Professor Stephen J. Perkins (co-author, CIPD annual reward management survey)
It is common to refer to ‘reward systems’ and, reflecting on our findings in the CIPD 2017 reward management survey, clarity to inform understanding of this term may help practitioners in planning action to manage them.
Organisations are made up of multilevel systems connecting social actors (i.e. individuals and groups of people) within and beyond the entity; and with other resources and processes available to management. The employment relationship has been characterised as a relationship involving exchange: employees’ commitment of skills and time in support of managerial initiatives in return for a salary and other forms of reward.
Given the indeterminate nature of the employment relationships both within and across organisations, ‘resources and processes’ are not just the preserve of management. It is reasonable to infer that these multilevel systems interact and influence each other at different organisational levels in a form of a complex network of activity by all nodes.
The roots of the concept of (active) reward management are in ideas set out originally in the late 1930s. An economist – Ronald Coase – turned on its head the notion that markets exclusively governed what happens in organisations, with the latter a ‘black box.’ The argument was that markets and firms should be understood as alternative ways of organising similar transactions. In other words, attention was needed to what managers do to govern organisations and outcomes from the interactions within them. It took another 40 years for the inference from Coase’s insight to be further refined within the literature on business and management.
Another economist, John Williamson took up the line of reasoning with the argument that in circumstances of indeterminacy – i.e. no-one has the power to impose terms – they must be negotiated, because specifying contractual terms in open market transactions is difficult. When the knowledge available to the actors involved as to what may be needed to adapt to changing operational conditions is bounded, then broadly set understandings between the actors internal to the organisation are to be preferred. Such understandings are hierarchical: the intention is to enable managers to curb opportunistic behaviour on the part of, for our purposes, employees in the interests of stable corporate governance.
Scope for give and take on both sides, under a set of policies and procedures laid down within the organisation, is intended to reduce the ‘transaction costs’ of setting up exchange contracts repeatedly for similar undertakings (e.g. work under a job description and performance management regime). Where undertakings are one-off (such as hiring a consultant to complete a project) then price-setting market forces are preferred; where they are continuous then under Williamson’s reasoning they should be institutionalised (i.e. set out in a formal undertaking such as a permanent employment contract).
More recently, the hierarchical form of organisational transacting has come under scrutiny as being made less relevant when systemic organisational interactions have come to resemble multi-level networks: project teams, intra- and cross-organisation alliances and joint ventures, as the nature of corporate activity moves further into the digitally enabled circumstances broadly described as the ‘knowledge economy’. Thus, the capacity of managers to impose hierarchical control, even when employment relations and reward determination are shaped by a collective bargaining system with trade unions, has become problematic, calling for a rethink.
Traditional forms of performance management – specifying and then mechanistically appraising and recognising employee performance against rigidly codified prescriptions – come into question when managing forms of collaboration across networks of specialists that, as organisational behaviour scholar, Walter Powell, signalled at the start of the 1990s, are viable means of exchange. And this may explain the populist call to abandon the performance appraisal and delink it from salary and other reward decision-making.
Given the indeterminate employment relationship, rigidly imposing what in detail managers expect of employees – who subjectively interpret their instructions anyway – has always been less clear cut than some of the performance management and reward management prescriptions have implied.
But with the scope for a power shift to individuals, and to an extent specific groups of employees working in teams, under multilevel exchange networks, the confidence with which management may rely on engaged employee cooperation disciplined by the risk of losing their place within an internal labour market, as such internal markets have themselves become less secure as long-term transactional forms of control, needs to be regarded as similarly diminished.
Employees may feel less secure, from personal or vicarious experience, while also empowered by their status within networks of knowledge their employer needs to harness to achieve intended organisational outcomes under competitive conditions. Supported by specialist guidance from HR professionals line mangers need to develop and continuously refine their capacity to manage this potential dilemma.
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