Reward Management Challenges in Strategic HRM

Introduction to Strategic HRM

In order to gain an accurate understanding of the problems that reward management poses to strategic human resource management (HRM), a deeper understanding of the latter concept is necessary.

Strategic HRM is a relatively recent trend that has moved away from viewing people as simple resources handled separately from company objectives, integrating them instead into the overall business strategy. This major shift relies heavily on the conclusion that intangible assets are what make the difference in today's competitive environment. Among these, human resources are the most prominent, capable of shaping a corporation's trajectory in either a positive or negative direction depending on the skill with which they are managed.

As S. R. de Silva (1998) pointed out, HRM has shifted from a focus on employee welfare toward obtaining the best possible productivity from personnel. Strategic HRM therefore correlates the management of people with corporate strategy. This relationship is mutual: HR policies and actions derive from business strategy, while the skills, knowledge, and motivation of employees also have a great impact in shaping the company's course of action.

If we resort to an analogy between an organization and the human body, strategic HRM subordinates human resources to major corporate goals in the same way that arms or legs move according to what the brain dictates. This coherence between managing employees and attaining objectives results in increased market value for products or services and, implicitly, in a competitive advantage. Therefore, the HR strategy should be designed according to the nature and structure of the business (De Silva, 1998) and should continuously monitor changes in corporate goals in order to adapt to new requirements in a timely manner.

Why Reward Management Is Problematic for Strategic HRM

Yet, however optimistic this integrative approach may sound, certain elements hinder its full application. One of these impediments concerns rewards, which are difficult to align with company goals for several reasons discussed below.

First, tailoring rewards according to staff's personal traits and organizational objectives is particularly challenging for diversified enterprises. These organizations may operate within several markets and provide various products and services. Consequently, each business segment has specific objectives, and human resources must be stimulated in different ways to achieve them (De Silva, 1998). For example, if an organization comprises both a ground handling division at an airport and a chain of travel agencies, it might reward employees in the first branch by offering training aimed at improving customer service quality, while opting for a variable commission based on the volume of travel packages sold in the second. Where objectives differ, the reward system must accommodate those differences. An organization that designs a single, uniform compensation system risks undermining its ability to reach its varied goals.

Second, there are situations in which the "hard" nature of HRM — encompassing a rational, quantitative perspective on managing employees — is more necessary than its "soft" nature, which encourages communication, motivation, and leadership. This creates a tension between strategic HRM and the principles of rewarding employees through non-financial incentives such as training, career opportunities, recognition, and appreciation. De Silva (1998) invokes the case of an organization compelled to reduce labor costs in order to survive or improve performance. One alternative is laying off employees who lack the skills or knowledge of their colleagues — a measure clearly at odds with a reward system that endorses training to develop individuals' full potential.

This dilemma is addressed by two arguments. The first holds that employee development is only viable when the organization itself is successful. If cutting labor costs is necessary to ensure a company's health, that measure must be taken, because it is the only way to provide a stable, motivating work environment for the remaining employees (De Silva, 1998). The second argument states that reduced labor costs can, in fact, be achieved through greater "involvement, training, and commitment" (De Silva, 1998), particularly when the nature of the business allows it — for example, in mass production companies.

Third, the flexibility of the reward system is another issue that conditions the achievement of company objectives. It is widely accepted that today's organizational environment is complex and dynamic, and that corporations must adapt in order to remain viable. Reward systems can impede such adaptation. For instance, if a company seizes an opportunity that demands quality over quantity, it must modify its pay and reward system accordingly. Otherwise, a significant gap can emerge between what senior leadership says about quality and what employees are actually incentivized to do.

One of the most frequently cited examples in the economic literature concerns Sears, Roebuck and Co., which offered its mechanics a commission proportional to the number of customer problems they resolved. Because of this incentive, employees attempted to ensure customers would return by not fully fixing their problems. When managers became aware of customer complaints, they declared that quality should be the top priority — yet did nothing to abolish the commission. As a result, employees continued to perform in the same manner, illustrating the damaging consequences of misaligned objectives and rewards.

Although history offers many similar examples, reward flexibility continues to be a persistent problem. When CIPD's 2006 reward management survey asked respondents to rate the flexibility of their reward systems on a scale from 1 (inflexible) to 4 (flexible), public sector organizations obtained an average of 2.61 while the private sector received an average of 3.18 (CIPD, 2006). Thus, most organizations maintain a gap between rewards and objectives despite claiming to embrace a strategic HRM approach. In summary, the reward system is problematic for strategic HRM because the latter requires continual adaptation to environmental changes — an imperative that demands keeping rewards consistently up to date.

According to the framework outlined on accel-team.com (Developing a HRM Strategy, 2007), the HRM strategy comprises seven major steps.

The first step consists of getting "the big picture." In order to deliver a coherent strategy, the HR department should closely examine the company's objectives and overall business strategy, identifying core activities and their implications for employees.

The second phase involves defining a mission statement. Although many regard this as idealistic and unnecessary, it serves an important function by showing people why their contribution matters — employees cannot engage fully in pursuit of a goal without understanding what is at stake.

Integrating Reward Management into HRM Strategy

The third stage involves carrying out a SWOT analysis of the organization. The HR department must identify the corporation's strengths and weaknesses as well as the opportunities and threats in the external environment. This allows it to determine which skills and rewards are needed to motivate employees to address weaknesses and counter external threats.

The fourth step consists of a thorough HR analysis. The main elements to be examined are culture, organization, people, and HR systems (COPS), as well as the gap between the desired position and the current one.

The fifth phase focuses on detecting critical people issues in order to identify the efforts and resources required. The HR manager must identify key problems that highly impact the company's strategy and establish a list of top priorities.

The sixth phase is dedicated to developing solutions. To identify effective alternatives, the HR manager must go beyond surface-level appearances and investigate the real causes of issues, even when this requires considerably more effort than addressing obvious symptoms. After such a detailed analysis, managers should divide the plan into several broad objectives. Alongside targets such as management development, employee selection and recruitment, and manpower planning, a significant part is played by designing the appropriate reward system — for which a reward strategy must be drawn up.

It is essential that such a strategy be clearly specified in writing so that it can be easily understood and communicated. This document acts as a benchmark for evaluating performance: managers will know which outcomes or behaviors to measure, and employees will know what rewards to expect. This transparency will be welcomed by employees, who will trust the commitments made by managers and will be motivated to contribute to achieving the desired results (CIPD, 2007).

Conclusion

Not only must a reward strategy be appropriately designed, but it must also be appropriately implemented. In order to achieve coherent integration within the HRM strategy, rewards should be closely tied to organizational objectives, and the managers responsible for carrying them out should be equipped and motivated to act in accordance with this integrative approach. Reward management remains one of the most complex challenges in strategic HRM precisely because it sits at the intersection of individual motivation, organizational culture, and strategic direction — all of which are subject to continuous change.