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39 Second Quarter | 2020
Pankaj M. Madhani, Ph.D.,
ICFA I Business S chool
Effective Rewards and
Recognition Strategy: Enhancing
Employee Engagement, Customer
Retention and Company
Performance
Organizations across the world seek to retain
their talent. The loss of an employee has
been proven to cause exorbitant costs in the
recruitment, selection and training of a replacement —
costs amounting to a full year’s compensation or more.
Moreover, an organization’s workforce is among its most
precious resources. Skilled and competent employees —
and thus their retention — are acknowledged as being
imperative for business success. Rewards and recognition
are important resources that can motivate employees to
accomplish organizational goals and play a key role in
employee retention. To guarantee not only the retention
of, but also optimum performance from, its employees,
an organization must offer a range of diverse means of
rewarding its employees.
With workers constituting about 80% of a company’s
expenses, it is vital that the workforce be engaged.
Employee engagement not only promotes retention
but enhances customer satisfaction, customer loyalty,
company reputation and overall stakeholder value.
Engagement is found to correlate with positive orga-
nizational outcomes such as lower absenteeism, lower
turnover intention, lesser costs and higher growth.
Second Quarter 2020
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40 The Journal of Total Rewards
Effective rewards and recognition systems improve employee engagement and
enhance work performance (Fairlie 2011). Rewards and recognition have long been
established as an antecedent of employee engagement.
EMPLOYEE ENGAGEMENT
Rewards and recognition have major potential to boost employee engagement and
corporate performance in a world in which four out of every 10 employees are
not engaged (Brown and Reilly 2013). According to Gallup (2018), only 34% of the
U.S. workforce is engaged, with 53% not engaged and 13% actively disengaged.
Aktar and Pangil (2018) empirically found that effective rewards and recognition
positively influence employee engagement.
Employee Turnover Cost
The direct economic costs associated with losing talented employees include
replacement of the employee, separation of the employee, downtime, recruiting,
interviewing, onboarding, and training and development of the new hire. The
costs associated with losing employees and recruiting, selecting and training
new employees often exceed 100% of the annual compensation for the position
and vary from 1.5 and 2.5 times the annual salary paid for a job (Cascio 2006).
In addition to these direct financial costs, losing employees can also lead to
work disruptions, loss of tacit or strategic knowledge, losses in productivity and
customer service, diminished diversity, and even a turnover contagion effect on
remaining employees (Allen, Bryant, and Vardaman 2010). Both the direct and
indirect economic costs of employee turnover significantly affect organizational
performance and success. Park and Shaw (2013) presented a strong correlation
between turnover and organizational performance, showing that a 1% increase in
turnover results in a 40% reduction in workforce productivity and a 26% loss in
financial performance.
Employee Engagement – Key Benefits
Employee engagement is much more than contentment and employee satisfaction.
Engaged employees understand and commit to the organization’s mission and
values and go beyond the call of duty toward the organization’s goals, driving
high performance. An effective rewards and recognition strategy is considered one
of the tools for enhancing organizational commitment. Commitment represents
something beyond loyalty to an organization and involves individuals who are
willing to dedicate their talents to contribute to the organization’s well-being.
While engaged employees drive performance, disengaged employees are more
concerned about time rather than energy or dedication during their job perfor-
mance. Organizations with highly engaged employees have been found to enjoy an
increase of more than 5% in operating margins and 3% in net margins, compared to
organizations with highly disengaged employees (Rabbanee et al. 2019). Moreover,
41 Second Quarter | 2020
72% of highly engaged employees (compared to 27% of disengaged employees)
believe they can positively affect customer service, which leads to greater customer
satisfaction, loyalty and profitability. When companies enhance the engagement
of their employees, they accomplish something that would be difficult for their
competitors to imitate (Ghosh et al. 2016).
Construction-equipment manufacturer Caterpillar’s increased employee engage-
ment resulted in $8.8 million annual savings from decreased attrition, absenteeism
and overtime in a European plant, a 70% increase in output in less than four
months in an Asia Pacific plant, a decrease in the break-even point by almost 50%
in units/day, a decrease in grievances by 80% in a unionized plant, a $2 million
increase in profit, and a 34% increase in highly satisfied customers in a startup
plant (Vance 2006).
EFFECTIVE REWARDS AND RECOGNITION STRATEGY: CRITICAL
SUCCESS FACTORS
Rewards and recognition practices are integral components of HR strategy. Rewards
are the material and psychological payoffs given to an employee for performing
tasks well in the workplace. Organizations can’t merely replicate the rewards and
recognition practices of other organizations. Rather, a rewards and recognition
strategy should be created to support an organization’s unique culture. Developing
these strategies has typically been more of an art than a science.
People want to be rewarded, but do not necessarily know what rewards would
be of optimal benefit for them. There is no guarantee that the various rewards
and recognition provided will affect each individual employee in the same way.
A system of rewards cannot therefore expect to be successful unless the orga-
nization has a thorough understanding of the various needs, expectations and
values — as well as education, skills and potential — of its diverse employees.
Hence, rewards and recognition plans should be applied differently depending
on employee segment and profile, including functions, roles, skills, geography
and demographics (age, gender, income level and family status). Many companies
put together their rewards and recognition package by relying more on instinct
and opinion than on hard quantitative analysis to decide what will be most
motivational to employees. An effective rewards and recognition strategy enables
organizations to deliver the right types of rewards and recognition, to the right
people, at the right time, for the right reason.
Many managers put considerable effort into performance enhancement and are
then shocked when employees remain unmotivated, unappreciative and unhappy
because rewards and recognition plans lacked proper design and implementation.
Organizations should adopt unconventional and creative methods to restructure
their rewards and recognition programs for engaging and retaining their workforce.
Five critical success factors of effective rewards and recognition strategy are:
42 The Journal of Total Rewards
1 | Holistic. Effective plans must address the entire employee value
proposition (EVP).
2 | Integrated. The components must fit together and complement each other.
3 | Aligned. The plans must be designed to support the organization’s unique
HR and business strategies.
4 | Measurable. The plans should be based on hard facts and quanti-
tative analysis.
5 | Delivered. Effective communications and administration as well as ongoing
monitoring of the rewards and recognition strategies are critical to realizing the
sustainable benefits.
Because rewards and recognition strategies are more about best fit than best
practice, rewards and recognition should complement each other to support all
dimensions of employee motivation. A useful approach is to aim for consistency
with local flexibility. Individuals place different values on various aspects of
rewards and recognition, and these valuations change over time. While differing
dimensions make the job of designing rewards and recognition plans more
complex, they can also create opportunities to eliminate potentially wasteful,
one-size-fits-all spending.
REWARDS AND RECOGNITION: A COMPLEMENTARY RELATIONSHIP
Rewards and recognition are means for organizations to demonstrate the value of
their employees. Effective rewards and recognition strategies also signal that an
organization cares about the well-being of its employees and is willing to invest
in them. The use of recognition serves as a reminder of commendable perfor-
mance. Such recognition can further reinforce that the organization values the
employee. When employees receive appreciation and recognition for their work,
they often reciprocate with a sense of obligation and respond with continued
high performance.
Effective recognition strategies should cover all three types of recognition: orga-
nizationwide formal recognition, departmental-specific informal recognition and
everyday spontaneous recognition. Everyday recognition validates the attitude of
caring and appreciation for a majority of employees. It also gives support, cred-
ibility and meaning to the few who receive the nominated or earned formal or
informal awards.
However, recognition is not sufficient in itself and must come along with rewards.
Rewards can control behavior externally because they can announce future bene-
fits to those who expect them. Rewards can increase the likelihood of a behavior
to be repeated over time as they aim to encourage specific behaviors. Similarly,
rewards without recognition could possibly saturate employees with tangible items
that would gradually lose significance. Therefore, recognition is integrated with
rewards in order to produce a more inclusive, effective and broader HR strategy.
43 Second Quarter | 2020
While rewards may be great for attracting people toward a desired outcome,
recognition is considered a tool for sustaining this attraction by retaining the
motivation. Both rewards and recognition are interlinked and complementary as
they reinforce a continuous performance enhancement culture in the organiza-
tions. (See Figure 1.)
Rewards and recognition are quite distinct and represent a major duality in
human motivation. The basic difference between rewards and recognition is that
rewards are transactional and recognition is relational. Rewards are awarded in
the context that “if you do A, only then will you get B in return.” Recognition, on
the other hand, is more to do with relational exchange between individuals. It is
about noticing and honoring. Table 1 describes how various management theories
differentiate rewards and recognition.
INTRINSIC VS. EXTRINSIC MOTIVATION
Rewards and recognition represent two fundamentally different mechanisms
of human motivation. Rewards involve extrinsic motivation while recognition
enhances intrinsic motivation. (See Figure 2.)
Intrinsically motivated behaviors are performed in the absence of any apparent
external contingency as those behaviors are motivated by the underlying need
for competence and self-determination (Deci 1975). Intrinsic motivation focuses
FIGURE 1 Complementary Rewards and Recognition Relationship
Recognition
(Formal,
informal,
day-to-day)
Reinforce Intrinsic Motivation
(Relational nature)
Reflect Extrinsic Motivation
(Transactional nature)
Employee
engagement
Customer
retention
Firm
performance
Rewards
(Tan g ib l e,
intangible)
Administrative
function
Strategic
function
Source: Model developed by author
44 The Journal of Total Rewards
only on the activity itself
while extrinsic motivation
considers the instrumental
value of the activity. Managers
can prompt intrinsic moti-
vation through careful job
design or tangible incentive
programs. However, there
are many instances where
it is difficult to redesign a
job, and budgets may be too
restricted to provide tangible
incentives. Effective rewards
and recognition strategies
can help create work experi-
ences that meet the needs of
employees and encourage them to contribute extra efforts. An optimal mix of
rewards and recognition not only increases employee motivation and engagement,
it can also reduce organization expenditures and lead to a win-win situation for
both employers and employees.
It has been argued that rewards will motivate some of the people all of the time and,
perhaps, all of the people some of the time. But rewards cannot be solely relied on to
motivate all of the people all of the time, so they need to be reinforced by recognition
programs, especially those that provide intrinsic motivation. Businesses with strong
strategic recognition programs exhibit greater productivity, lower turnover and greater
returns on investment than other companies in their industries (Nelson 2012).
Aberdeen Group Study
A study by the Aberdeen Group highlighted the importance of rewards and recogni-
tion as a vital compensation component (Ostrow 2014). The study, titled “Incentive
Success: Best-In-Class Sales Management,” underscored the competitive advantages
TABLE 1 Rewards vs. Recognition
Management Theory
Contributor
Reward
Subsystem
Recognition
Subsystem
Maslow
(1954)
Coping/deficiency
motivation
Expressive/growth
motivation
Herzberg
(196 6)
Work motivation based on
hygiene factors
Work motivation based on
motivator factors
Deci
(1975) Extrinsic motivation Intrinsic motivation
Source: Model developed by author
FIGURE 2 Types of Organizational Cultures
Optimal
Mix
Optimal
Mix
Rewards
(Extrinsic
Motivation)
Recognition
(Intrinsic
Motivation)
Financial Rewards
Low
High
High
Low
Nonfinancial Rewards
Source: Author
45 Second Quarter | 2020
companies can gain when they venture outside the traditional realms of compen-
sation. It found that the compensation techniques that worked most effectively
across top-performing companies included a mix of nonfinancial rewards. Successful
companies’ most common practice was their utilization of these nonfinancial rewards.
Organizations that took a more holistic approach and implemented nonfinancial
rewards and recognition programs outperformed rivals that did not.
ENHANCING EMPLOYEE ENGAGEMENT, CUSTOMER RETENTION AND
BUSINESS PERFORMANCE
Effectively managed rewards and recognition systems will have a strong positive
influence on employee attraction, motivation and retention. Happy and dedi-
cated employees provide better service, can enhance customer satisfaction and
contribute to a company’s bottom-line financials, such as sales growth, market
expansion or even profitability (Tortosa, Moliner, and Sanchez 2009).
Effective rewards and recognition strategy should match an employee’s preferences
and needs as employees differ in such factors as risk preferences, career stage, skills
and rewards preferences. Companies are introducing new data mining and analytics
solutions to better understand employee’s preferences and customize rewards and
recognition plans. Managers should remember that the value of a rewards and
recognition plan is often idiosyncratic to each employee. Thus, they should carefully
match rewards and recognition to the specific personal needs of the employee. The
effectiveness of a rewards and recognition plan depends on management’s ability
to match these plans with employees’ characteristics, situations and preferences.
Internal Service Quality
Internal service quality is referred to as the quality of work life — defined by the
favorable conditions of a workplace that support and promote employee satisfac-
tion by ensuring rewards and recognition systems meet or exceed expectations.
A high level of internal service quality will result in higher levels of employee
satisfaction, productivity and retention (Ennew 2015). Employee satisfaction is
imperative for providing better and timely service to customers and achieving
their satisfaction and loyalty. Rewards and recognition are viewed as some of
the most important factors related to employee satisfaction (Madhani 2019). They
are certainly closer to their organizations and perform better jobs when they
receive what they deem optimal rewards and recognition in their organizations
(Khawaja et al. 2012).
External Service Quality
Customer retention becomes an even more important corporate objective given
the growing competition in global markets and pressures from the international
economic environment. To retain customers, service organizations focus on
service quality. A positive service climate is an important antecedent of employee
46 The Journal of Total Rewards
enthusiasm, sensitizing employees toward providing superior service quality and
delivering value to the customer during the encounter.
Customer-contact employees are very important because their service perfor-
mance represents the intangible component of the customer’s perception of service
quality, which influences customer relationships and loyalty. According to Heskett
et al. (1994), employee satisfaction is “reflected” in terms of customer satisfaction,
also referred to as the “satisfaction mirror,” which in turn generates business
growth and profitability.
Business Performance
Satisfied customers will likely continue to buy goods and services from a company,
which leads to higher customer lifetime value (CLV). Customer satisfaction is an
important determinant of repeat purchasing behavior, and therefore it is the essential
component of sustainable competitive advantage (Montfort, Masurel, and Rijn 2000).
Loyal customers amplify sales through frequent repurchases and customer referrals
and also reduce service costs and marketing expenditures because they are familiar
with the service provider’s processes and are reluctant to switch. There is a high
correlation between high customer retention and company profitability. Gronholdt and
Martensen (2019) confirmed the expected positive impact of employee satisfaction,
loyalty and attitudes on customer satisfaction and loyalty and, in turn, on profitability.
Figure 3 shows how effective rewards and recognition strategies enhance
employee engagement, customer retention and overall business performance.
Zappos
Zappos.com, the online shoe and clothes retailer, illustrates how optimal design
of rewards and recognition leads to satisfied, engaged and empowered employees.
Zappos believes that the most productive employees work for the intrinsic rewards
that come in helping others (Palmeri 2010). The company, which was acquired by
Amazon in 2009 for $850 million, wants to ensure that employees aren’t focused
only on the pay, but that they also believe in the company’s long-term vision and
FIGURE 3 Enhancing Employee Engagement, Customer Retention and Company Performance
Rewards
and
Recognition
(Optimal Mix) Satisfaction
Mirror
Cross-selling
& Up-selling
Low
Turnover
Long-term
Relationship
Employee –
Engagement
Satisfaction
Productivity
Retention
Customer –
Satisfaction
Trust
Loyalty
Retention
Firm –
Growth
Revenue
Profit
Valuation
Compelling
Place to Work
Compelling
Place to Buy
Compelling
Place to Invest
Internal
Service Quality
External
Service Quality
Firm
Performance
Source: Author
47 Second Quarter | 2020
want to be a part of its culture (Hsieh 2010). Perks, as well as a comprehensive
benefits package and wellness programs, are an integral part of Zappos’ everyday
culture because management believes that if employees are happy, other chal-
lenges will be met. Employees can earn Zollars (Zappos dollars) for participating
in the required training by answering questions or volunteering to help out. Those
Zollars can be spent at an onsite store, making rewards and recognition visible and
real (Zappos 2012). Deployment of an effective rewards and recognition strategy
has helped Zappos to achieve higher customer retention as 75% of Zappos sales
come from repeat customers who act as advocates for the online retailer (Askin,
Petriglieri, and Lockard 2016).
CONCLUSIONS
This research focuses on rewards and recognition that are contingent on an
employee’s work performance. Because people represent a potential source of
sustained competitive advantage, rewards and recognition strategies are significant
to organizations’ success or failure. Effective rewards and recognition practices
enhance internal service quality. The internal quality of a working environment
contributes most to employee engagement and satisfaction. Highly engaged and
satisfied employees are generally more productive and offer superior service than
their disengaged counterparts. Therefore, HR managers should implement better
internal service quality policies and practices that focus on employee engagement,
satisfaction and service orientation to enhance organizational performance. The
effects of internal service quality practices on employee satisfaction vary in part
according to the type of service. Therefore, HR managers should tailor internal
service quality to ensure that the practices fit particular jobs and meet the expecta-
tions of employees in various service settings.z
ABOUT THE AUTHOR
Pankaj M. Madhani, P h.D., ( pmad hani@iit.edu) earned bachelor’s degrees in chemical engineering and law,
and an MBA from Northern Illinois Unive rsity, a master’s degre e in computer science from the Illinois Institute of
Technology and a Ph.D. in strategic management from CEP T University. He has more than 32 years of corporate
and academic experience in India and the United St ates. Madhani works as associate dean and profes sor
at ICFAI Business School (IBS). He received the “IBSAF Best Teacher Award” twice (2013 and 2017). He has
published several management books and more than 300 book chapte rs and research a rticles in various
academic and practitione r journa ls. He also served as editor of the IUP Journal of Corporate Governance.
Madhani received the “Best Research Paper Award” at the 2016 International Management Convention. He
is a frequent contributor to The Journ al of Total Rewards, having published more than 10 papers. His main
research areas include sales compensation, corporate governance a nd business strategy.
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