Against the backdrop of the recent global economic crisis, a study by UK researchers sought to examine the impact of such adverse operating conditions on employee rewards offered by small and medium-sized enterprises in the South-Eastern European region and how reward affected organisational performance. The results indicated that rewards generally decreased during the economic crisis, while adverse operating conditions persisted, and interestingly, the results showed that non-financial rewards, such as work-life balance, had the greatest effect on organizational performance under these conditions.
Key Topics: Organizational performance; Total rewards; SMEs; Economic crisis
Title of Reviewed Article: Rewarding employees in turbulent economies for improved organisational performance: Exploring SMEs in the South-Eastern European region
Researchers: Rea Prouska (Middlesex University), Alexandros G. Psychogios (University of Hull), and Yllka Rexhepi (The University of Sheffield).
Publication: Personnel Review, 2016, Vol. 45 No. 6, pp. 1259-1280.
Setting the Scene
Total reward systems can play a central role in employee attraction, retention, motivation, and performance as well as various other positive employee behaviours (Day et al., 2014; Tomaževič et al., 2014). Such systems typically include all types of financial and non-financial rewards, both direct and indirect, and extrinsic and intrinsic (Armstrong, 2010). Total reward has become increasingly prevalent in recent years as companies look to efficiently manage reward cost for increasingly diverse workforces (Brown, 2005).
While the benefits of total reward systems have been well established, research has often focused on large Anglo-American companies in financial stable environments (Brown, 2005). This study aims to examine the role of total reward systems under extreme conditions, against the backdrop of the recent economic crisis in recessionary economies in the South-East European (SEE) region, focusing specifically on small and medium-sized enterprises (SMEs), who are often hardest hit by downturns in economic conditions.
This study examined three primary research questions:
Research question 1 – “What is the total reward system currently (2014) applied by SMEs across SEE countries (Greece, Romania, Bulgaria, Albania, Kosovo and Former Yugoslav Republic of Macedonia (FYROM))?”
Research question 2 – “How has the economic instability affected the application of total reward strategies in SMEs in this region between 2011 and 2014 and what are the projected implications for 2015?”
Research question 3 – “Which aspects of the total reward systems applied positively affect organisational performance?”
How the research was conducted
The study sample consisted of 199 SMEs operating in the following SEE countries: Bulgaria, Albania, Romania, Greece, Kosovo and the Former Yugoslav Republic of Macedonia (FYROM). The companies chosen were formed at a minimum two years prior to the start of the global crisis (2008), as the study examined total reward systems following the emergence of this crisis.
The study was carried out between September – December 2014 and a survey designed for this research was used to assess the total reward systems used in participating companies during 2011-2014 and projected outcomes for 2015 were assessed. Top level managers (e.g. CEOs, CFOs) from each company completed the survey.
The survey contained six sections - 1) Respondent demographics (e.g. age, position); 2) Pay and other financial rewards details (e.g. performance related pay, commission); 3) Benefits offered (e.g. healthcare, annual leave); 4) Learning and development opportunities offered (e.g. training, promotions); 5) Work environment (e.g. culture, leadership style); 6) Company performance (e.g. return on assets, growth in sales).
Key Research Findings
The first research question explored the reward system elements currently (2014) applied by SMEs in SEE countries:
Performance-related pay/bonus was found to be most frequently provided (68% of companies), followed by the provision of overtime pay (26%), pension benefits (13%), commission (12%), and company share plans (6%).
The most common benefits provided were annual leave (94%), maternity/paternity leave (72%), personal leave (65%), sick pay (62%), company car (50%), and health care (36%).
From a learning and development perspective, 94% of companies provided on-the-job training, 38% offered career development opportunities, 35% provided off-the-job training, and 34% used performance management.
46% of companies self-reported that they had a culture supportive of employee development, with 46% having an open leadership style, and 41% having open communications in place.
The second research question examined how economic instability affected the application of reward strategies:
On average salary was found to have remained the same over the period, as well as being projected to stay the same in 2015, and therefore did not increase in line with inflation. Similarly, on average overtime pay was found to remain the same, while performance related pay, company share plans, and commissions decreased over the period.
The results also indicated a decrease in benefits offered over the 2011-2014 period, with 61% of companies providing more benefits in 2011 than in 2014, with the results pointing to an average year on year decrease. Furthermore, 29% of companies expected further reduction in benefits in 2015.
In respect to learning and development opportunities, there was a general decrease in opportunities over the period and no changes in opportunities were expected for 2015.
48% of companies reported a deterioration in overall work environment over the period.
The third research question examined the aspects of total rewards positively affecting organisational performance:
A correlation between satisfaction with organisational performance and the number of financial rewards, fringe benefits, and learning and development opportunities was not found. However, a relationship between organisational performance and work environment was found. The most significant aspects of work environment were found to be work-life balance practices, followed by employee involvement, and then organisational culture supportive of personal and professional development.
Consistent with prior research which showed that financial rewards offered by organisations typically decrease during the challenging economic times (e.g. Rowley & Tashiro, 2009), the results of this study showed a salary decease in real terms, as well as a scaling back of other reward types.
The importance of performance related pay is well established, and may be particularly the case for SMEs (Zhend et al., 2007). Consistent with this, the study results showed that performance- related pay was the primary financial reward offered by companies in the study, with other financial reward mechanisms offered to a lesser degree.
Research suggests that there is a correlation between the number and size of employee rewards and individual and organizational performance (Brown, 2005). Interestingly, this study found no such correlation, however, a correlation was found between work environment and organisational performance, which supports findings in previous research that non-financial rewards such as a work life balance can lead to greater organizational performance.
Organizational and Reward Implications
The importance of non-financial rewards, in the form of work environment, found by this study should be of particular interest to companies. In challenging economic times when budgets are tight, financial rewards can often be the first and hardest hit as this study demonstrates. The findings of this study indicate that a focus on non-financial rewards and particularly work environment policies, such as work-life balance, can help to maintain employee motivation and performance levels, and can offer a viable alternative to costlier financial rewards.
It is worth noting that the absence from this study’s results of a strong link between financial rewards and organizational performance is somewhat contrary to prior research and so shouldn’t be taken as an opportunity for companies to needlessly reduce financial rewards. As with the reduction or elimination of any reward type, the wider implications of making changes should be carefully considered. The relatively low impact of financial rewards in this study may well be a reflection of employees’ acceptance of the need for their employer to cut or freeze costs given the economic conditions, and such tolerance would likely be reduced under better economic conditions.
This study provides valuable insight into the effect of a poor economic climate on employee rewards provided by companies, particularly SMEs. While the results are certainly interesting and suggest that employees can continue to be motivated even when reward budgets are limited, it should be noted that the study does focus on the SEE region, and so is generalizable primarily to that region. Further similar research should be undertaken in other regions and with larger samples to help develop a global picture of this phenomenon.
Source Article: Prouska, R., Psychogios, A. G., & Rexhepi, Y. (2016). Rewarding employees in turbulent economies for improved organisational performance: Exploring SMEs in the South-Eastern European region. Personnel Review, 45(6), 1259 - 1280.
Published by: Emerald Group Publishing Limited
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