Tim Holden examines the effect of reward on performance, the benefits and downsides of rewarding employees, and how – especially in this current climate – reward can be used to motivate staff.

With an increased emphasis on no-cost benefits such as praise, recognition and flexible working, a growing number of employers are seeking to compensate valued employees in creative and cost-effective ways.

Most organisations we deal with recognise that one size does not fit all and that individuals are motivated in different ways. Some want to work from home, some want learning opportunities, some want rapid career advancement and some want to link their work to their personal objectives such as sustainability. An effective way of finding out what people would value is through performance appraisals, an annual task that is often viewed as a time-consuming chore but which can be the opposite.

Last year, the CIPD identified that the main benefits being introduced were childcare vouchers, bicycle loans and coaching/mentoring – such initiatives create an important employer brand message. For instance, childcare vouchers suggest a favourable inclination to diversity, work-life balance and flexible working. Bicycle loans imply an interest in fitness, a desire to lower levels of absenteeism and a commitment to reducing the organisation's carbon footprint. Some organisations use coaching and mentoring programmes to assess the suitability of individuals for promotion into management roles of the future.

Twice in 2008 we were involved with projects relating to flexible benefits being implemented for the first time. Making sure that employees are happy with their benefits provision is crucial and it is important to recognise that requirements alter during the employee's life cycle. We find that the birth of a child, the purchase of a new house, a divorce or becoming an 'empty-nester' are the main catalysts to alter the range of benefits chosen. A growing phenomenon is for providers to offer 'cafeteria-style' benefits to smaller employers, with an increased emphasis on empowering the individual to make amendments online.

The most recent CIPD Reward Management survey revealed that a whopping 46% of respondents are not aware of the total cost of staff remuneration. In addition, it was found that the same percentage of organisations has never completed an equal pay review, leaving them vulnerable for costly and embarrassing legal proceedings.

A recent project we completed for a professional services firm demonstrated the classic Pareto principle: 80% of their revenue resulted from 20% of fee-earners and the current economic slowdown meant that the spotlight was shining very brightly on the bottom 20%. One of the areas we investigated was linking individual reward to performance, which has both positives and negatives.

Advantages of linking reward to performance

• Results in a feeling of fairness that exceptional performance results in higher financial benefits
• Making pay contingent on the performance of an individual motivates employees to strive for even higher standards
• A link between pay and performance can communicate powerful messages about values and norms relating to expected and valued employee behaviour
• Provides an opportunity for employers to improve the efficiency and effectiveness of their employees by emphasising the need for high performance
• Increases the likelihood of top performers being retained in the organisation as their earnings are inflated above the market average
• Encourages poor performers to move on because their earnings fall below the market average and they cannot afford to remain working for the organisation
• Can be introduced as part of a package of changes such as revised appraisal systems and the harmonisation of terms and conditions of employment.

Disadvantages of linking reward to performance

• Developing a market-based approach to reward provides a contradiction to the social contract between the employer and the employee
• Reward is not a motivator for some individuals and putting income at risk may pose a threat to feelings of financial security
• Demotivation may take place as workers see the scheme as a means of punishment and believe that it is not fair
• Relationships can become strained, trust may evaporate, a feeling of fear may evolve and teamwork may prove to be more difficult as co-operation decreases
• Managers may abdicate their responsibility of performance management
• Individual objectives may rise to the fore at the expense of organisational objectives
• Creativity can reduce as risks are not taken, with an emphasis on the short-term rather than the long-term
• Little scope exists for collective employee involvement in pay decisions
• The intrinsic interest in the work itself could be undermined
• There's a risk that personalities and political skills are being rewarded rather than performance
• Discrimination may take place.

With another of our clients, there was a worry that they had slipped in terms of market competitiveness and were being viewed as a 'poor payer'. They were keen to extol the virtues of their health & wellbeing scheme and their impressive diversity statistics, in an attempt to attract and retain talent in a sector notorious for skills shortages. We made them aware of the website www.glassdoor.com and we recommend that other forward-thinking employers take a look at the information here covering reward at no less than 18,000 organisations.

At a recent HR forum we discussed the significance of engagement in 2009 and reward is a big factor here too. Some may say the high number of redundancies ensures that pay rises aren't that important. However, disengaged employees will lead to slack customer service, more customer complaints and a general air of negativity that could lead to the attrition of top talent.

It is vital in the present climate to hang on to valued employees who could join a competitor at any time. In our experience these individuals typically work in sales, creative, technical or engineering roles.

To sum up, pay rises aren't essential as there are valued alternatives, but in some cases they may be necessary to stay ahead of the competition – even in these hard times.

Tim Holden is managing director of Fluid Consulting Limited.