Reward: an introduction

The term ‘reward’ generally covers all financial provisions made to employees. It can include cash pay, and the wider benefits package (such as private medical insurance). It can also include wider provisions for employees, with the term ‘total reward’ sometimes used to encompass non-pay benefits, such as flexible working opportunities.

Pay may be divided into two categories:

• Fixed (or base) pay is a guaranteed cash wage or salary paid to employees for doing their work for a contracted period, such as a 37-hour week. This can include location allowances and other associated guaranteed payments.

• Variable pay is not guaranteed. It can include bonuses, incentives and overtime payments.

Pay definitions vary. For example, some employers might treat location allowances as fixed pay. Others, however, may see it as variable pay.

Other terms may also be used. ‘Compensation’ is usually taken to mean just pay (both fixed and variable). ‘Remuneration’ might be used interchangeably with ‘reward’ to mean the wider benefits package, such as the value of employer pension contributions.

Reward is an area of specialist knowledge in our Profession Map.

A CIPD report shows a clear business case for supporting employees’ financial wellbeing. Those who experience money worries are more likely to be absent from work.

Financial distress can also lead to presenteeism, where employees still work but, because of health problems or other personal issues, don’t perform to their usual standards.

During the cost of living crisis, employers should review their reward approach to see if it is fit for purpose. They can do this by asking such questions as:

• What’s happening to workplace financial wellbeing?
• Are we paying our workers a liveable wage?
• Are the organisations in our supply chain paying their workers enough?
• If we can’t increase pay for our employees by as much as the cost of living, what else can we do to reduce the impact of inflation on earnings?
• Can we offer opportunities for low-waged workers to increase their skills and experience so they can take on higher-paid roles?
• Should we invest in HR technology so we can explore if we pay our people fairly?
• Are certain groups of workers, such as female, black, or disabled staff, being affected disproportionately by inflation? If so, what can we do to support them?
• What can we do to protect people from financial scams, such as around pensions?
• How does our benefits package support employee financial wellbeing?
• Should we change how we communicate with employees about pay and benefits?
• What ways are there to improve employee productivity and reduce our cost base?
• Are we directing employees needing help to sources of regulated financial information and guidance?
• Are we clearly communicating our financial wellbeing policy to employees?

The answers to these questions will help employers to better support their people and reduce the impact of poor financial wellbeing. Our 2022 Reward management survey explores the impact that the rise in the cost of living is having on:

• employee financial wellbeing and
• in-work poverty.

There’s lots more on what employers can be doing in our ‘Tackling in-work poverty hub’. The CIPD’s 'Pay, performance and transparency' survey explores the steps employers have taken recently to help their staff cope with the jump in the rate of inflation. 

The main reason for offering pay and benefits is to influence employee behaviour so they want to join and stay with an employer, and do their best in the job. Traditionally, organisations used:

• salaries to attract people
• benefits to help keep them, and
• bonus and incentive schemes motivate them.

However, thinking has changed about which parts of reward are best suited for recruitment, retention and motivation. 

Individuals come, stay and perform for a range of financial and non-financial reasons, which can change over time depending on personal circumstances. In some situations, individuals may not consider the financial elements of a package that important. For instance, people at the beginning of their career may be more interested in gaining access to training and career development. Similarly, individuals may be willing to work for lower pay rates (or even volunteer) if they have a strong attachment to an organisation’s purpose.

Employers should find out what attracts, keeps and inspires their current and future people, and explore how best they can meet these needs – as well as meeting the requirements of the business within the appropriate legal and regulatory environment. When creating a reward package, it’s also important that organisations integrate the various reward elements so that they support, rather than contradict, one another, such as the factors used to increase pay and give bonuses.

Behavioural science has given us useful insights about how individuals may respond to various aspects of reward. Employers should use the lessons from behavioural science when designing, implementing, and communicating their reward packages. Find out more in our report Show me the money! The behavioural science of reward. Our Employee engagement - definitions, measures and outcomes report also shows the impact reward and recognition practices can have on the level of commitment employees feel to their organisations.

Because there are various elements to reward, it’s important to think about the appropriate mix of base to variable pay, fixed to flexible benefits, and financial to non-financial rewards to meet both employer and employee needs.

When making decisions about how to reward and recognise contribution, it’s crucial to recognise the people risks involved. Employers operating overseas should also consider whether to set reward centrally, or allow each region or subsidiary to develop its own approach.

Organisations should establish a reward strategy spelling out the aims of the various reward elements and how they are integrated. Because a reward strategy reflects the organisation’s purpose and values, it’s critical the organisation explains to staff what behaviours and performances it is rewarding, how, why, and when. This may include employee education, so that staff understand the benefits on offer. It’s important to think about the implications for other parts of HR, such as the skills line managers might need so they can communicate effectively about the rewards on offer. Employers also need to have measures and systems in place to assess the impact of their reward strategy on people and performance.

Pay structures

Pay structures provide a framework for valuing jobs and understanding how these jobs relate to one another both within the organisation and to the external labour market. 

Pay structures may also need to allow for certain additional elements other than basic pay rates, for example location allowances. Find out more in our pay structures factsheet.

Pay levels

There are several approaches to setting pay levels or ranges for jobs. For example, job evaluation is important for setting pay rates in the public sector. By contrast, market pricing can be more influential in the private sector. Where market rates are used, employers need to decide where to pitch in-house rates (for example, at the median or the upper quartile). See more in our factsheet on job evaluation and market pricing.

Pay awards

When setting the overall pay review budget for annual pay increases – which often includes performance-based pay rises as well as general pay structure movement (often known as the annual pay award or cost of living uplift) – key factors include:

• ability to pay
• inflation
• the going rate of pay awards
• market rate changes
• stakeholder perspectives, such as those of customers, employees, or investors.

There are variations by sector. In the public sector the government’s pay policy is key, sometimes together with union pressure. However, union pressure is rarely an issue for many private sector companies. The CIPD’s 'Pay, performance and transparency' survey explores the various factors that influence pay increase decisions. Our quarterly Labour Market Outlook reports look at pay forecasts for the coming year.

Pay progression

Individual performance, competency and skills are common factors used to move individuals along salary bands or ranges. Often, employers use a hybrid approach that bases progression on more than one factor. For example, it might involve assessing individual employee achievements against the backdrop of the wider labour market. Find out more in our factsheet on pay progression.

Many organisations expect ‘satisfactory’ performers to progress to a target point in their pay range. Among private sector service employers, the target is often the mid-point in the range. In the public sector, it tends to be close to the top of the salary scale. In the voluntary, manufacturing and production sectors, employers tend to be more split on where the target is. Read more in our performance-related pay factsheet.

Variable pay: Cash bonuses and incentives

In the private sector, there is widespread use of bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonuses). Employers often have more than one bonus or incentive scheme with senior staff often treated differently.

Among those offering a performance-related reward scheme, common individual performance-related variable schemes include individual bonuses and sales commission. Profit-sharing and gain-sharing are common group performance-related plans. See more in our factsheet on bonuses and incentives. The CIPD’s 'Pay, performance and transparency' survey explores the proportion of employers that link employee pay to performance, and how they do this. It also looks at the reasons given by organisations not to adopt this approach.

The advantage of variable pay schemes is that they can link earnings closely to desired performance and, in theory, only pay out when there is reason to do so. Variable pay does not generally feed through into other remuneration elements, such as overtime or pension contributions, and so does not create additional on-costs.

However, the success of variable pay schemes depends on such factors as:

• how performance goals are set;
• the type of tasks being encouraged;
• how fairly employees view the process and outcomes to be; and
• the approaches used to allocate rewards.

See our report Incentives and recognition: an evidence review for more detail.

Many employers offer a wide range of benefits. From traditional perks such as paid leave and occupational pensions, to newer benefits such as paid time off to adopt a pet or set your own pay.

Benefits are provided for a variety of reasons, including:

• to match market practice,
• to give some measure of health or disability security,
• to retain employees.
• it is required by law or 
• it is a tax efficient way to reward staff.

There are various ways of offering benefits. For instance, flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') allow employees to vary their benefits package to meet their individual needs.

Other issues to consider include how the benefits on offer support the needs of the organisation and its employees, and how to communicate the benefits package, such as through Total Reward Statements.

Read more in our employee benefits factsheet.

While pay and benefits are important, and getting them wrong can have adverse consequences, they are not the only rewards that employers should consider. Research shows that non-financial rewards can be just as important. These include:

• Good performance management.
• Opportunities for personal and career development.
• Flexible working.
• Being involved in decisions that affect how and when people do their work.
• Recognition, such as through an ‘employee of the month’ award or team-based events.

Reward strategies that mix non-financial provisions with pay and benefits are often known as total reward approaches. Read more in our factsheet on strategic reward and total reward.

Contacts

Acas - Pay and wages

GOV.UK - PAYE and payroll for employers

Books and reports

Armstrong, M. and Brown, D (2019) Armstrong's handbook of reward management practice: improving performance though reward. 6th ed. London: Kogan Page.

Low Pay Commission. (2019) The National Living Wage: beyond 2020. The Commission.

Low Pay Commission. (2021) Living Wage Employers: Evidence of UK Business Cases. The Foundation. 

Perkins, S.J. and White, G. (2020) Reward management: alternatives, consequences and contexts. 4th ed. London: Chartered Institute of Personnel and Development and Kogan Page.

Rose, M. (2022) Reward management: a practical introduction. 3rd ed. HR Fundamentals. London: CIPD and Kogan Page.

Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.

Journal articles

Baska, M. (2019) Government rejects key recommendations on curbing executive pay. People Management (online). 17 June.

Cotton, C. (2020) CEO pay: complex solutions for complex problems. CIPD Voice. Issue 26, 16 November.

Howlett, E. (2019) Two decades on, has the minimum wage worked? People Management (online). 28 September.

Pissaris, S., Heavey, A. and Golden, P. (2017) Executive pay matters: looking beyond the CEO to explore implications of pay disparity on non-CEO executive turnover and firm performance. Human Resource Management. March-April, Vol 56, No 2. pp307–327. Reviewed in Bitesize research.

CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.

Members and People Management subscribers can see articles on the People Management website.