Employee reward system refers to programs set up by a company to reward performance and motivate employees on individual and / or group levels. They are considered separate from salary but may be monetary in nature or otherwise have a cost to the company. A reward system consists of financial rewards (fixed and variable pay) and employee benefits, which together comprise total remuneration. The system also incorporates non financial rewards (recognition, praise, achievement, responsibility and personal growth) and, in many cases, performance management processes.

Employees are motivated by both intrinsic and extrinsic rewards, to be effective, the reward system must recognize both sources of motivation. All reward system is based on the assumptions of attracting, retaining and motivating people. Financial rewards are an important component of the reward system, but there are other factors that motivate employees and influence the levels of performance.

An increase in reducing payroll costs would demotivated the employees thus the organizational objectives would not be achieved due to less work force. Due to the reduction of payroll costs some employers will be forced to use their profitable units to cover loses of uneconomical units.

The reward practices and policies are linked through an employees’ point of view where the reward management should take into account of the aspirations, expectations and needs of employees as stakeholders in the organization. Considerations have also to be given to the needs or views of other stakeholders, especially owners in the private sector and governments, local authorities and trustees elsewhere.

The challenge that the managers face during performance and reward management is to find a way of doing performance management that will make sense to both the employer and the employees, what they need to do their job and