Exploring Four Levels of Reward and Compensation Strategies Aligned with Business Objectives

I have conducted some research about reward and compensation KPIs. According to this research, four levels of reward practices can be defined.

The 1st level links rewards to a performance KPI of an individual.

The 2nd level links rewards to significant business outcomes, not just an individual's performance. Logically, this is supposed to work better, but in reality, it does not serve as a long-term solution to motivational issues.

Most companies are at the 3rd level, where a reward is given in the form of stocks or investments in a retention plan. For instance, Apple is currently at this level.

The 4th level is where a company does not pay a reward at all. This is what Henry Mintzberg wrote about in The Wall Street Journal back in 2009.

The conclusion of my research is:

- A company should select a reward scheme (be on one of the four levels) according to its current business objectives.
- It's crucial to change the reward type when business objectives change.

Understanding the Four Levels of Reward and Compensation

🔍 It's essential for companies to carefully consider their reward and compensation strategies to align with their business objectives effectively. Let's delve into the four levels identified in your research:

1. Individual Performance KPIs:
- At the 1st level, rewards are directly tied to individual performance Key Performance Indicators (KPIs). This approach motivates employees to excel in their roles and achieve set targets.

2. Business Outcome Focus:
- The 2nd level shifts the focus to significant business outcomes rather than solely individual performance. While this may seem more logical, it doesn't always address long-term motivation issues effectively.

3. Stocks and Investments:
- Many companies operate at the 3rd level by offering rewards in the form of stocks or investments, especially through retention plans. This strategy, exemplified by Apple, aims to incentivize employees to stay with the company.

4. No Monetary Rewards:
- Contrary to traditional practices, the 4th level, as highlighted by Henry Mintzberg, involves not providing any monetary rewards. This approach challenges the notion that financial incentives are always necessary for motivation.

📈 Adapting to Business Objectives:
- It's crucial for organizations to select the most suitable reward scheme based on their current business goals. Additionally, as business objectives evolve, companies should be ready to adjust their reward types accordingly.

🏆 By aligning reward and compensation practices with business objectives and periodically reviewing them, companies can enhance employee motivation, engagement, and overall performance.