Until a few years ago, the terms “compensation” and “compensation and benefits” were used commonly. But more recently, these terms have been replaced with “rewards” and “total rewards.” A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of an employment relationship. An employee’s tangible returns include cash compensation (i.e., base pay, cost-of-living and merit pay, short- and long-term incentives) and benefits (i.e., income protection, tuition reimbursement).

In addition, employees also receive intangible or relational returns, which include recognition and status, employment security, challenging work, and learning opportunities. Not all types of returns are directly related to performance management systems. Some returns are based on seniority, as opposed to performance.

A “traditional” approach in implementing reward systems is to reward employees the positions they fill and not necessarily by how they do their work. In other words, employees are rewarded for filling a specific slot in the organizational hierarchy. In such traditional pay systems, one’s job directly determines pay and indirectly determines benefits and incentives received. In a traditional reward system, each of these positions would have a minimum, midpoint, and the maximum base salary.

Contingent pay (CP), also called pay for performance, means that individuals are rewarded based on how well they perform on the job. Thus, employees receive increases in pay based wholly or partly on job performance. Organizations are embracing CP plans because performance management systems are more effective when results are directly tied to the reward system.

Performance management systems that are fair and acceptable to employees are also legally sound. A basic principle that guides the design of a fair system is that procedures are standardized and that the same procedures are used with all employees. This is also the basic principle that underlies the implementation of performance management systems that are legally sound.