A tight job market in a healthy economy creates a dynamic that affects business owners and employees similarly, but both groups have different objectives. Each side hopes to get more out of the other. A middle ground does exist in employee reward and recognition programs though; it benefits small businesses through employee engagement, and employees who want more from their employers will choose to alter their work habits, attitudes and behaviors, ultimately elevating your business.
Distinguishing Rewards from Recognition
While they may seem the same, and many people use them interchangeably, differences exist among rewards and recognition programs. Companies set up employee rewards systems to show appreciation for performance and to offer motivation to groups or individuals. An employee reward may have a monetary value or generate a cost of some kind to a company(see pay-at-risk plans), or something as simple as an employee of the month program, but it stands apart from salary considerations. Once practiced only by large companies, employee rewards systems appeal to small businesses as a means of attracting new talent in a competitive job market and increasing performance by existing employees. On the other hand, recognition programs offer psychological benefits to assure employees of a company’s appreciation. Companies may combine reward and recognition programs because both systems use many of the same components. However, small-business owners who want to motivate employees and keep costs low as well need to recognize the distinctions that mark the differences between reward and recognition programs.
Why Separating Reward from Performance Appraisal and Merit Pay is So Important
The design of an effective reward program separates it from a company’s merit pay or salary systems. To prevent any misunderstanding about bonuses or profit sharing, small-business owners can link them to performance. Considered “pay at risk” occurrences, rewards programs can maintain a safe distance from salary and other compensation models. The clear separation allows managers to prevent employees from developing a sense of entitlement while reinforcing the importance of excellence of achievement instead of basic competency. The delineation of purpose removes merit pay increases from inclusion in an employee reward system. Under normal conditions, merit pay provides a boost for inflation and includes options to add a percentage for competency. Merit pay does not show a significant ability to motivate because of the small difference between a good employee and one who ranks as average. It increases a company’s fixed costs where variable increases do not. Employees must earn bonuses each year to make them occur. The concept of teamwork in a small business constitutes a crucial component of a successful employee’s job, but a merit increase tends to review individual performance. Consequently, the efforts within a group may not receive adequate consideration
How to Create a Reward Program Design
The success of a reward program rests on a design that identifies goals, determines measurement levels and communicates both to employees. The identification component requires a company to state the purposes that it expects the program to support. Concurrently, it must include the preferred level of employee performance that can reinforce the results that a company hopes to achieve.
• Identifying Goals – Clarity in expressing expectations such as an increase in productivity can assist a designer in creating a reward program when it features a statement of required goals and the behaviors that can contribute to them. It may seem a common mistake to avoid, but companies sometimes reward behavior and achievements that do not further business goals and may cause detrimental effects. When a goal involves teamwork, the failure to participate in a group effort by employees who improve only individual productivity misses the point. Similarly, when quality becomes a goal for an entrepreneur, the system must not provide a reward for the quantity of work that an entire unit produces.
• Measuring the Results – Proper measurement of performance that contributes to business goals can make a reward program pay off. For specific results other than financial returns, small-business owners need to measure specific factors such as speedier deliveries, fewer defects and more satisfied customers.
• Matching Rewards to Tangible Results – Precision in providing an appropriate award can allow a company to treat perfect attendance differently than a contract negotiation process that saves thousands. A reward can promote initiative for a single employee and contribute to cooperation and performance by a group.
• Spelling Out the Details – Employees who have an understanding of expectations can become motivated and help make a rewards program successful. Memos and regular meetings can reinforce the concept in the original announcement or make sure that everyone knows of any changes that may occur in the system.
What are the Different Types of Rewards?
Companies can select a type of program that rewards individual as well as group or team performance. Most options encourage employees to stay with a company over the long term and show appreciation for employee loyalty, but some businesses may prefer to provide short term rewards as well.
• Bonuses – A proven practice in American business, bonus programs can provide incentives for individual accomplishment in sales organizations to encourage an increase in business or the bottom line. However, companies can use them to recognize group accomplishments as well. A trend to switch from bonus programs for individuals may encourage more companies to reward contributions that benefit the company through group, department or companywide efforts.
The effect of bonuses tends to create short-term motivation, an impact that some experts advise small businesses to avoid in favor of another type of reward. An employee who receives an award for performance in the previous year may set sights on the short-term instead of future-oriented opportunities. A solid structure of bonus programs can ensure that the rewarded accomplishments go beyond the essential job functions. In a reversal of the desired intent, a bonus can let employees perceive it either as an entitlement or a regular merit pay instead of as a reward for performing outstanding work. Supporters of bonus programs regard them as a legitimate way to reward excellent performance and a powerful tool that encourages enhanced efforts going forward.
• Variable Pay – A type of compensation that puts a portion of an employee’s pay at risk, variable pay or pay-for-performance allows companies to create options that depend on varying factors. While some businesses link compensation to the performance of the company, some choose to reward a business unit, an individual or a combination of all of them. Through bonus programs, stock options or one-time presentations of awards for outstanding achievement, business owners can provide choices. Some businesses offer employees lower compensation than competitors as a motivation to accept the variable pay option. When an incentive pay package requires employees to stretch to reach an optimal goal, it may produce desired results. However, small-business owners must understand that employees may ignore the program when it seems exceedingly difficult to do.
• Profit Sharing – A concept in rewards and recognition programs that allows a company to share a percentage of its profits with employees, profit sharing provides awards for contributions that help it reach its goals. Companies that offer profit sharing can give each awardee an amount equal to a percentage of their salary. The disbursal may take the form of a cash amount or a contribution to an employee’s 401(k) plan, and it occurs after a company closes its books annually.
A company can achieve benefits from profit sharing by keeping fixed costs low and rewarding employees who help reach corporate profit goals. An incentive to encourage loyalty to a company, profit sharing favors long-term employees. Some companies require them to wait for a few years before they can receive any money from a profit-sharing program. A well-managed profit-sharing plan can motivate employees when it engenders a spirit of teamwork that they initiate, but it can dissipate under poor management that lets everyone receive the share anyway.
• Stock Options – Like profit sharing, stock options favor employees who remain with a company for the long term. In a comparison of reward and recognition programs, it can provide tangible cash reward as proof of a company’s appreciation for years of dedicated service. Most companies require at least four years of employment before eligibility to purchase stock at a previously agreed-upon price can occur. Employees can benefit from a stock-option program that offers a company’s shares at a “strike” or fixed price for a limited period, a privilege that rewards middle management primarily. The practice requires authorization by a company’s board of directors and approval by shareholders as an indication of its value.
Companies can award an employee an option that equals a percentage of outstanding shares. After purchasing the shares, an employee can sell them on the open market to realize a profit when the market allows or choose to retain them. A company can benefit from a stock-option plan in several ways, and a popular one provides tax deductions for compensation expenses. Since accounting methods do not mandate businesses to show options as expenses on their books, the practice can inflate a company’s value unless accounting rules become more conservative. Employees and companies share risks in this type of reward and recognition program. While it provides both the psychological benefit of receiving appreciation as well as financial gain for an employee, the amount of the strike price may exceed the market price, making the option worthless. When employees exercise a stock option, it initiates actions by the company that can affect its earnings.
What are Group-based Reward Systems?
While traditional reward and recognition programs tend to focus on individuals, businesses with an entrepreneurial approach can use them to reward cooperation between departments and individuals. Group-based reward systems rely on the measurement of team performance, and individuals can receive rewards as a contributor. An unintended consequence of the system that offers bonuses, stock options and profit sharing can allow underperforming employees to benefit as much as average or above-average employees
How are Recognition Programs Different From Rewards Programs?
Reward and recognition programs both have a place in small business, and owners can determine which to use to develop support for company goals. Rewards and recognition for outstanding performance can give entrepreneurs a competitive edge in the marketplace. Without careful evaluation, a recognition program may seem to provide few tangible benefits to employees and little apparent return to business owners or managers for the effort invested. Entrepreneurs who need to preserve cash can use recognition as an opportunity to motivate employees who want nothing more than the satisfaction of receiving an expression of appreciation.
Innovative, cash-strapped entrepreneurs can use privileges as awards that provide recognition and satisfaction more than a cash award. An opportunity to work from home, observe flexible hours or enjoy long lunch breaks can offer informal recognition that shows appreciation for a job well done. Employers can empower employees by providing a wide choice of assignments, some decision-making authority or a title that designates an employee as an in-office consultant for other staff members. A small-business owner who implements a recognition program that does not involve much money can gain support from employees, but they may expect more traditional rewards from a well-established company
The timing of recognition produces a significant effect on its success, and it must occur while management and other employees remember it. When an employee routinely performs at a high level, recognition can continue regularly, but it must come at timed intervals that prevent it from becoming automatic. Business owners need to match the method of recognition to the significance of an achievement to make sure that the actions that make the biggest contributions receive the most attention.
In whatever form of recognition an employer chooses, it must state what the employee did to comply with the stated guidelines for qualifying for it. The success of any reward and recognition program allows both to stand alone. For the recognition component to succeed, it requires a complete separation from the company’s reward system to ensure that the focus remains on honoring the efforts of employees. While a presentation may include a plaque, luncheon or gift certificate, business owners must never offer cash to recognize performance.