The Role of Rewards

Rewards play a critical role in a firm’s internal labor market dynamics. We use the term rewards to mean more than money. Rewards include compensation, benefits, and career-related opportunities and experiences. Understanding how those elements come together to energize internal labor market dynamics is essential to managing them successfully.

Rewards affect more than employees’ motivation on the job. They affect who is in the workforce: both the kinds of people attracted to the organization and the kinds who stay with it. Rewards also influence the way human capital develops in an organization. Indeed, rewards and development are linked inextricably. For one thing, development opportunities are rewards in themselves: a form of in-kind payment. Development expands an individual’s capabilities and enhances his or her prospects for future earnings. If you doubt the financial significance of this statement, think about how often people take a lower-paying job because of the experience or special training opportunities it provides. Employment in the military is a classic example.

Rewards also influence employees’ choices about their learning and development. They signal what an organization ultimately values. Let’s recall the manufacturing company discussed in Chapter 1. That company knew that it needed technical specialists to ensure product quality, and it extolled their contributions. However, capable engineers, observing how much farther and faster generalists progressed, could not misconstrue what the company’s actions said about its values. They did not need to look at their colleagues’ paychecks to learn the truth. They only had to look at where individuals were moving in the career hierarchy. That was why so many tried to get on the generalist development track. The company rewarded generalists, and that was precisely what it got, to its chagrin.

Over time, an organization becomes what it rewards. Thus, any attempt to measure and model the dynamics of an internal labor market must include a careful evaluation of the drivers of rewards. Prices and quantities are always linked. Translated to the terms of an internal labor market, this means that rewards (price) and labor flows (quantities) define the system together.