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NotesBusiness ManagementTopic 2.4Financial and non-financial rewards
Back to Business Management Topics
2.4.312 min read

Financial and non-financial rewards

IB Business Management · Unit 2

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Contents

  1. 1Paid for time: salary and wages
  2. 2Paid for results: piece rates, commission, PRP
  3. 3Beyond the pay packet
  4. 4Changing the job
  5. 5Trust, purpose and teamwork
  6. 6Exam-style question
Pay day at Lena's Bakery: Tom, one of the six bakers at Mill Lane, is paid for every hour he works. Aisha, who manages the High Street shop, is paid the same every month.

Tom, paid for each hour

  • In a week with an extra Saturday bake he takes home more.
  • In a week off sick, he takes home less.

Aisha, paid the same each month

  • Her pay does not change from month to month.
  • It is the same whether December has her working 50 hours a week or August only 38.

Both are being paid for their time. They are paid in two different ways.

Anything an employee receives in money, or in something that has a money value, is a financial reward. Pay for time comes first, and it comes in two forms: a salary and a wage.

Two ways to pay for time

1

Salary

A fixed amount for the year, paid in equal parts, usually every month. It does not change with the hours worked.

Aisha, Kofi and Jonas each earn $38,000 a year, paid as twelve monthly payments.

2

Wages at a time rate

A rate for each hour worked, paid weekly or every two weeks. More hours, more pay.

The bakers earn $17 an hour, a living wage above the legal minimum. Tom's 40-hour week earns $680.

SalaryWages at a time rate
Paid forThe job, as a fixed amount per yearEach hour worked
At Lena's BakeryThe three shop managers and Priti, the head bakerThe bakers and the counter staff
Good for the employeeThe same pay every month, so it is easy to plan rent and billsExtra hours, such as the Christmas bakes, are paid for
Good for the businessEasy to budget: the pay bill is known a year aheadPay follows the work: fewer hours in a quiet week cost less
The catchNo extra pay for extra effort, so a hard December can feel unfairPays for time, not output: a slow and a fast baker earn the same for the same hours
Paid for time, not for results: Both salary and time-rate wages pay for being at work, not for what gets done. Tom earns $680 whether his sourdough rises well or comes out flat.

That is also their strength. A steady, predictable income is what Maslow, earlier in this topic, called a safety need: staff who know what they will earn can stop worrying about the rent.

So a business that wants effort, not just attendance, adds something on top: pay that moves with results.

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Three thousand biscuit boxes: Every December, Lena's Bakery sells boxes of Christmas biscuits to local offices. This year there are 3,000 to pack.

Lena hires two students and pays them $0.50 for every box they pack. The faster they work, the more they earn.

A piece rate is the second kind of wage: a set amount for each item produced, instead of for each hour. It is the reward Taylor, earlier in this topic, built his scientific management on: if money is what motivates, pay for every piece. Piece rates, commission and performance-related pay all pay for results.

Piece rate

  • What it is: a fixed amount for each item produced
  • At the bakery: $0.50 for every biscuit box a student packs
  • Plus: output goes up, and Lena pays only for boxes actually packed
  • Minus: speed beats care, so broken biscuits and loose lids get through

Commission

  • What it is: a payment for completing a sale, usually a percentage of its value
  • At the bakery: counter staff earn 5% of every celebration cake they take an order for
  • Plus: staff suggest the cakes, and Lena pays only when a sale is made
  • Minus: pushy selling can put regular customers off, and pay swings month to month

Performance-related pay

  • What it is: extra pay on top of salary or wages for meeting agreed targets
  • At the bakery: a $400 bonus for each baker who keeps waste under 2 loaves in 100
  • Plus: effort goes where the business needs it, on the targets
  • Minus: targets can feel unfair, and work that is not measured gets neglected

Performance-related pay (PRP) usually rests on the targets set in an appraisal. At Mill Lane, Priti agrees each baker's targets in January and reviews them in December; the bonus is paid on the result. It can reward one person, a team, or the whole business.

What gets paid gets done: Pay for results works on exactly what it measures, and only on that. The students pack more boxes, but nobody pays them to check the lids.

Before choosing a results-based reward, ask what staff might stop doing because it is not counted: quality, helping a colleague, being polite to a customer who is not buying.

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A good year for everyone: Lena's Bakery Ltd made $60,000 profit last year. Lena and Marco decide to share 10% of it, $6,000, among all 22 employees, about $270 each, paid in December.

Nobody earned it by packing more boxes or hitting a target. They earned it because the whole bakery did well.

Rewards beyond the pay packet

1

Profit-related pay

A share of the business's profit paid to employees, on top of their pay. It goes up and down with the profit.

10% of the bakery's profit shared among the 22 staff each December.

2

Employee share ownership

Employees are given shares in the company, or can buy them below the market price, so they become part-owners.

Goldcrust plc lets every employee buy its shares at 20% below the stock-exchange price.

3

Fringe payments

Extra benefits on top of the normal salary or wage: things the employee would otherwise pay for.

Every Lena's Bakery employee takes a loaf home after each shift, and the night bakers get a free breakfast. Goldcrust's area managers have a company car and health insurance.

Why it worksThe catch
Profit-related payEveryone gains when the business does well, so staff pull together and cut wasteOne person's effort barely moves the total, and a bad year pays nothing however hard they worked
Employee share ownershipOwners care about the company's future and tend to stay longerThe share price can fall for reasons staff cannot control, and existing owners' share is diluted
Fringe paymentsThey attract and keep staff, and some cost the business less than they are worth to the employeeThey cost money even when staff do not value them, and are hard to take back once given
Fringe payments: Fringe payments are additional benefits given to employees on top of their normal salary or wage.

They are a financial reward: the free loaf, the company car, health insurance and paid holidays all cost the business money and have a money value to the employee.

Why not simply raise everyone's pay? Herzberg, earlier in this topic, put pay among the hygiene factors: fair pay stops staff being dissatisfied, but it does not keep them motivated for long. For that, a business has to change the job itself.

The same counter, every day: Aisha's four counter staff at the High Street shop spend most of the day at the till, serving the same loaves to the same queue.

A pay rise would not make that more interesting. Changing what the job involves might.

A non-financial reward is a reward that is not paid in money: it makes the work itself more interesting, more responsible or more worthwhile. Three of them change the shape of the job.

Three ways to change the job

1

Job enlargement

More tasks added to the job, at the same level of skill and difficulty. The job gets wider, not harder.

The counter staff now also do the morning stock count and set up the coffee machine.

2

Job rotation

Employees move between different jobs at regular intervals, so each learns several.

The six bakers swap every month between bread, pastries and preparing the dough.

3

Job enrichment

More challenging tasks added, the kind usually done by a manager. The job gets deeper.

Priti hands Maya the weekly flour order from Valley Grain and the planning of the night's bake.

Why it worksThe catch
Job enlargementMore variety, and one person can cover several small tasksStaff may see it as more work for the same pay
Job rotationLess boredom, and staff can cover for each other when someone is off sickTime is lost learning each job, and the tasks are no more challenging
Job enrichmentStaff use and develop their abilities, which lifts motivation and the quality of their workIt needs training, not everyone wants it, and staff may expect higher pay for it
Wider or deeper?: Enlargement adds tasks at the same level: the job gets wider. Enrichment adds tasks from the level above: the job gets deeper. Rotation adds no tasks at all; it moves people between jobs.

Counting stock is enlargement. Ordering the flour is enrichment.

Job enrichment works because it gives staff what Herzberg called motivators: responsibility, achievement and more interesting work. Maya is now trusted with the flour order, and she can see the result of her planning on every shelf.

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A dropped birthday cake: A customer at the Park Road shop drops the birthday cake she has just bought. The counter assistant gives her a new one on the spot, without phoning Jonas, the manager.

She can, because Jonas has trained his staff to handle refunds and replacements up to $20 and trusts them to decide.

That is empowerment: over time, staff are developed and given the tools, the information and the authority to make decisions themselves. It goes further than delegating one task: it changes who decides, every day. Empowerment, purpose and teamwork are three more non-financial rewards.

Trust, purpose and teamwork

1

Empowerment

Staff are trained and trusted to make decisions about their own work.

Park Road's counter staff decide on refunds and replacements up to $20.

2

Purpose

The chance to make a difference: work that matters beyond the pay.

Each evening the bakery's unsold bread goes to Second Helpings, the food NGO, and the bakers are told how many families it fed that week.

3

Teamwork

Employees work in groups towards one shared goal, deciding together who does what.

The night shift works as one team: all three shops' bread on the vans by 5 a.m.

Why it worksThe catch
EmpowermentDecisions are quicker and made by the person closest to the customer, who feels trustedMistakes cost money, training takes time, and managers give up some control
PurposeWork that matters motivates, and attracts staff who share the bakery's valuesIt cannot replace fair pay, and some jobs are hard to link to a bigger aim
TeamworkStaff help and cover for each other, share ideas and feel they belongTeams can argue, and one member may leave the work to the others
Why these rewards work: Teamwork meets what Maslow called social needs: the need to belong. Empowerment and purpose meet the higher needs: being trusted and respected, and doing something worthwhile.

None of the six non-financial rewards is free. Each costs time, training or some of the manager's control. But none is paid in money, and that is the test.
How this comes up: These questions come almost always on the case study, for two or four marks.

The usual questions

  • Describe the two financial rewards, other than wages and salaries, the business uses, for four marks.
  • Describe two non-financial rewards it offers, for four.
  • Describe one financial or one non-financial reward, for two.
  • Define fringe payments, for two.
  • Explain one advantage for the business of using job enrichment, for two.

The four-mark pattern

  • Find the rewards in the case. Underline every reward the business gives. The question is about what this business does, so those are the only rewards to use.
  • Name the first reward. Use its proper name: profit-related pay, fringe payments, job rotation.
  • Describe it as the business uses it. What it means, with the detail from the case: who gets it, what, how much.
  • Do the same for the second reward. A different type, not a second example of the first.
Three traps: The wrong family. Fringe payments are financial rewards. Calling a free meal or a company car non-financial loses the marks.

Not in the case. When the question asks what the business offers, a reward it does not offer cannot be described in its context.

The excluded ones. 'Other than wages and salaries' means neither counts, however well described.
IB-style questionDescribe[4 marks]

Describe the two types of financial reward, other than wages and salaries, that Lena's Bakery Ltd uses.

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the term salary. [2 marks]

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