Types of Rewards

There are a number of ways to classify rewards. Three of the more typical dichotomies are: Intrinsic versus extrinsic rewards, financial versus non financial rewards, and performance-based versus membership based rewards. These categories are far from being mutually exclusive.


1. Intrinsic versus extrinsic rewards: The satisfactions one gets from the job itself are its intrinsic rewards. These satisfactions are self initiated rewards, such as having pride in one’s work, having a feeling of accomplishment, or being part of a team. The techniques of flex time, job enrichment, shorter work weeks, and job rotation, can offer intrinsic rewards by providing interesting and challenging jobs and allowing the employee greater freedom.

On the other hand extrinsic rewards include money, promotions, and fringe benefits. Their common thread is that extrinsic rewards are external to the job and come from an outside source, mainly, management.

Thus, if an employee experiences feelings of achievement or personal growth from a job, we would label such rewards as intrinsic. If the employee receives a salary increase or a write up in the company magazine, we would label those rewards as extrinsic.

While we have stressed the role of extrinsic rewards in motivation, we should point out that intrinsic and extrinsic rewards may be closely linked.

2. Financial versus Non financial rewards: Rewards may or may not enhance the employees financial well being. If they do they can do this directly through wages, bonuses, profit sharing, and the like, or indirectly through supportive benefits such as pension plans, paid vacations, paid sick leaves and purchase discounts.

Non financial rewards are potentially at the disposal of the organization. They do not increase the employee’s financial position, instead of making the employees life better off the job, non financial rewards emphasize making life on the job more attractive.

The old saying “one man’s food is another man’s poison” applies to the entire subject of rewards, but specifically to the area of non financial rewards. What one employee views as something I’ve always wanted, another finds superfluous. Therefore care must be taken in providing the right non financial reward for each person, yet where selection has been done assiduously, the benefits to the organization should be impressive.

Some workers are very status conscious. An attractive office, a carpeted floor, a large executive desk, or a private bathroom may be just the office furnishing that stimulates an employee towered top impressive job title, their own business cards, their own secretary, or a well located parking space with their name clearly painted underneath the “Reserved” sign.

3. Performance based versus membership based rewards: The rewards that the organization allocates can be said to be based on either performance criteria or membership criteria. While the managers in most organizations will vigorously argue that their reward system pays off for performance, you should recognize that this is almost invariably not the case. Few organizations actually rewards employees based on performance. However, without question, the dominant basis for reward allocations in organization is membership.

Performance based rewards are exemplified by the use of commission, piecework pay plans, incentive systems, group bonuses, or other forms of merit pay plans. On the other hand, membership based rewards include cost of living increases, profit sharing, benefits, and salary increases attributable to labor market conditions, seniority or time in rank, credentials (such as a college degree or a graduate diploma), or future potential (the recent M.B.A. from a prestigious university). The demarcation between the two is not always obvious. For instance company paid membership in a country club or use of company owned automobiles by executives may be given for membership or performance. If they are available to say all middle and upper level executives, then they are membership base. However, if they are made available selectively to certain managers based on their performance rather than their entitlement, which of course implies they can also be taken away, we should treat them as performance based rewards for those who might deem them attractive.

For practical purposes, we need to break membership based rewards into two groups. One group is made up of benefits and services that go to all employees regardless of their performance level. All nurses at certain hospital, for instance, get ten days, sick leave, $ 200000 worth of life insurance, paid hospitalization coverage, and a host of other benefits and services regardless of whether they do an outstanding job or a barely acceptable one. Because benefits and services are explicitly acknowledged to be allocated on the basis of membership, we will call them explicit membership based rewards. All the other membership based rewards will be thrown into the second group which we will call implied. You may wonder why the need to differentiate two groups?

We have separated the membership based rewards into two groups to clarify what is often confusing in practice. Most organizations treat benefits and services as the only membership based rewards. All other rewards are traditionally treated as performance based. This or course, is both incorrect and misleading labeling. In practice, performance is only a minor determinant of rewards. This is true despite academic theories holding that high motivation depends on performance base rewards. In practice, a lot of lip service is given to the value a good job performance, but the organizations rewards do not closely parallel employee performance.

In summary, you should recognize that there are performance based rewards; there are explicit membership based rewards, which we call benefits and services; and there are implied membership based rewards. Practicing managers often call the latter group performance based but they are not.

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