Human resource management practice I also available by michael armstrong

1 

What is strategic reward?

2 

What is the main characteristic of strategic reward?

3 

What are the limitations to the concept of 

strategic reward?

4 

What is reward strategy?

5 

What are the main objectives of reward strategy?

6 

What are the main arguments in favour of 

having a reward strategy?

7 

What are the principal areas covered by  

a reward strategy?

8 

What is reward philosophy?

9 

What is the typical approach to formulating 

reward strategy?

10 

What are the main problems organizations 

meet in implementing reward strategy and 

how can they be overcome?

Questions

---

Part 

6

  Performance and Reward

368

Armstrong, M and Brown, D (2006) Strategic 

Reward: Making it happen, London, 

Kogan Page

Armstrong, M and Murlis, H (2007) Reward 

Management, revised 5th edn, London, 

Kogan Page

Lawler, E E (1990) Strategic Pay, San Francisco, CA, 

Jossey-Bass

Schuster, J R and Zingheim, P K (1992) The New Pay, 

New York, Lexington Books

Thompson, M (1998) Trust and reward, in (eds)  

S Perkins and St J Sandringham, Trust, Motivation 

and Commitment: A reader, Faringdon, Strategic 

Remuneration Research Centre

Trevor, J (2011) Can Pay be Strategic?, Basingstoke, 

Palgrave Macmillan

References

---

27

The practice of 

reward management

Key ConCePts and terms

Analytical job matching

Anchor point

Base pay

Base pay management

Broad-banded pay structure

Broad-graded pay structure

Career family pay structure

Compa-ratio

Competency-related pay

Contingent pay

Contribution-related pay

Distributive justice

Evidence-based management

Evidence-based reward 

management

Extreme market pricing

Factor plan

Financial rewards

Grade

Grade drift

Incentive effect

Job evaluation

Job family pay structure

Job matching

Job size

Job worth

Job-based pay

Line of sight

Lower quartile

Market pricing

Market rate

Median

Merit pay

Mid-point management

Narrow-graded pay structure

Non-financial rewards

Pay progression

Pay range

Pay spine

Pay stance

Payment-by-results

Performance-related pay

Person-based pay

Point-factor job evaluation

Reference point

Remuneration

Reward management

Reward system

Skill-based pay

Sorting effect

Spot rate

Target rate

Time-based pay

Upper quartile

LearnIng outComes

On completing this chapter you should be able to define these key concepts. You should also understand:

 

●

The meaning and aims of 

reward management

 

●

Pay determination

 

●

Job evaluation

 

●

Market pricing

 

●

Base pay management

 

●

Contingent pay

 

●

Recognition schemes

 

●

Employee benefits

 

●

The evaluation of reward 

systems

 

●

The administration of reward

369

---

Part 

6

  Performance and Reward

370

Introduction

The aim of this chapter is to describe how reward 

management works in practice. It starts with defini-

tions  of  what  reward  management  is  and  what  it 

aims to do. The following components of the reward 

system  are  then  dealt  with  –  pay  determination 

through  market  pricing  and  job  evaluation,  base 

pay management, contingent pay, recognition, and 

the  provision  of  employee  benefits  and  pensions. 

This  chapter  continues  with  two  sections  dealing 

respectively  with  the  evaluation  and  management 

of reward.

Reward management 

defined

Reward management is concerned with the strate-

gies, policies and practices required to ensure that 

the value of people and the contribution they make 

to achieving organizational, departmental and team 

goals  is  recognized  and  rewarded.  It  is  about  the 

design, implementation and maintenance of reward 

systems  that  aim  to  satisfy  the  needs  of  both  the 

organization  and  its  stakeholders  and  to  operate 

fairly, equitably and consistently.

Reward  management  deals  with  non-financial 

rewards such as recognition, learning and develop-

ment opportunities and increased job responsibility, 

as well as financial rewards.

Aims of reward management

As Ghoshal and Bartlett (1995) pointed out, reward 

management is there to add value to people. It is not 

just about attaching value to them. Its aims are to:

 

●

Reward people according to the value 

they create by providing for them to be 

recognized and paid in accordance with  

the degree to which they meet or exceed 

expectations.

 

●

Support the achievement of business goals 

by helping to ensure that the organization 

has the talented and engaged people it  

needs.

 

●

Promote high performance by ensuring 

that the reward system recognizes and 

encourages it.

 

●

Support and develop the organization’s 

culture by linking rewards to behaviour 

that is in line with core values.

 

●

Define the right behaviours and outcomes by 

defining expectations through performance 

management and merit pay schemes.

Pay determination

Pay determination is the process of deciding on the 

level of pay for jobs or people. Its two aims, which 

often conflict, are: 1) to be externally competitive to 

attract, engage and retain the people required by the 

organization;  and  2)  to  be  internally  equitable  in 

the sense that rates of pay correctly reflect the rela-

tivities  between  jobs.  These  aims  are  achieved  re-

spectively by market pricing and job evaluation.

Competitive pay

Pay is by no means the only factor that influences 

people to join or remain with an organization, but 

it  is  important.  The  most  significant  influence  on 

pay levels is the law of supply and demand. If the 

demand for labour exceeds supply, pay levels will be 

higher  and  vice  versa.  Organizations  pay  more  to 

attract and retain high-quality employees in critical 

positions.

The need to be competitive means that organiza-

tions  have  to  take  account  of  market  rates  when 

deciding on the level of pay for a job. They bear in 

mind the saying: ‘A job is worth what the market 

says it’s worth.’ Consequently, establishing market 

rates  through  what  is  termed ‘market  pricing’,  as 

described in the next section of this chapter, is a vital 

step in deciding on levels of pay.

Internally equitable pay

Internally equitable pay is fair pay. This means pro-

viding equal pay for work of equal value as required 

by the Equality Act (2010) and supporting case law, 

and ensuring that the rates of pay for jobs at differ-

ent  levels  properly  reflect  relative  values.  Internal 

---

Chapter 

27

  The Practice of Reward Management

371

by job titles to detailed matched analysis collected 

through  bespoke  surveys  focused  on  real  market 

equivalence.  Extreme  market  pricing  can  provide 

guidance on internal relativities. But it can lead to 

pay  discrimination  against  women,  where  the 

market has traditionally been discriminatory, and 

it does not satisfy UK equal pay legislation.

The concept of a market rate

Market  pricing  attempts  to  establish  the  market 

rate for jobs, but the notion of a market rate is a 

more elusive concept than it seems. There is no such 

thing as a definitive market rate for any job, even 

when comparing identically sized organizations in 

the  same  industry  and  location.  Different  market 

information sources for the same types of jobs pro-

duce  different  results  because  of  variations  in  the 

sample, the difficulty of obtaining precise matches 

between jobs in the organization and jobs elsewhere 

(job matching), and timing (the dates on which the 

data is collected may differ).

This  means  that  market  rate  analysis  is  most 

unlikely to produce definite information on the rate 

for  the  job.  The  possibly  incomplete  data  from  a 

number of sources, some more reliable than others, 

has to be interpreted to indicate what the organiza-

tion should do about it. This may be expressed as 

a ‘derived market rate’, which is a sort of average of 

a  range  of  pay  information  –  a  dubious  notion. 

Data  may  be  available  for  some  jobs  but  not  for 

others that are unique to the organization.

Market rate analysis

Market rate analysis involves the following steps:

 

●

Identify and define the jobs for which  

market rate data is required. These are 

benchmark jobs that are representative of 

different levels and occupations and can be 

compared with similar jobs. In conducting 

the survey the aim will be to ‘match’ these 

jobs as closely as possible with jobs 

elsewhere.

 

●

Identify the sources of information. These 

can include published surveys conducted  

by a pay consultancy or research 

organization, surveys conducted specially  

by the organization, ‘pay clubs’ (groups of 

relativities  are  established  by  job  evaluation.  But 

there is a tension between external competitiveness 

and  internal  equity.  Some  adopt  the  slogan,  ‘the 

market  rules  ok’  –  internal  equity  considerations 

are  secondary.  But  if  this  policy  is  pursued  too 

vigorously there is a risk of alienating existing em-

ployees  and  contravening  the  provisions  of  equal 

pay legislation. This risk should be assessed.

Market pricing

Market pricing is the process of making decisions 

on pay structures and individual rates of pay and 

obtaining information on market rates (market rate 

analysis). A policy decision is required on the rela-

tionship  between  market  rate  levels  and  levels  of 

pay within the organization. This is called the ‘pay 

stance’,  which  may  be  expressed  in  such  terms  as 

matching  median  (average)  rates  or  paying  upper 

quartile rates (loosely, within the top 25 per cent).

Use of market pricing

Market pricing informs decisions on base rates of 

pay, ie, the amount of pay that constitutes the basic 

rate for the job or the person. The aim is to ensure 

that  the  rates  are  competitive.  It  helps  to  develop 

the pay structure – the pay ranges attached to grades. 

Information on market rates may lead to the intro-

duction of market supplements for individual jobs 

or the creation of separate pay structures (market 

groups) to cater for particular market rate pressures. 

It  is  referred  to  as ‘extreme  market  pricing’  when 

market rates are the sole means of deciding on in-

ternal rates of pay and relativities, and conventional 

job  evaluation  is  not  used.  An  organization  that 

adopts  this  method  is  said  to  be ‘market-driven’. 

Market pricing may be associated with formal job 

evaluation,  which  establishes  internal  relativities 

and the grade structure.

Acceptability of market pricing

The acceptability of either form of market pricing is 

dependent on the availability of robust market data 

and, when looking at external rates, the quality of 

the job-to-job matching process, ie comparing like 

with like. It can therefore vary from analysis of data 

---