Article: Strategic reward system in SMEs

Talent Management

Strategic reward system in SMEs

Since rewards have a real cost in terms of time or money, small business owners need to confirm that performance has actually improved before rewarding it. Often this requires measuring something other than financial returns.
Strategic reward system in SMEs

Almost one-half of startups fail in the very first year of beginning operations due to many different reasons, and not having a proper HR strategy is one of them. HRM for small businesses and startups is different from that of big corporations because the challenges they face and the objectives they seek to gain vary from one another. HR professionals strive to establish effective performance management in order to identify development opportunities, reward excellence, and provide disciplinary or remedial actions when necessary. 

Every company needs a strategic reward system for employees that addresses these four areas: compensation, benefits, recognition and appreciation. The problem with reward systems in many businesses today is twofold: They're missing one or more of these elements (usually recognition and/or appreciation), and the elements that are addressed aren't properly aligned with the company's other corporate strategies. A winning system should recognize and reward two types of employee activity-performance and behavior. Employee reward systems refer to programs set up by a company to reward performance and motivate employees on individual and/or group levels. They are normally considered separate from salary but may be monetary in nature or otherwise have a cost to the company. While previously considered the domain of large companies, small businesses have also begun employing them as a tool to lure top employees in a competitive job market as well as to increase employee performance. 

Managers are bound by law to pay the same to all employees for work of equal value. The manager may not discriminate.  Employees also expect to be treated fairly and to be paid a fair wage considering their competencies and performance compared to those of their peers. Pay is part of a bigger rewards picture covering pensions, benefits, personal development and work environment. There is a concept today of ‘total reward’ describing the whole employer-employee remuneration relationship. Managers will need to consider the degree to which a total reward package can be built up from exchangeable elements unique to each employee.  Firms pay employees for their contribution to the success of the business.  It is therefore essential that pay is linked to the business strategy and to performance.   The rewards process sends a message about the expected behaviours and outcomes. 

Whilst there are dis-benefits in paying commission-only pay or pay that is highly individual-performance based, some element of performance-related pay is valuable. The labour market sets a wage for every job.  Scarce skills attract higher wages.  And in times of unemployment, wage rates deflate.  The market can be described by a range of rates for a given job.  In assessing the market, it is important to match job for job.  Where this is done, a spread can be described allowing the principal to elect where on the distribution to set their pay point.  Typically firms might elect to pay at the median (about the average) of all firms or maybe at the sixty percentile representing a desire to attract good staff. No doubt, SMEs and startups cannot compete with bigger corporations when it comes to offering glamorous salary packages and benefits. It is necessary to offer a competitive salary and offer as many benefits to the team as possible, such as health insurance, life insurance, retirement plans, etc.

The existence and inherent challenges of reward systems is an ongoing and heated debate. Poorly designed or corrupted reward systems continuously attract public attention through scandals concerning complex bonus systems and rewards given to employees, often without a direct linkage to a certain performance. During the worldwide financial crisis in 2008 and the recession that followed, The American International Group (AIG) stated an example of how a reward systems can be misused, leading to heated public debates on the misusage of rewards. AIG created a worldwide controversy when it was revealed that the company had distributed large bonuses to its employees shortly after the US government had bailed out the company in order to avoid bankruptcy. One infamous case in Sweden concerns the Insurance group Scandia, where highly questionable bonuses were given to employees. Between 1997 and 2002 Scandia distributed over 4 billion SEK among its top managers. The scandal received excessive coverage in media and resulted in legal actions against individuals within the company as well as companies involved in auditing the company. 

In order to sweeten the deal even more, companies offer soft benefits like flexible hours and performance-based benefits like profit sharing. Companies reward their employees with both tangible goods, as well as praise. For example, a sales department may offer a monthly bonus to the highest earner. Not all tangible rewards come in the form of money. Some companies host free lunches, or give away company gear to good workers. Many managers choose to reward their best employees by simply praising them for a job well done, or by recognizing the hard work they put in to a project. The keys to develop a “reward strategy” are as follows:

  • Identification of company or group goals that the reward program will support
  • Identification of the desired employee performance or behaviors that will reinforce the company's goals
  • Determination of key measurements of the performance or behavior, based on the individual or group's previous achievements
  • Determination of appropriate rewards
  • Communication of program to employees


In order to retain top talent and reward them generously, it is important to provide employees with work flexibility. Gone are the days when work from home days used to be the goof off days. One can now carefully monitor the performance of employees, or at least offer flexible office hours, to facilitate top talent and satisfy both the employees and the employer. SMEs have the opportunity to create a work-friendly, easy going environment with an open culture so the employees can relax and focus on work. HR managers working in such small-scale companies can easily resolve work-place problems by having one-on-one interactions with the employees and share valuable information. Every employee wants to go far in their professional career and a company with few top positions cannot offer as many promotions and rewards as a big corporation would. In such a situation, HR managers can move employees laterally to enrich the work experience by offering them the chance to learn new skills, job share or cross train. One can also throw in some extra perks like providing top talent a chance to visit industry conferences or other events to add value.

Finally, in today’s knowledge world where the firm’s performance is linked to the growth in competence in employees, some acknowledgement of the relative value of one employee over another is essential.  In this case it’s also important that employees are rewarded for acquiring greater competence – for developing themselves.  If nothing else this acknowledges their added value and perhaps avoids them looking elsewhere when new competence is acquired. Since rewards have a real cost in terms of time or money, small business owners need to confirm that performance has actually improved before rewarding it. Often this requires measuring something other than financial returns: reduced defects, happier customers, more rapid deliveries, etc. Small business owners should first determine desired employee behaviors, skills, and accomplishments that will support their business goals. By rewarding and recognizing outstanding performance, entrepreneurs will have an edge in a competitive corporate climate. Financial rewards, especially those given on a regular basis such as bonuses, profit sharing, etc., should be tied to an employee's or a group's accomplishments and should be considered "pay at risk" in order to distance them from salary. By doing so, a manager can avoid a sense of entitlement on the part of the employee and ensure that the reward emphasizes excellence or achievement rather than basic competency.

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Topics: Talent Management, Benefits & Rewards, #SMETalent

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