The importance od compensation, incentives, and rewarding your employees.


Rewarding human resources is one of the most important functions of a company, and therefore a main priority for human resource management. People seek employment mainly to earn a living. They expect to earn a good wage and receive fair benefits in return for their work. Rewarding employment properly has a circular impact because if employees are happy with their rewards, they will be more productive, and in turn the company will benefit. When employees are not happy with their compensation, they will be less productive and the company will be hindered. Developing a program for fair compensation is therefore extremely important to all businesses, but there is also a social impact as well. People depend on their work to earn a living, and their involvement in society is a direct impact on how they are compensated from their work.

This goal of this article is to look at the history of how employment has been compensated, compare and contrast how different cultures have compensated their workforce, and provide insight on effective ways to motivate employees to work efficiently towards a common goal. It should also help managers better assess and compensate employees’ in order to achieve the goals of both the employees and of the company.

The history of work itself is very broad and complex though there are some principles that remain constant. Through history different cultures have had different ways to explain and view work, but the basic foundation is that it is necessary, no matter how it is viewed. Many of the early, classical cultures, such as the Hebrews and Greeks, viewed work as a curse. “The Greek work for work was ponos, taken from the Latin poena, which meant “sorrow.” Manual labor was for slaves. The cultural norms allowed free men to pursue warfare, large-scale commerce, and the arts, especially architecture or sculpture.” (Rose, 1985) Greek leadership was based on the work a person didn’t have to do. Clearly, the old view (and many times the modern view) of work was negative. The Judeo-Christian view of work started to take hold after the collapse of the Roman Empire and in into the middle-ages. Christian thought became more prevalent and influential on western culture. “The fall of the Roman empire marked the beginning of a period generally known as the Middle Ages. During this time, from c400 AD until c1400 AD, Christian thought dominated the culture of Europe (Braude, 1975). Woven into the Christian conceptions about work, however, were Hebrew, Greek, and Roman themes. Work was still perceived as punishment by God for man's original sin, but to this purely negative view was added the positive aspect of earnings which prevented one from being reliant on the charity of others for the physical needs of life (Tilgher, 1930). Wealth was recognized as an opportunity to share with those who might be less fortunate and work which produced wealth therefore became acceptable.”

The protestant reformation brought about the “protestant work ethic” which changed the view of work from being that of dread and punishment to a view that work is good and the main way to serve God. Working hard was seen as noble, and gaining wealth was accepted as long as you do not hoard the wealth. This work ethic remained consistent through the western world and the early American lifestyle, which soon saw the rise of industrialism. Industrialism saw a sharp decline in manual and skilled labor due the rise of machines. People were now needed to operate the machines. Though the hard working protestant work ethic was still alive, much of the individual accomplishment aspect of hard work was being diminished. The workplace became mundane and people were now seen as simply wage earners (or wage-slaves). The industrial age saw the rise of capitalism, which in turn showed employees that if you do work hard enough you can “make it” and become rich through ownership. This was the image of the American Dream, where anybody can work hard enough and become wealthy, although in reality there was still quite a contrast between the owners and the employees.

Today we are in the information age and are seeing change towards empowerment. The industrial era took away the human and creative element of work and made the workplace a “work for a wage” environment. Today, employers are seeking to empower their employees through coaching and allowing them to manage their own environments. They are allowing employees more creative power, which in turn motivates employees to be productive and put out quality work.

The information age puts an emphasis on knowledge, which brings much more meaning to the phrase “knowledge is power.” There are many more technology driven jobs and jobs that require post-graduate skills. The new generations that are filling these jobs are learning from past mistakes ad are demanding better workplace conditions that previous generations. People are willing to apply their highly technical skills but don’t want to work 80 hours per week to make a living. They are looking for family time and time for leisure, which the time between the industrial period and information period took away since people had a notion that work was everything.
Looking through the history of work ethics and how people have viewed work over the ages will give insight on what motivates people. When employers know how to motivate people they will be able to create compensation packages that are appealing to employees and are not just “work and get paid” packages. We have seen many different views of work but it remains that work is necessary to make a living and sustain life. The purpose of modern day human resource managers should be to work out compensation plans that don’t merely allow people to make a living and sustain life, but to allow them to pursue happiness as well. Allowing means for employees to pursue happiness will motivate them to be productive and both the employees and the employers will be working for a common goal.
Compensation Overview

Compensation is effected by internal and external influences. External influences come from outside of an organization, either by another organization, a government, or a market. The labor market plays a role in compensation through basic supply and demand. “In times of full employment, wages and salaries may have to be higher to attract and retain enough qualified employees; in depressions, pay can be lower. Pay may also be higher of few skilled employees are available in the job market.” (Ivancevich, p. 295) Basically, the labor market works just like any other market. Compensation will be higher for the jobs that are in demand and have fewer people to fill the positions. In addition to market factors, there are also demographics that play a role in compensation. Diversity has had an effect on how employers go about compensating their employees. This means that there are now many different cultures and backgrounds in the American workforce. Different cultures have different motivators and employers need to adjust their compensation and benefits for the diverse workforce.
The increasing level of formal education and college level education are also contributing factors to modern rewards systems. Highly educated people will demand higher compensation, especially in benefits. There will also be more competitiveness between not only employee’s seeking work, but companies seeking to higher the best people. This will not only effect compensation and benefits, but even fringe benefits and work environments that companies offer. One company may pay less than another, but they may have a fun and enjoyable atmosphere compared to the other company n order to attract people.
Government is another major external influence. Policies and wage controls have an obvious effect on compensation because they carry the weight of law. Laws such as minimum wage must be followed or companies will face legal problems. Government can also pass laws to create better/fair work environments as well as safe work environments. Overtime pay is a government instituted law that affects non-exempt employees.
Comparable worth, or pay equity, is a doctrine that is being discussed and has been implemented in some public-sector jobs. “Comparable worth attempts to prove that employers systematically discriminate by paying women less than their work is intrinsically worth, versus what they pay men who work in comparable (equally valuable) positions-and the remedy this situation.” (Ivancevich, p.301) This concept compares jobs that may be dissimilar in content but tries to weight their relative worth and value. If jobs are found to be comparable in value, then the compensation is reviewed to see if there is an imbalance of pay, mainly between men and women.

Union influence is another outside factor that effects compensation. Labor unions help to set wages and work workers for workers in many organizations. Their influence also has an effect on non-unionized organizations because the wages they set usually become standard. If not, it can create employee dissatisfaction in other companies that wish t receive the compensation that unionized employees are getting. The influence of unions are very strong, and sometimes this is not always a good thing as they can force companies to make decisions that are not financially and economically strong which will hurt them in the long run.

Internal influences on compensation are factors that come from within an organization. One influence is the labor budget which determines how much money is allocated for employment. Normally there is an amount set for each division and the department heads and supervisors make the individual decisions for their respective departments. Another internal influence are the people who make the compensation decisions. In publicly traded companies stockholders and board of directors have major influence. Many organizations, however, are beginning to involve more people in determining pay. This includes different levels of management and even non-managerial employees.


Motivation is probably the most important factor in the workplace. It is the key to getting work completely efficiently as well as gaining a sense of accomplishment for the work completed. Motivation is defined as “an invisible inner state that energizes human goal-directed behavior, which can be divided into two components: 1) the direction of behavior (working to reach a goal) and 2) the strength of the behavior (how hard or strongly the individual will work). (Ivancevich, p.304) Despite the fact that motivation is the driving factor in getting work done and done well, there is still plenty of debate as to how and what truly motivates people. Aristotle and his contemporaries debating this issue, and there is still no definitive or universal answer today. Modern theories include the need theory, which says that all human behavior stems from needs or drives, which are mainly biological. Social comparison theory suggests that people are motivated by how fairly they think they are being treated or paid. Other social behavior theorists believe that people are motivated by outside influences, not innate needs or desires. Many people today think that money is the main motivator, but they are finding out that people are motivates more by accomplishments, recognition, status, fulfilling family needs, and being able to enjoy leisure time. Religion is also a strong motivator for people.
The problem for employers is to find what motivates their employees so they can reward them properly; doing so will motivate the employees to perform efficiently and benefit the company. In the classical and middle-age time periods work was seen as a curse and drudgery and workers only worked as much as needed, in other words, doing the bare minimum. They may only work three days and then celebrate the other four. When the industrial age came around the “incentive” wage was introduced. This was based on the theory that hungry workers would work harder so they can get money to buy food, so wages should be kept at a sustenance level. This theory was modified to make money the main motivator, in which theorists thought that the more money a person would make the harder they would work. This led to performance rewards and the more modern views of incentives and wages. This is the reward system that is prevalent in today’s world. Wages are normally determined by performance and bonuses given for goals that are completed.

The answer to the motivation question is difficult since there is no single answer. Each person has different motivators and managers need to take this into consideration. Incentive plans need to be tailored towards individuals instead of creating collective plans. Companies that implement new initiatives like empowerment are recognizing that the there are more motivators than just money, and people will work harder to gain more creativity and free time, even if they are paid less.

Performance Evaluation
In addition to finding the motivators for employees, employers need to assess and evaluate the performance of each employee. This is critical within every company because managers need to know who is performing well and who is lagging behind. It is important not only so managers can use it as a base for giving incentives, but to analyze why some people are performing better than others. Performance evaluations offer manager the opportunity to find what the motivators are for each employee. They can also use performance evaluation to determine if a particular position is correct for an employee, and make decisions accordingly.
Determining the best methods for performance evaluations are a subject for debate as there are many ways to conduct appraisals. There are grading systems, point systems, description methods, and combinations of each. Grading systems base jobs according to a grade or category. The categories are based on difficulty of job and evaluations and pay decisions are decided accordingly. Point system evaluations allow managers to rank each person to different elements of the job. Various skills are listed and the manager ranks the employee, usually on a scale of 1-5, for each skill description. While this is a decent method since it’s easy to visually see how an employee measures in performance, it is difficult to create the system and it relies on the subjective judgment of the manager. It can also make the employee feel more like a number instead of a person.

A new trend in companies today is that of using feedback as an evaluation tool. 360-degree feedback is a form of evaluation that allows not only managers to evaluate their subordinates, but the subordinates to evaluate the managers as well. 360-degree feedback means that not only those above you evaluate you, but those below and on the same level evaluate your performance. The theory behind this is that the best people to evaluate somebody are the ones who work with the person on a day-to-day basis. It also can cut down on the subjectivity of a top-down approach and give different insights into how others perceive an employee is performing. The drawbacks to this approach are that it is still a subjective approach and other people may use emotion to evaluate their managers or colleagues instead of objective performance facts.

Business managers and HR managers need to asses their evaluation process to see if it is effective and make changes as necessary. Developing combinations of different plans is a good idea, but most important is the communication between managers and their employees. Open communication will allow managers to determine the motivators for their employees, and the employees will in turn be motivated to work for somebody who cares.

Methods and policies of Compensation

Methods of compensation vary between companies, and it does depend to an extent on whether or not the companies have unionized employees or not. Many unionized employees have flat rates for specific jobs. They may also have set cost of living adjustments and raises. Companies without unions have a bit more flexibility in their compensation packages. A method that is popular in the United States and other developed countries is the variable pay method. Variable pay is defined as: “any compensation plan that emphasizes a shared focus on organizational success broadens opportunities for incentives to nontraditional groups (such as nonexecutives or nonmanagers), operates outside the base pay increase system.” (Ivancevich, p.329) Variable pay systems seek to effectively link pay to performance and productivity. This differs from traditional pay structures where employees receive a base wage and expect an annual increase each year, regardless of company performance or personal productivity. The lack of connecting pay to performance has caused many American companies to fall behind in the global market. Linking pay to performance effectively increases performance and productivity which allows companies to better compete both domestically and abroad.

The challenge for implementing variable pay structures is that companies need to clearly define their goals and measurements, and effectively communicate these with their employees. Variable pay structures need to be based on competition and need to support the goals of the company. Methods include gainsharing, profitsharing, lump-sum bonuses, and individual variable pay. Each method directly links performance to higher rewards.

Merit pay is the most widely used pay structure, and although it attempts to reward employees base on their performance, many plans fail to reward for superior performance since employees do not make the connection between pay and performance. The reason for this are that managers determine the merit pay, which is a subjective measure, and the size of the reward (merit) has little to do with performance, and more specifically, company performance. Variable pay structures determine incentives based on measurable company goals and how an employee performed to reach those goals. It is a more objective measure than a managerial assessment. The merit pay system looks for the reward itself to produce an effect, instead of having a result determine the incentive.

Benefits are another very important aspect of compensation. Benefits include, but are not limited to: health insurance, paid time off, family leave, paid holidays, life insurance, workers compensation, retirement accounts, stock options, and tuition reimbursement. These means of indirect financial compensation are used to keep competitive with other companies (in attracting employees) and to increase productivity. There are benefits that are mandated by the government such as unemployment insurance, social security, and workers compensation; and there are voluntary benefits that are offered but not necessary, such as health insurance, and paid time off. Employers should evaluate what benefits are preferred by most employees and offer those as too many offered benefits can be difficult and costly to handle. Employers should offer enough benefits, however, to attract and retain competent employees.
Retirement benefits are very important and have seen changes over the years. Pensions used to be the main retirement benefit where employees would receive a set amount of money from a company after retirement. This is still a norm in many public sector jobs, but not in the private sector. 401(k) plans are becoming the norm for retirement planning. These are plans that are offered to employees where they can set aside money on tax-deferred basis. Most of this money is kept in stock and bond markets, and sometimes companies will match the employee’s contribution. 401(k)’s cannot be withdrawn until the person reaches 59 ½ years old except for special reasons, in which case they can borrow from the account and pay it back with interest. IRA’s (individual retirement accounts) are another form of retirement benefits. Employee’s can make annual tax-free contributions and not have to pay taxes on the money until retirement when the tax burden would equate to lower personal income and lower taxes.

There are many variables that are present in the modern workplace. Employers and managers need to be flexible and able to adapt to a constantly changing environment. There is no single answer to properly motivating employees or to the best way of evaluating performance. Managers need to assess their unique situation and make decisions based on what their situation calls for. Managers need to be aware that there are many types of motivators and they differ from person to person. A more personal approach is necessary in today’s world, especially since the workplace is becoming more diverse and more educated. Demands from employees will be higher and they will not be content with merely a wage for their work. People spend on average a third of their life at work. They want the experience to be rewarding and be able to gain satisfaction from their work. If employers can work together with their employees instead of just viewing employees as working for them, they can then collaborate to succeed in each other’s mutual goals. In other words, the company will work to fulfill the employee’s goal and in turn the employee will fulfill the company’s goal. This collaborative and empowering environment should lead to more productive employees who are satisfied and in company’s better achieving their goals.



Ivancevich, John M., Human Resource Management, tenth edition, McGraw-Hill, Irwin, 2007.


Tilgher, A. (1930). Homo faber: Work through the ages. Translated by D. C. Fisher. New York: Harcourt Brace. Department of Workforce Education, Leadership, & Social Foundations
The University of Georgia; Athens, GA;col1