Sunday, 8 July 2012

When and Why Individuals prefer Financial to Non-Financial Reward

It is an axiomatic fact that, for a whole range of reasons, individual wants and expectations are subject to changes over time. These changes also influence individual attitude towards the overall composition of the reward package they receive also for what concerns the balance between financial and non-financial rewards. For different reasons essentially linked to their current wants and circumstances, with the passing of the time individuals’ preference for reward packages mainly based on financial rewards switches to packages mainly composed of non-financial rewards and vice versa. Since this change in preference can occur rather frequently, it could prove to be interesting the exercise of trying and identifying which particular factors and circumstances contribute to urge people focusing upon the one component, rather than on the other. Pinpointing the reason why the balance between the two components of reward changes over time can provide employers remarkably interesting insights, which can in turn help these to develop and introduce more sound and suitable reward management practices.

Individuals at large tend to get used to receive larger amounts of money rather quickly; it is hence unlikely that an individual could ever consider him/herself not needing or appreciating extra amounts of cash. In general, individuals tend to spend their money and make plans about how to spend it in the future according to the level of pay they actually receive. Every individual, nonetheless, dreams to purchase something which could never be able to buy taking heed of the current disposable income, or to buy something, which needs to buy, more easily and without needing to make huge financial efforts (for instance, buying it on credit).
During their everyday working life, nonetheless, individuals do not habitually focus on their personal expenses plans, but rather on the activities, duties and tasks these have to perform. Employees actually aim at performing compelling, meaningful works and are willing to shoulder the related responsibility; for the vast majority of them this is indeed firmly part of their psychological contract. Individuals want to understand how their activity contributes to the attainment of the overall organizational strategy and objectives. As long as employees perceive that the activities they perform and the results they yield are contributing to the overall organizational success, they will be willing to go the extra mile and feel encouraged to engage in discretionary behaviour and make extra efforts.

The picture described above essentially represents a situation according to which people are likely to care about their personal commitments when they are at home, whereas they are totally focused on and involved in their tasks, activities, duties and assignments when they are in the workplace. When individuals encounter personal difficulties, notwithstanding, meaning by that that these experience remarkable hardships associated with their personal and family lives, such occurrences are very likely to make an impact on the quality of the working activities employees perform and hence on the output and results that these produce and yield in the organizational settings.
It can be argued that individuals are likely to focus on their working activities and perform well as long as they are not seriously concerned about or distracted by personal-related issues. It is likely, for instance, that an individual performs below his/her average level after having learned that one of his nuclear or extended family members has been diagnosed a severe disease. This actually is just an example of a personal circumstance potentially able to affect individual performance in the workplace. It might also be possible, nonetheless, that under such circumstances, which have nothing to do with their workplace and their employer, individuals might even find and perceive their working activity as a way to momentarily forget their personal problems, help them to be resilient and regain personal strength.
When family- or personal-related hardships and adversities are rather caused by the lack of cash, putting people in a situation to barely be able to pay their bills or even worse to pay their debts off, such situations are likely to have a wider, more remarkable and longer-lasting impact on individual performance and on the quality and quantity of their output. Differently from the previous case, in this instance individuals can identify a clear line of sight between their personal situations and the income provided to them by their employers, which at this point they can perceive as unfair and inadequate.
This particular nuance about the importance individuals attach to financial reward, in relation to their ability to honour their personal and family financial commitments, can be clearly identified during periods of economic downturn and slowdown. Pay freezes and below-inflation salaries increases, eroding individual purchasing power and disposable income, are in fact particularly suffered by individuals, causing them to pay more-than-usual attention to the financial component of the reward package they receive. Research at large supports this assumption; findings of a number of investigations have revealed that individual attention to the financial component of the reward package they receive becomes particular important during glooming economic periods. Can, for instance, be mentioned to this extent the CIPD’s “Employee attitude to pay” (CIPD, 2012), the NorthgateArinso’s “Global Pay Optimism Index” (NGA, 2012) and the Aon Hewitt’s “Salary Survey” (Aon Hewitt, 2012). It is also of paramount importance stressing the circumstance that the findings of the Global Pay Optimism Index investigation carried out by NGA (2012) revealed that 1,300 respondents across the globe rated “a pay increase” as the most valued benefit they would be glad to receive from their employers.

It clearly emerges that, albeit individuals would ideally prefer to receive reward packages offering the right balance between financial and non-financial reward, where each individual has his/her different view of what “right” means, individual focus tends to transfer to the financial component of reward in those periods in which, for whatever reasons, their disposable income and purchasing power have been reduced and weakened or are, more in general, no longer sufficient to enable them to honour their financial commitments.


Despite only economic downturn and slowdown periods have been mentioned thus far as potentially dangerous factors capable to erode individual purchasing power, these do not clearly represent the only reasons for individuals focusing at times more on the financial component of the reward package they receive.


Whether the predicted emergence of future economic contingencies can put organizations on alert for a likely consequent widespread employee urge and appreciation of salary increases, other less obvious and unpredictable personal factors can contribute to alter the balance between financial and non-financial reward preferred by a limited number of individuals or even by just a single person within an organization. The above mentioned circumstance in which an employee’s family member should develop a dangerous illness, for instance, requires the employee concerned to incur unexpected expenses which could severely impact his/her disposable income sufficiency.


There are indeed a number of factors which may potentially impact individual needs and thus the preference for the one to the other form of reward. Some can be considered predictable, others less predictable; nevertheless, being aware of and understanding all of the possible occurrences which may have an impact on individual preferences can be considered a completely thorny feat to perform for an employer. Employers need to be conscious that such circumstances can occur and develop, and should hence pay attention to unusual individual behaviour, which sometimes can be originated by the personal circumstances affecting in turn their level of performance and the quality of their output.

The fact that every individual aims at receiving a combination of financial and non-financial reward can be taken as axiomatic; by contrast, what it is difficult to determine is when and why individuals tend more specifically to prefer a larger component of financial reward to the non-financial component.

Inasmuch as employees want to carry out meaningful works and aim at actively participating in the achievement of their organization objectives, individuals can actually and genuinely adopt this attitude only when they have a financial stability, that is, when their disposable income and purchasing power enable them to rather comfortably honour their personal and family financial commitments. There basically is a financial security threshold below which individuals find it particularly difficult to genuinely and truly focus on their working activities and fully benefit from the intrinsic aspect of the work they carry out. Only once this threshold has been passed individuals can feel confident and at ease with their personal situations and hence in a position to more comfortably and genuinely focus on their working activities.
The minimum wages and salaries set by national governments, where applicable, are aiming to some extent at identifying this threshold, clearly in a completely hypothetical way and do not taking into account the different personal circumstances. From this point of view employers, consistently with their own financial circumstances, should strive to identify the right threshold for their organization, even though it could prove not to be sufficient too in that a financial threshold should be in theory identified for each person.
Organizations should also ensure that the reward packages they offer to their employees are perceived as equitable and fair by all of them. Whereas on the one hand individuals tend to consider as fair and adequate the reward packages whose financial component enables them to live relatively comfortable lives, employers should make sure on the other hand that the reward packages they offer are considered and perceived as fair and consistent by the entire workforce. Trying and identifying individual needs and expectations does not indeed mean to cause unjustified inequalities and unfairness.
Designing and developing reward management systems and express these by means of adequate and consistent practices and policies is indeed everything but straightforward. Nonetheless, employers should be aware of the importance of meeting as far as possible individual wants and expectations. It is also important for employers to be aware of all of the likely pitfalls associated with the design and introduction of inconsistent and unfair reward practices and systems in order to avert these. The task is genuinely challenging and that is why employers must build and develop synergism with other forms of rewards, that is to say flexible benefits and non-financial rewards, in order for them to attain the desired objective.
Longo, R., (2012), When and Why Individuals prefer Financial to Non-Financial Reward; Milan: HR Professionals, [online].

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