Table Of Contenti
Armstrong’s
HAndbook
of REWARD MANAGEMENT
PRACTICE
Improving performance
through reward
3RD EDITIoN
michael Armstrong
ii
Publisher’s note
Every possible effort has been made to ensure that the information contained in this book is accurate at the
time of going to press, and the publishers and author cannot accept responsibility for any errors or omissions,
however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from
action, as a result of the material in this publication can be accepted by the editor, the publisher or the
author.
First published in 2005 as A Handbook of Employee Reward Management and Practice by Kogan Page Limited
Second edition, 2007
Third edition published in 2010 as Armstrong’s Handbook of Reward Management Practice
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted
under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or trans-
mitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of
reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concern-
ing reproduction outside these terms should be sent to the publishers at the undermentioned addresses:
120 Pentonville Road 525 South 4th Street, #241 4737/23 Ansari Road
London N1 9JN Philadelphia PA 19147 Daryaganj
United Kingdom USA New Delhi 110002
www.koganpage.com India
© Michael Armstrong, 2005, 2007, 2010
The right of Michael Armstrong to be identified as the author of this work has been asserted by him in accord-
ance with the Copyright, Designs and Patents Act 1988.
ISBN 978 0 7494 5534 7
E-ISBN 978 0 7494 5908 6
British Library Cataloguing-in-Publication Data
A CIP record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Armstrong, Michael, 1928–
Armstrong’s handbook of reward management practice : improving performance through reward / Michael
Armstrong. -- 3rd ed.
p. cm.
Rev. ed. of: A handbook of employee reward management and practice. 2nd ed. 2007.
ISBN 978-0-7494-5534-7
1. Incentives in industry. 2. Employee motivation. 3. Compensation management. I. Armstrong, Michael,
1928– Handbook of employee reward management and practice. II. Title. III. Title: Handbook of reward
management practice.
HF5549.5.I5A668 2010
658.3´142--dc22
2009040082
Typeset by Saxon Graphics Ltd, Derby
Printed and bound in India by Replika Press Ltd
iii
Contents
Introduction 1
Part I Essentials of Reward Management 3
1. An Overview of Reward Management 5
Introduction 6; Reward management defined 6; Characteristics of reward
management 7; The reward management framework 9; Aims of reward
management 9; Achieving the aims in general 11; Achieving the specific
aims 14; Contextual factors 16; Fundamental concepts 19; Pay level
concepts 22; Effective reward management 23; References 24
2. The Reward System 26
Introduction 27; How a reward system operates 27; Components of a
reward system 28; Reward systems in action 35; References 38
3. Total Rewards 39
Introduction 40; Total rewards defined 40; Underpinning concepts 41;
The elements of total rewards 42; The significance of total rewards 43;
Models of total rewards 44; Models of total rewards produced by other
consultants 47; Introducing total rewards 49; Total rewards in
practice 55; Conclusion 60; References 60
4. Strategic Reward 62
Introduction 62; Strategic reward management defined 63; The rationale
for strategic reward 63; The problem with the concept of strategic
reward 64; Characteristics of strategic reward 65; Reward philosophy 65;
Guiding principles 66; Reward strategy 72; Developing reward
strategy 79; Implementing reward strategy 84; References 85
iv Contents
5. International Reward 87
Introduction 87; The international scene 88; International reward
strategy 89; Rewards for expatriates 92; References 96
Part II Performance and Reward 99
6. Performance Management and Reward 101
Introduction 102; The meaning of performance 102; Influences on
performance 103; How does reward impact on performance? 105;
High-performance cultures 106; High-performance work systems 108;
Impact of reward on individual performance 112; Impact of reward on
organizational performance 112; Managing organizational
performance 113; Managing team performance 117; Managing individual
performance 118; References 124
7. Engagement and Reward 127
Introduction 127; The meaning of employee engagement 128; Why
engagement is important 130; The factors that influence engagement 131;
Enhancing engagement 132; Developing engagement policies through
reward 133; References 135
8. Financial Rewards 136
Introduction 137; Incentives and rewards 138; The theoretical
framework 139; The role of money 143; Views about the importance of
pay 143; Research on the effectiveness of financial rewards 147;
Arguments for and against financial rewards 152; Criteria for
effectiveness 154; Conclusions 156; References 156
9. Non-financial Rewards 160
Introduction 161; The significance of non-financial rewards 161; Types of
non-financial rewards 161; Individual extrinsic rewards 162; Individual
intrinsic rewards 163; Collective extrinsic rewards 164; Collective
intrinsic rewards 165; References 166
10. Contingent Pay Schemes 167
Introduction 167; Objectives of contingent pay 168; Criteria for
success 168; Performance-related pay 169; Contribution-related pay 173;
Competency-related pay 180; Skill-based pay 181; Overall conclusions on
contingent pay 183; Summary of individual contingent pay schemes 183;
References 185
Contents v
11. Bonus Schemes 187
Introduction 187; Bonus schemes defined 188; Aims of bonus
schemes 188; Rationale for bonus schemes 189; Criteria for a bonus
scheme 190; Types of scheme 191; Designing a bonus scheme 193;
Introducing a bonus scheme 195; References 196
12. Team Pay 197
Introduction 197; Team pay defined 198; Aim of team pay 199; Rationale
for team pay 200; How team pay works 200; Requirements for team
pay 202; Advantages and disadvantages of team pay 202; Developing
team pay 203; NHS case study 204; References 205
13. Rewarding for Business Performance 206
Introduction 206; Types of schemes 207; Aims 207; Profit-sharing 208;
Share ownership schemes 209; Save-as-you-earn schemes 209;
Gain-sharing 210; References 211
14. Recognition Schemes 212
Introduction 212; Recognition schemes defined 212; Benefits of
recognition schemes 213; Principles of recognition 213; Types of
recognition 214; Examples of non-cash awards 216; Designing a
recognition scheme 216; Examples of recognition schemes 217
Part III Valuing and Grading Jobs 221
15. Pay Levels 223
Introduction 224; Determinants of pay 224; Pay levels within
organizations 229; Pay systems 230; Factors affecting pay levels 232;
References 233
16. Job Evaluation Schemes 235
Introduction 236; The purposes of job evaluation 236; Achieving the
purposes 237; Analytical job evaluation schemes 238; Non-analytical
schemes 242; Market pricing 245; Levelling 246; Job analysis for job
evaluation 248; Computer-aided job evaluation 249; Choice of
approach 251; Developing a point-factor job evaluation scheme 255;
References 263
17. Equal Pay 264
Introduction 264; Reasons for unequal pay 266; The equal pay legal
framework 268; Achieving equal pay 273; Risk assessment 275; Defending
an equal pay claim 276; References 278
vi Contents
18. Market Rate Analysis 280
Introduction 281; The concept of a market rate 281; Job matching 282;
Use of benchmark jobs 283; Sources of market data 284; Interpreting and
presenting market rate data 286; Using survey data 289
19. Grade and Pay Structures 290
Introduction 291; Grade structures 291; Pay structures 292; Guiding
principles for grade and pay structures 293; Narrow-graded
structures 293; Broad-graded structures 297; Broad-banded
structures 301; Career-family structures 308; Job-family structures 314;
Combined career/job-family and broad-banded structures 318; Pay
spines 320; Spot rates 321; Individual job grades 321; Choice of grade and
pay structures 322; Developing a grade and pay structure 325;
References 332
Part IV Rewarding Special Groups 333
20. Rewarding Directors and Senior Executives 335
Introduction 336; Executive pay levels 336; Factors affecting the level and
nature of executive rewards 337; Why has executive pay grown so
much? 340; Corporate governance and executive remuneration 340;
Directors’ and senior executives’ remuneration 342; Benefits 345; Service
contracts 346; References 346
21. Rewarding Sales and Customer Service Staff 348
Introduction 348; Rewarding sales representatives 348; Salary only 349;
Rewarding customer service staff 354; References 358
22. Rewarding Knowledge Workers 359
Introduction 359; What motivates knowledge workers? 360; Approaches
to rewarding knowledge workers 361; References 364
23. Rewarding Manual Workers 365
Introduction 366; Factors affecting the pay of manual workers 366; Time
rates 367; Pay structures 367; Incentive schemes for manual workers 368;
Payment by results schemes 370; Contingent pay schemes 372; Collective
schemes 373; Assessment of schemes 373; Single status and
harmonization 377; References 378
Contents vii
Part V Employee Benefit and Pension Schemes 379
24. Employee Benefits 381
Introduction 381; Rationale for employee benefits 382; Employee benefit
strategies and policies 382; Types of benefit 383; Incidence of
benefits 385; Choice of benefits 386; Administering employee
benefits 386; Total reward statements 386; Reference 387
25. Flexible Benefits 388
Introduction 388; Reasons for introducing flexible benefits 388; Types of
flexible benefits schemes 389; Introducing flexible benefits 392;
Reference 393
26. Pension Schemes 394
Introduction 394; Why occupational pensions are provided 395; What
occupational pension schemes provide 395; The two main types of
occupational schemes 396; Other types of pension schemes 400; The state
pension scheme 401; Advising employees on pensions 401; Developing
and communicating pensions policies 402; Reference 403
Part VI The Practice of Reward Management 405
27. Developing Reward Systems 407
Introduction 407; The task of developing and implementing reward
systems 408; Objective setting 408; The approach to development and
implementation 410; The development and implementation
programme 413; Advice from practitioners 415; References 420
28. Managing Reward Systems 421
Introduction 422; Reward policies 422; Controlling reward 426;
Monitoring and evaluating reward policies and practices 427; Conducting
pay reviews 429; General reviews 429; Individual reviews 430; Reward
procedures 434; The use of computers in reward management 435;
Communicating to employees 437; References 439
29. Evaluating Reward Management 440
Introduction 440; Why evaluate? 441; Why don’t people evaluate? 442;
What can be done about it? 443; Reward effectiveness reviews 444;
Evaluating the impact of reward innovations 449; References 451
viii Contents
30. Responsibility for Reward 452
Introduction 452; The role of the reward professional 452; Role of line
managers 455; Using reward consultants 456; References 457
Appendix A: Reward Attitude Survey 459
Appendix B: Employee Engagement Survey 461
Index 463
This book is accompanied by additional online material. To access these resources go
to www.koganpage.com/resources and under ‘Academic Resources’ click on either
‘Student Resources’ or ‘Lecturer Resources’ as appropriate.
1
Introduction
This handbook is designed to provide guidance on the approaches that can be adopted to
the development and management of reward systems that will contribute to improving
organizational, team and individual performance while respecting and catering for the needs
of employees.
The book is evidence-based in that it makes use of the practical lessons learned from academic
research projects but also refers to the considerable number of reward surveys and case studies
produced over the last few years by e-reward together with surveys conducted by the Char-
tered Institute of Personnel and Development (CIPD).
The theme of the book is that reward delivers performance. This is especially the case when a total
reward management philosophy is adopted: that is, an integrated approach to reward designed to
enhance engagement by responding to individual as well as organizational needs and making
appropriate use of both financial and non-financial rewards. It is in line with the main message of
the new performance and reward professional map produced by the CIPD. This spells out that
those involved in reward management are there to build a high-performance culture by delivering
programmes that recognize and reward critical skills, capabilities, experience and performance,
and ensure that reward systems are market based, equitable and cost effective.
Plan of the book
The book consists of the following parts:
Part I: Essentials of reward management
This provides an overview of what reward management is about and examines the three fun-
damental elements of reward management: the structure and elements of reward systems, the
concept of total rewards, and the contribution made by strategic reward management proc-
esses. This part also covers the special features of international reward policy and practice.
Description:Third edition published in 2010 as Armstrong's Handbook of Reward Rev. ed. of: A handbook of employee reward management and practice. 2nd
