward Management Practice:  Improving Performance Through Reward, 3rd Edition, Kogan Page

Bratton and Gold (2007), Human Resource Management Theory and Practice, 4th edition, Palgrave Macmillan

CIPD (2021) Reward: an introduction, available at: https://www.cipd.co.uk/knowledge/fundamentals/people/pay/reward-factsheet#gref  (accessed 30 November 2021)

Smet, A., Dowling, B., Baldocchi, M., and Schaninger, B. (2021) ‘Great Attrition’ or ‘Great Attraction’? The choice is yours, available at: https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/great-attrition-or-great-attraction-the-choice-is-yours (accessed 07 December 2021)

Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.