The Use of Reward and Incentive Systems: A Case Study of McDonald's

Updated on May 5, 2018
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Hanh has a Master's Degree in Economics. She enjoys researching and writing about economic and business issues.

1. Introduction

Human resource management is an indispensable aspect of business management, and an organisation will incur a boost in productivity and efficiency if it can bring into line its human resource management strategy, business strategy and the overall corporate level strategy (Schuler & Jackson, 2014). Nonetheless, there is no one-size-fits-all key to success in terms of prescribing the right scheme for the practice of people management; in fact, different companies design their own policy, and even within the same company, each department can implement their own technique (Schuler & Jackson, 1987). To be more specific, companies can utilize different methods to monitor and manage the performance of employees in different positions and from different educational, racial, etc. backgrounds. Among different methods to motivate employees and enhance business competence, reward and incentive systems are often utilized by business managers to achieve their corporate goals of raising the company’s profits.

McDonald's, in Australia, faces challenges in implementing its reward and incentive system due to limited financial resources and its business strategy of cost-effective leadership, aiming to lower its operating costs to remain competitive. This essay starts by providing an overview of the fast food industry and McDonald's in Australia. A literature review of the use of financial and non-financial rewards, and the relationship between reward, motivation and business outcome follows. McDonald's’ current reward and incentive strategy is then discussed and evaluated. It is argued that the rewards and incentives system, both intrinsic and extrinsic has positive impacts on employees’ performance and business results for businesses in general and McDonald's in particular. Nonetheless, other human resource practices are also beneficial for the company.

2. Overview of McDonald's in Australia

With the change in Australian people’s lifestyles, particularly dining habits, and new job requirements, the fast food industry in Australia has expanded rapidly since the end of the 20th century (Lyons, 1999). Beliefs and perceptions regarding the consumption and health risks of fast food have also been altered (Dunn, Mohr, Wilson, & Wittert, 2008). The fast food industry, which serves foods such as burgers, pizza, sandwiches, salads, juices, desserts and confectionery, is characterized by a low level of capital, and labor costs constitute the majority of daily operating costs. According to a report by IBIS World, this industry’s revenue is forecast to achieve an annualized growth rate of 3.9% over the five years through 2016-17, to reach $19.3 billion(Fast Food Services in Australia, 2017).

In Australia, in 2015, McDonald was the leading fast food brand, followed by Subway Systems Australia. Australia had more than 905 McDonald's restaurants, comparable with the US in terms of the number of McDonald’s restaurants per capita, employing more than 90,000 people. The majority of its workforce is young people. The company attributed its success to its efforts to innovate and tailor its products to serve increasingly diverse demands of customers with initiatives such as Create your Taste, The Corner, all-day and gourmet breakfasts at selected stores, etc. (Corporate Responsibility and Sustainability, 2012). As competition in the food industry is on the rise and customers have also become more selective with their food choice, paying much more attention to the nutritional values and convenience (Fast Food in Australia, 2016), McDonald's is required to offer suitable reward and performance enhancement incentives to improve the quality of its workforce, which in turn can help to improve the quality of customer services and efficiency. As customers place higher emphasis on their time and the quality of their experience, service has become the new important criteria when consumers decide on the choice of restaurants (Talbot, 2006).

3. Literature review

3.1. Definitions of rewards and incentives

Bussin and Van Rooy (2014) describe total rewards as the consumption of the value proposition that employers offer to the employee. In addition, total rewards can be divided into financial and non-financial rewards. According to Schlechter, Hung, and Bussin (2014), financial rewards included monetary incentives such as compensation, benefits, performance, and talent management, while non-financial rewards refer to non-monetary incentives such as development and career opportunities, work/life balance, and social activities in the workplace…It has long been believed that financial incentives are highly effective in changing short-term behavior but non-monetary incentives have much more long-lasting effects.

It has been hypothesized that people react to various kinds of incentives and stimuli: therefore, rewards and incentives encourage employees to change their current behaviors and work harder to achieve certain targets associated with specific rewards (Schneider, 2014). Rewards are categorized into two groups based on their tangible vs. intangible natures and the source of the rewards: intrinsic or extrinsic. Intrinsic rewards are those that come from the inside of an individual, his or her innate preferences or liking towards a specific activity, enabling him or her to gain pleasure from doing and completing the activity. Extrinsic rewards, on the other hand, come from outside sources, including motivating factors such as financial payment or compliments (Levesque, 2014).

In order to encourage and motivate employees, the leaders or executive managers of the organization also need to establish a fair and objective performance measurement system. If employees suspect that their performances are assessed based on unfair judgement because of personal favorites, race, gender, etc., they will be discouraged. Individuals will also compare the rewards they have received against the rewards of those with similar efforts, and against the inputs they have contributed to the company. If they sense injustice, they might cease to make further efforts in the future (Noe, Hollenbeck, Gerhart, & Wright, 2016). Moreover,an effective award system will improve a company’s business environment by rewarding and punishing employees fairly, and eliminating opportunities for shady behaviors (Kumar & Suresh, 2009).

Definitions of rewards and incentives

Author(s)
Year
Definitions of rewards and incentives
Bussin and Van Rooy
2014
- The consumption of the value proposition that employers offer to the employee
Schlechter, Hung, and Bussin
2014
- Monetary incentives (compensation, benefits, performance, and talent management)
 
 
- Non-financial rewards (development and career opportunities, work/life balance, and social activities in the workplace...)
Schneider
2014
- Intrinsic and extrinsic rewards
Levesque
2014
- Intrinsic rewards come from the inside of an individual, his or her innate preferences
 
 
- Extrinsic rewards come from outside sources, including financial payment or compliment

3.2. The relationship between rewards and business outcomes

Human capital is vital to business outcome and managers have long understood that human resource management can enhance a company’s efficiency and create value (Schuler & Jackson, 2014). Therefore, decisions such as how much to pay, how to measure performance, and which rewards and punishment schemes should be used are crucial in overall strategic business scheme. Although money has always been regarded as one of the most effective motivators and a way to bring an expected outcome almost immediately, non-financial rewards can also be a powerful tool to improve employee’s morale and performance. For example, Laakso (2012) makes the case that if the managers know how to appropriately give recognition to an employee in front of other employees, they not only motivate and boost that employee’s ego and performance but also convey their supports for that type of behavior and inspire other employees to follow suit. However, if done inappropriately, the managers will trigger jealousy and make other employees feel inferior or embarrassed, thus backfiring the reward’s intention (Laakso, 2012).

Brown and West (2005) examined customer service organisations and found a strong connection between reward practices such as variable pay and recognition and the level of employee engagement and customer service performance. Employees who believe that their efforts are recognized and complimented by the company’s executives obtain higher job satisfaction. Satisfied employees have a greater tendency to stick around and contribute more to the organisation.

A study by Edirisooriya (2014) investigating how employee rewards influence employee performance in ElectriCo, a state-own enterprise in Sri Lanka confirmed a positive relationship between extrinsic rewards and intrinsic rewards and the performance of the company’s employees. In particular, the employees responded very considerably to such non-monetary incentives as recognition, career advancement, and learning opportunities, as well as monetary incentives including pay, bonuses, and benefits (Edirisooriya, 2014). Chijioke and Chinedu (2015) also found a connection between rewards and employee performance. Their empirical research also highlighted that intrinsic and extrinsic rewards have different impacts on employee performance. Specifically, the existence of intrinsic rewards such as recognition, opportunities for growth, challenging tasks, etc. improve the performance of employees and can sustain it over time. On the other hand, extrinsic rewards such as salaries, office space, cash bonus, etc. can help the company to attract employees but cannot keep them for a long time, leading to high turnover rates (Chijioke & Chinedu, 2015).

4. McDonald’s current practice and evaluation

According to McDonald's’ stated policy, the company’s pay and rewards program is based on the employees’ performance, or in other words, the better their performance is, the greater their pay opportunities become (Pay & Benefit, n.d.). At the company, employees are offered a base pay, which is the fixed amount of cash compensation in exchange for their work. McDonald’s base pay is comparable with other companies’ rates for employees doing similar types of job and it is commensurate to the particular employee’s experience, skills, and performance over time. The company also offers short-term financial incentives, which entitle the employees to a certain amount of cash payment on a yearly basis based on their performance and the business’s profitability. In terms of long-term incentives, McDonald's gives stock to employees who satisfy the company’s criteria to make them become more personally responsible for McDonald's' productivity and financial performance and more engaged with the company’s business activities. The company also implements a car program which allows employees to use a company car for free or at a discounted rate. The employees are also offered other benefits such as insurance. As for non-monetary incentives, McDonald's runs several recognition programs to show gratitude and compliment excellent performers. These include the Presidents' Award and the Circle of Excellence Award (Total Compensation, n.d.).

Although often associated with the image of a typical low skill/low pay environment, McDonald's has tried to improve its work environment and change that impression. For example, during the company’s recruitment advertising campaigns, such as ‘Not bad for a McJob’, the company designed an attractive reward system for its employees, emphasizing the use of both financial and non-financial incentives including flexible working hours for parents, higher pay, health benefits, promotion, and opportunities for personal advancement (Sweney, 2006). The company also hired Professor Adrian Furnham to carry out a survey among McDonald’s employees in all corporation about their perceptions on the company’s reward and employment practices. The results showed that among hourly paid staff, 77 per cent agreed that their pay and benefits are competitive; 80 per cent perceived that they are respected and recognized for their work; and 85 per cent are satisfied with their personal development and growth opportunities. The survey also revealed that in the McDonald's stores with the most satisfied employees, sales and staff retention rate were also higher (Thomas, 2006).

5. Conclusion

It is argued that the reward system undoubtedly has significant impacts on employees’ performance and hence the business’s success. While the extrinsic incentives can give an immediate boost to employees’ accomplishment, the intrinsic incentives are also very crucial since they can positively improve the company’s work environment and employees’ work ethics (Foss & Laursen, 2003). In the case of McDonald's, the company utilized both monetary and non-monetary incentives to motivate its workers and increase its profitability. Nonetheless, since the company’s main business strategy is effective cost leadership, and one of its main competitive edges is the lower product price compared to other companies, the success of these incentives might be quite limited. Hence, in the long term, the company and its employee can also benefit from other employee-friendly HR policies and practices such as human resource automation, innovation, on-the-job training and development, and organisational culture development.

References

Barney, J., & Wright, P. (1998). On becoming a strategic partner: The role of human resources in gaining competitive advantage. Human Resource Management.

Chijioke, N., & Chinedu, E. (2015). Effect of Rewards on Employee Performance in Organizations: A Study of Selected Commercial Banks in Awka Metropolis . European Journal of Business and Management, 7(4), 2222-2839. Retrieved May 2017, from http://iiste.org/Journals/index.php/EJBM/article/viewFile/20242/20606

(2012). Corporate Responsibility and Sustainability. McDonald in Australia. Retrieved from https://mcdonalds.com.au/sites/mcdonalds.com.au/files/CH2_McDonalds_CR%26S_OurBusiness.pdf

Dunn, Mohr, Wilson, & Wittert. (2008). Beliefs about fast food in Australia: A qualitative analysis. Appetite, 51(2), 331–334.

Edirisooriya, W. (2014). Impact of Rewards on Employee Performance: With Special Reference to ElectriCo. International Conference on Management and Economics.

(2016). Fast Food in Australia. Euromonitor International.

(2017). Fast Food Services in Australia. IBISWorld.

Foss, N., & Laursen, K. (2003). New human resource management practices, complementarities and the impact on innovation performance. Cambridge J Econ.

Knight, G., & Cavusgil, S. (2004). Innovation, Organizational Capabilities, and the Born-Global Firms. Journal of International Business Studies, 124-141.

Kumar, S., & Suresh, N. (2009). Operations Management. New Delhi: New Age International (P) Ltd., Publishers.

Laakso, L. (2012). The impact of financial and non- financial rewards on employee motivation. Bachelor’s thesis of Turku University of Applied Sciences. .

Levesque, R. (Ed.). (2014). Intrinsic and Extrinsic Motivation. Springer New York.

Noe, R., Hollenbeck, J., Gerhart, B., & Wright, P. (2016). Fundamentals of Human Resource Management. New York: McGraw-Hill Education.

Olsen, M. D., Ching-Yick Tse, E., & West, J. J. (1998). Strategic management in the hospitality industry. New York: John Wiley and Sons.

Pay & Benefit. (n.d.). Retrieved May 2017, from McDonalds' Corporation Website: https://source-dev.mcdonalds.com/us/en-us/careers/benefits.html

Pay & Rewards. (n.d.). Retrieved May 2017, from http://corporate.mcdonalds.com/mcd/corporate_careers/benefits/highlights_of_what_we_offer/pay_and_rewards.html

Robbins, S., & Coulter, M. (2012). Management (11th ed.). Pearson Education, Inc.

Schneider, S. (2014). Managing across cultures . Pearson Education Limited.

Schuler, & Jackson. (2014). Human resource management and organizational effectiveness: yesterday and today. Journal of Organizational Effectiveness: People and Performance, 33-55.

Sweney, M. (2006, April 20). Not bad for a McJob? Retrieved from The Guardian: https://www.theguardian.com/media/organgrinder/2006/apr/20/post3

Talbot, B. (2006). The power of personal service: Why it matters what makes it possible how it creates competitive advantage. Cornell Hospitality Industry Perspectives, 6-13.

Thomas, D. (2006, June 13). McDonald's to boost basic skills of staff. Retrieved from Personnel Today.

Total Compensation. (n.d.). Retrieved May 2017, from McDonald Corporation: http://corporate.mcdonalds.com/mcd/corporate_careers/benefits.html

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    • Larry Fish profile image

      Larry W Fish 

      4 months ago from Raleigh

      McDonald's has changed their ways a lot in the way they treat their employees. However, if you watch the movie, Founder, you will see how McDonald's started and how the McDonald brothers were treated so badly and actually pushed out of the business that was started because of them.

    • aesta1 profile image

      Mary Norton 

      5 months ago from Ontario, Canada

      This is a good study. As you said, incentives have different effects on individual employees and the type of company as well. I think the best is for managers to be more cognizant of what is happening in the company and what motivates their staff. Thisway, they can evolve their own changes.

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