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Analysis Of A Reward System And Changes Business Essay

Paper Type: Free Essay Subject: Business
Wordcount: 5448 words Published: 1st Jan 2015

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Bearing in mind that most employees do not work for free, they have to be rewarded for their efforts. Every organization has some kind of reward system which is usually used as a tool for management to achieve desirable objectives. “Rewards refer to all the monetary, non-monetary and psychological payments that an organization provides for its employees in exchange for the work they perform” (Kulkarni, 2012).

The one way employees would fulfil the dreams of their employer is to share in the dream. Having a good reward system is a mechanism to make this happen. Rewards can take many different forms not only money but status, position, praise and recognition. Rewards could be either intrinsic (psychological) or extrinsic (financial) [1] .

(Micheal R Carrell, 2012) the objectives of a reward system include attraction [2] , motivation [3] and retention [4] of employees at all organizational levels. To accomplish these objectives, a proper management of the reward system is crucial. Managing a reward system involves establishing, developing and maintaining a system that has a core purpose of rewarding the work done by employees in an organization. Rewards management concerns formulating and implementing strategies and policies that help in rewarding employees. A proper management aims at being fair, equitable and consistent on account of a particular employee’s value to the organization (Carolyn, 2010). Also, (Micheal R Carrell, 2012) stated that in managing the reward system, managers consider policy issues like

• Should pay incentives reward individual or group behaviour?

• Should profits or reduction in operating cost be shared by employees?

• How should employees be involved in the design and administration of the pay system?

• What is the most effective mix of pay and non-pay rewards to motivate performance?

Answers to these questions define a critical aspect of employee-employer relationship and helps managers deal with handling a reward system. The reward from a job is termed a good reward system if it is that which the individual values in relation to their needs (Harrison, 1992). Pfeffer (1998) asserts that though people work for money, they also work to find meaning to life and sense of identity and (Kohn, 1998) goes further to suggest that extrinsic rewards erodes intrinsic rewards i.e people work for the money, the status and recognition even if they are not satisfied with the job.


(Nelson, 2012) stated that the term ‘banking industry’ is used to describe every bank in the world, the financial services and the markets they participate in. Like every other thing, the banking industry is greatly affected by trends and advances in technology. Services like the ATM (Automated Teller Machine) which provides 24hours banking services and speed up banking operations came about as a result of advance in technology. Analyzing the banking industry includes monitoring of and outlook for technological development, managing human & capital resources that can affect the performance of the organizations that deal within the banking industry. The banking industry, HSBC in particular would be used as a case study in this research.


The objective of this research work is to analyze how a particular reward or changes in the reward system for HSBC would impact on achieving the overall objective of HSBC. Specifically, it would examine recent changes in the reward system and the main objectives of the change, it would analyse the problems encountered in the design and implementation of the new reward system, it would further examine if the objectives of the new reward system were achieved and also recommend some policies for HSBC to implement.

Furthermore, answers would be provided to questions like : How does HSBC want to achieve success? How would the Human resource department help the company? What strategies would the Human Resource department use in terms of Rewards Management and How would the reward management bring success to achieving the organizational objectives?


According to (Webster), methodology has to do with the procedures of inquiry used in a particular field. To complete this research work, a clear procedure that attempts to understand a particular scenario is important.

(Withers, 2012) a contributor to ehow described the common research methods that are used in social science researches. And they are case studies, focus groups, questioning, field search and analysis of archival data. In this study I would be making use of case studies as it does not dwell on stated theories but observes, attempts to understand and analyze the behaviour expressed by a particular individual/organization with regards to a particular event. A case study involves a comprehensive research which includes documented proofs of a particular event (Holetzky, 2012).


The data used for this research are mainly qualitative [5] and derived from secondary [6] sources which are the most widely used data sources and give access to written reports of event, organizational reports, formal studies, books, articles, newspapers and journals. Most of the data’s were already published on the internet.



Every organization, most importantly those that are not voluntary service organizations need to have a system for rewarding employees. Policy makers i.e the human resource management team in an organization need to have a proper scheme for managing rewards in such a way that the organization is still able to achieve its stated objectives and goals. The human resource team could also be using a hard or soft approach to manage employees which also encompasses rewards (Armstrong, 1992). The hard version disregards human feelings treating them as though they are just part of the inputs-output equation while the soft version is a leadership form that communicates with staffs and motivates them recognising that they are human and have feeling. A mix of both hard and soft HRM approach is best for an organization to be successful. Going to the extreme of both cases would have its costs and benefits. Using a hard hand on employees is needed sometimes to get work done and a soft hand should be used most of the time.

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Reward system is an issue of vital concern to both the employer and the employees. Employees are really demanding about their lives and surrounding and employers use rewards to motivate employees by satisfying those demand. A reward means different things to different people and is termed good if it is that which the individual values in relation to their needs (Harrison, 1992). A proper management of reward is important so as to get it to achieve the desired aim which is to motivate employees. Rewards management is concerned with intrinsic, as well as extrinsic motivation with non-financial as well as financial rewards. The non-financial reward system will satisfy people’s need for responsibility, challenge, variety, achievement, recognition, skill development, influence in decision making as well as career opportunities . The financial reward system will incorporate procedures for tracking market rates, for valuing jobs, designing and maintaining pay structure, paying for performance and skill and providing employee benefit. (Armstrong, 1992). A reward system includes all organizational components like people, rules and procedures, processes and decision making activities involved in the process of allocating compensation and benefits to employee in exchange for their contribution to the organization. (Griffin and Morhead 2009).

There are various forms in which a reward system can be used in an organization. It could be in form of a variable pay/ pay for performance [7] (which include bonuses [8] , profit sharing [9] and stock option [10] ), pay for skill [11] (they are people oriented rather than job oriented), pay for competence [12] and also in form of a flexible benefit (employees can choose what they value from the benefit options available and want to be included in their package) all of which could be a source of motivation to employees one way or another. (inc.com, 2012) (Micheal, 1995). Banking industries are well known to use a variable pay system to reward employees as they usually have some staffs who are hired on a contract base (as seen in peripheral employees) who are numerically flexible and can contract and expand based on the market growth and core employees who are stable and handle the key firm activities.

Rewards also depend on how high up the grid an employee is. Ms Arrowsmith [13] said that “the chief executive of large banks in the UK would have a salary which is between £1million and £1.25 million”. Added to this, “they would on average, be opportuned to get a bonus of between two and four times their salary as well as “the right to own shares based on three years’ performance which would be somewhere between two-and-a-half and five times their basic salary. The chief executives are core employees who are high up the grid and are very important to the organization. Therefore, they get to have the highest pay level in the organization.

A reward system contains powerful symbols that communicate beyond their instrumental value, management’s philosophy, attitudes and content. A reward strategy should support and drive desired behaviour, be in line with corporate value and beliefs, be linked to business performance, fit required management style and emanate from business strategy and goals. (Armstrong, 1992)

According to Shannon T. Kalvar (2003), monetary and social rewards are a natural way of expressing appreciation for someone who goes above and beyond his job. It could also be a way of rewarding crisis leading to destructive behaviour. With the pay of an employee being raised and not seen as fair by other employees, they would get demotivated as they feel the other employee is being overpaid i.e the payment is far above the job done and causing inequality, they form a behaviour which is destructive out of anger leading them to underperform.

It is noteworthy that in as much as a financial motivation is seen as a basic factor to attract valuable employees, the non-financial motivator is what would help to keep and retain valuable employees. This happens because non-financial motivators are based on the individuals need for personal growth and focus on the psychological and emotional wellbeing of the employee for instance giving praises and recognition to employees who have been very good is very helpful.

Furthermore, a rewards system would make the employer go far into monitoring the performance and contribution of staffs to the organization to provide adequate reward. This can also come in handy in gingering employees to work well as they know that their performance is being monitored and rewarded.


From the objectives of a good reward system attraction, motivation and retention of employees ( Micheal Carrell 2012), an individual is only motivated by a reward system if it is that which he/she values in relation to his/her need. A good deal of thinking and discussion around reward now centres on motivation and incentivisation (Chris Brewster, 2008).This brings about the need to study different motivation theories and how they are relevant to managing employees.

2.1.1 THEORY X and THEORY Y (Bramham, 1989)

Douglas McGregor(1960) set out two set of propositions that he suggested underpin assumptions about motivating people in any organization. (Bramham, 1989).

Theory X viewed people as lazy and workshy. The average employee lacked ambition and wanted to be led and to undertake duties following clear description; there was no wish for responsibility and change was always resisted. Motivation for this workers consisted of incentives and a moulding of behaviour to the organization through rewards and punishment. To these kind of workers a constant change(addition) to their reward package is a good source of motivation.

Theory Y shows most of the philosophy which is now reflected in HR management. In theory Y people are seen as active and positive by nature. People are considered to have a desire for fulfilment at work and thrive for responsibility. In this context managers are leaders still but through facilitating and creating the environment in which creativity and adaptability can thrive. Rewards for this kind of workers could be in the form of promotion, appraisal or something related to their present need.

Knowing the type of employee employed , what motivates them would help to know what kind of reward system is applicable in the setting. Theory X workers need more motivation majorly in form of rewards for them to perform well and Theory Y workers work best when they are allowed to take up responsibilities.

2.1.2 MASLOW’S HIERARCHY OF NEED’S THEORY (R Cartwright, 1998)

Maslow’s hierarchy of need addressed the issue arising from the differences between what people need and what they want. Needs are internal to individuals and are part of the human functioning while wants are more of external influences, they are desired but not necessary. Abraham Maslows work provides a very useful starting point in considering motivation. He argued that people are motivated by the desire to specific group of need that are arranged in

hierarchical order.

Source: www.peakoilblues.org

The most basic need are the physiological [14] ones . They have to be satisfied first before any other thing. Having fulfilled the physiological needs, the need for safety [15] arises. Physiological and safety needs are often met in a physical sense but the rest of the needs are much more psychological. After meeting the safety need, the social [16] needs come then the Esteem [17] needs which is a higher level need (R Cartwright, 1998). The highest level of need is the ‘growth’ need also known as self-actualization [18] . An employee is likely to be motivated so as to satisfy the lowest level unsatisfied need at that time. Maslow believed that these needs are similar to instincts and are very important in motivating behaviour (Cherry, 2012). If an individual gets a benefit/reward that satisfies his most important need at a given time, the individual would be motivated.

2.1.3 EXPECTANCY THEORY (Schmidt, 2002)

Victor Vroom’s (1964) theory is seen as a model of behavioural choice. The theory stipulates that the motivation of the behaviour selection is determined by the desirability of the outcome. It explains why individuals choose one behaviour over other behaviours (Schmidt, 2002). This theory does not explain what motivates people per say but how people make decisions to achieve what they value. The motivational force(what drives people) is equal to the product of expectancy, instrumentality and valence.


This theory proves that when individuals are making a behavioural decision, they select the option with the greatest motivational force (Schmidt, 2002). The expectancy theory suggests that motivation and performance are shaped by links between effort and reward and by significance or ‘valence’ of the reward to the person in question. (Chris Brewster, 2008)


Understanding what people want from their job is a basis for this theory (Mindtool, 2012). If employers understand what their employees require from the job, they would be able to choose what kind of reward system is adequate for them. His theory which looked into how to motivate employees concluded that there were factors at work that led to job satisfaction(motivators) and factors that prevented job dissatisfaction(hygiene factors). (R Cartwright, 1998). The hygiene factors just get a dis satisfied employee to be satisfied with the job but the motivators get the employee to be satisfied and motivated. If an employer is set about eliminating dissatisfying job factors, this may create peace, but not necessarily enhance performance. (Mindtool, 2012) depending on the employees need at the particular time.

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Motivator factors include; achievement, recognition for skills and achievement, the work itself, responsibility, advancement and promotion while the hygiene factors are; the organization’s policies and administration, styles of supervision and management, relationships with superiors, colleagues and subordinate, money, status, security (R Cartwright, 1998). The motivation factors revolve around the need to develop in ones’s occupation as a source of personal growth and the hygiene factors operate as an essential base to motivating factors associated with fair treatment in the factors stated (Micheal, 1995). An employer gives a reward in this kind of system either bearing in mind that he /she wants to have satisfied employees or motivated employees.


In addition, from Armstrong’s flexible model of firm, reward system is based on whether an employee is a core employee or peripheral employee. In his model, the labour force in a firm is broken up to increasing peripheral i.e a numerically flexible group of workers clustered around a numerically stable core group that conducts the organizations key firm specific activities. As the market grows, the periphery expands to take up slack and when the growth slows, the periphery contracts. At the core, only responsibility and tasks changes. Rewards would depend on whether an employee is a core or peripheral employee thereby having a flexible reward system. Peripheral employees come in form of contract staffs used a lot by banks to fulfil short term skill gap. And the core employees in banks range from to executives, managers, full time permanent staffs (i.e retail managers, customer service staffs who could also be peripheral staffs depending on how the bank values them).



HSBC— Hong Kong Shanghai Banking Corporation.

HSBC is an establishment which is surrounded with over the top and amazing past stories ranging from its inception to practices, to branching out and to its reward package etc. It was established in 1865 in Hong Kong when Hong Kong was still a colony of the British Empire and then further expanded by setting up branches all over Asia and many other countries. HSBC has had employees striking over unfair reward packages which they later got compromises on. They have also had exorbitant pays for executives which were often fought against by shareholders. HSBC as an organization uses strategies like managing for growth( to help the company’s growth and development), strategic human resource management( to provide comprehensive and intensive values to their staffs through attractive salaries, excellent training facilities, choice of benefit option, using more of the soft version HRM approach etc.), customer relationship management( to establish and maintain a good relationship with customers all over), and strategic management( to enable them have a good reputation and be a strong competitor all over), strategies that would help the organization to protect and sustain a leading position in the market targeted which would lead to it achieving its objectives of being the first choice for customers and for employees to work, having strong capital and liquidity, having effective and efficient operations in order to be the world’s leading financial services company.

In this chapter I would be analysing three aspects of HSBC reward package:

• The 2005 change to employee reward package

• The CEO Stuart Gulliver’s reward package

• The Flexible benefit scheme

3.0.1 The 2005 change to employee reward package

In 2005, a new payment plan was brought forth for employees of HSBC. An employee benefit plan which was designed to help them save for retirement [19] . It locks away profit and turns it to capital for the future. This payment plan was such that left staffs with a below-inflation pay deal and cut bonuses. It would leave up to 10% of staffs with no pay rise and another 45% will receive below inflation increase [20] . This reward system failed to put the expectancy theory into consideration. A theory that states that people are motivated to choose a particular behaviour based on what they are expecting. With a reward system cutting down bonuses, the employees have a little to expect at the end of each month. Two of the factors that make up the motivational factor in the expectancy theory; the valence and instrumentality were going to be at the minimal which would hitherto affect the staff motivation. As seen in reports, staffs formed a union (a sign of dis satisfaction) to fight against the unfair pay system. They embarked on strikes and took days off work to show that they did not want that pay package. The will to work wasn’t there at that period. There was a very low motivation to work. They were willing to give up some days job to fight for a better pay package. Also from the objective of a well-managed reward system which is to motivate employees to work, this reward system has failed as all it did was motivate employees to form a union group to fight. The human resource team also with a strategy of providing attractive salary to the staff is not well implemented here as staffs did not in any way find this change attractive and then the overall objective of HSBC of being a company where employees want to work is not going to be achieved as they would not be having staffs who are fully motivated and love their job. The kind of workers that would remain there would be those who are just ok with the job.

In addition, as reported by BBC News [21] , HSBC made a 37% rise in profit in 2004 from its 2003 profit. The profit before tax was $17,608m as against $12,806 made in 2003 a very good reason why staffs should be paid enough bonuses as they all worked towards the profits. They contributed to the bottom line and should be rewarded for that. One of the strategies used by HSBC as reported by Gavin Stamps of BBC was to reward staffs based on individual and group performance. Bearing in mind that a 37% rise was made in 2004 staffs were supposed to get rewarded and not get a bonus cut. This was not in line with the banks policies. It also was not in line with the pay for performance aspect of reward system forms.

The rewarded system resulted in staff walkout with bad moods and they were unable to satisfy customers as the branches closed to business.

3.0.2 The CEO Stuart Gulliver’s pay package

In 2011, the Chief Executive Officer Stuart Gulliver was paid £7.2m which included his base pay and bonus, a pay which is seen as being very huge. This huge pay was defended by the chairman of HSBC. He said and I quote “we continued to develop a truly meritocratic culture because as international competition for the best talent intensifies, we need to ensure that HSBC is making the most of the skills and abilities of our people and encouraging them to reach their full potential” [22] . He also said the bank offered huge packages to attract the best talents”. The human resource strategy of providing attractive salary to retain talents is very effective here as this huge salary was intended to encourage executives to reach their full potential thereby bringing HSBC close to achieving its objective of strong capital and liquidity and becoming the world’s leading financial institution. As seen in the profit made at the end of the year 2011, HSBC made a profit before tax of $21.9billion [23] , which was more than its 2010 profit of $19billion. It is observed that a lot of progress is being made by HSBC and it is their duty to reward staffs accordingly. Executives are usually the top earners in any organization. Armstrong’s model shows that executives are the major core employees in an organization as they are stable and they conduct key activities. Their role is such that they are allowed to put their creativity to use and hence can be seen as theory Y workers.

This pay package which was very huge was in line with the pay for performance form of rewards and HSBC’s strategy of giving a proper pay for proper performance [24] as his pay was based on the fact that the organizations performance was satisfactory on the aggregate [25] . Profit was made in HSBC which was a valid reason to give executives high pay because if they had slacked the profit would not have been made. This pay package was not perfect to every party involved as PIRC( Public Interest Research Centre) refused to understand why emphasis should be laid on rewarding the Chief executive for still being employed claiming that they should be leading the bank to outperform [26] . Investors and shareholders on the other hand rebelled against the pay before it was approved making a 14% cut from his 2010 pay given to him. This pay packages ‘effect on other staff was not looked into. This pay package was such that was over 300times higher than that of other employees. This is an evident case of inequality. All staffs contribute to the progress of the organization, executive or not so they should also have fair pays that are reasonable compared to that of executives. From John Mackey’s blog, we can see that a high CEO pay can demoralize other employees and make them cynical [27] . Agenda new for 2006 also said that high CEO pay way higher than other employees pay can make them leave [28] .

Also, executives’ pay package being high is not just what would make them stay/reach their full potential. They have other needs some of which are shown in the Maslow’s hierarchy of need that cannot be met by money. An example is the need to spend more time with their family and friends. With a job like this (an executive job), they have less time to spend with their family and friends. A job like this requires a lot of time in handling, lots of meetings to be attended etc.

3.0.3 The Flexible benefit scheme

No matter what experience an individual has, wherever his ambitions lie or status, HSBC has an opportunity for every person and their skills, dedication and success are always recognized and rewarded [29] . HSBC offers a full range of benefits to employees. They have flexible benefit packages that can help employees meet specific needs. Employees are allowed to choose from different benefits like life assurance, finance, child care, retirement saving, donating to charity, partner benefit, car, health cover since the bank has noticed that rewards mean different things to different people. We can see this from the Maslow’s hierarchy of needs which says that people are motivated by the desire to specific need that are arranged hierarchically. People need different things at different times which make HSBC to set up a My Choice platform for choosing what kind of package is desired. Employees can choose more of the things they desire (and suits their lifestyle) in their package and less of other not so important things. This flexible benefit scheme is in line with the HSBC’s strategy of managing for growth and their human resource strategy of giving priority to employees and making certain their rights are preserved moving them close to being the world leading financial service and be the first choice for employees to work as having satisfied employee is major motivational factor. An example, Karen’s work [30] shows that a employee having a quality childcare facility at work would improve her productivity, reduce absenteeism and then improve company value. Having a flexible benefit scheme is one of the best decisions that could be made by an organization’s human resource team because it is a very good way to attract, motivate and retain talents and give employees satisfaction. Knowing fully well that an organization can take you no matter what you have attained is a plus. Even the lowest qualified citizens can apply for a role in the organization. Also, knowing that your need for constant health care, child care or partner benefit can be addressed by the organization is a big plus. HSBC employee’s also confirmed that having a benefit package that meets specific needs is important [31] .

The My Choice benefit scheme does not give staffs opportunities to change a benefit package if a dif


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