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Advanced Performance Management · Performance and reward

Designing Effective Reward Schemes for ACCA APM

Updated 11 October 2026 · Fact-checked

A reward scheme links what employees receive to what the organisation wants from them. Good schemes balance fixed and variable pay, suit the job, and meet Lawler's criteria: the reward is understood, valued, controllable, timely, and measured fairly. To evaluate one in APM, test it against these criteria using the scenario facts.

Understand Designing Effective Reward Schemes

A reward scheme is the set of pay and benefits an organisation uses to attract, keep and motivate people. In APM you are not asked to design payroll. You are asked whether a scheme pushes people towards the strategy and the performance measures the business has chosen.

Fixed pay is salary that does not change with results. It gives security and is easy to run. It does little to push effort towards a target. Variable pay changes with results. Examples are bonuses, commission, profit share and share options. It focuses people on targets, but it can encourage short-term thinking, risk-taking or manipulation of results. Most schemes mix both. The right mix depends on the job. A salesperson whose results depend on their own effort suits a higher variable share. A person whose output is hard to measure suits more fixed pay.

Lawler set out conditions for a scheme to motivate. The common exam list is: the scheme should be understood by those it applies to; motivating, meaning the reward is something people value and the effort is worth it; controllable, meaning the person can influence the measure used; timely, meaning the reward follows the performance soon enough to link the two; and measurable or consistent with objective, fair measures. Many textbooks and examiner reports also add that the scheme should be cost-effective, aligned with organisational goals and ethical and fair. Use the wording your study text uses, and apply each point to the case.

You must also decide who is rewarded. Individual rewards give strong motivation and a clear link between effort and pay. They can harm cooperation and encourage people to protect their own results. Team rewards support cooperation and suit work where output cannot be traced to one person. They risk free-riding, where a weak member gains from others' work, and the link between personal effort and pay is weaker. A mix, such as an individual element plus a team or company element, is common.

Finally, link the scheme to the performance measures. People respond to what is measured. If a bonus uses only profit, expect a focus on profit even at the cost of quality, customers or the long term. Good schemes use a balanced set of measures that reflect the strategy.

Key rules to remember

Lawler criteria (exam checklist)
Understood | Motivating | Controllable | Timely | Measurable and fair
Use as a test list. Some texts present the criteria in slightly different words, so apply the version in your study material and add cost and alignment with strategy if the case calls for it.
Pay mix
Total pay = Fixed pay + Variable pay
The balance matters. More variable pay increases focus on targets and risk transfer to the employee. More fixed pay gives security and stability.
Individual vs team reward
Individual: strong effort link, weaker cooperation. Team: stronger cooperation, free-rider risk
Choose based on whether output can be traced to one person.

How to solve Designing Effective Reward Schemes questions

Use this method for any question that asks you to evaluate, design or recommend changes to a reward scheme.

  1. 1Read the requirement. Note whether you must evaluate, criticise, design or advise, and who the audience is.
  2. 2Identify the strategy and the key performance measures in the scenario. A scheme must support these.
  3. 3List what the current scheme pays: fixed, variable, individual, team, short or long term.
  4. 4Test the scheme against each Lawler criterion in turn. Quote scenario facts for each point, such as a target the manager cannot influence.
  5. 5Assess the fixed and variable mix and whether it is individual or team based, given the nature of the work.
  6. 6Note side effects: short-termism, manipulation, unfairness, cost, or conflict with other objectives.
  7. 7Recommend specific changes, such as adding non-financial measures, deferring part of the bonus or adding a team element.
  8. 8Finish with a clear conclusion that answers the requirement, in the format asked for.

Quickest way: Lawler scan with a verdict

When to use it: Use when time is short and the question asks you to evaluate a scheme in a few marks.

  1. Write the five criteria as a short list in the margin.
  2. Against each, write one scenario fact and a verdict: met or not met.
  3. Add one line on fixed versus variable and one on individual versus team.
  4. Give one or two concrete fixes.
  5. Write up the points in full sentences, one paragraph per criterion.

Common mistakes in Designing Effective Reward Schemes

  • Listing the Lawler criteria without applying them to the scenario.

    Students memorise the list and treat it as a knowledge question.

    Fix: For each criterion, state whether the scheme meets it and quote the fact that proves it.

  • Saying variable pay is always better because it motivates.

    Bonuses are seen as the main tool for performance.

    Fix: Show the trade-off. Variable pay focuses effort but can cause short-termism, manipulation and stress. Fixed pay gives security.

  • Ignoring controllability.

    Students focus on whether the target is hard or easy, not on who can influence it.

    Fix: Ask whether the person can affect the measure. A manager should not be rewarded or penalised for items outside their control, such as allocated head office costs.

  • Recommending team rewards without mentioning free-riding.

    Cooperation sounds positive, so the downside is forgotten.

    Fix: Always state both sides, then choose based on whether individual output can be measured.

  • Giving generic advice that ignores the strategy.

    Students write about reward in general instead of the case.

    Fix: Link each recommendation to the strategy and the measures the business wants to improve.

  • Missing professional skills marks by writing an unstructured answer.

    Time pressure leads to a stream of points.

    Fix: Use headings from the requirement, give a clear recommendation and write to the stated reader.

Worked examples

Example 1

A company pays its sales managers a basic salary plus a bonus based only on this year's sales revenue. The bonus is paid 14 months after the year end, once the audit is complete. Sales managers do not set prices, which head office decides. Evaluate the scheme using the Lawler criteria. (8 marks)

Show the solution
  1. Timely: the bonus is paid 14 months after the year end. The link between effort and reward is weak, so the motivational effect falls. Not met.
  2. Controllable: managers do not set prices. Revenue depends partly on prices, so they cannot control the measure fully. This is partly met, because they control selling effort and customer relationships.
  3. Motivating: the bonus is on top of a salary, which gives security, but its value to managers is unknown. If it is small, it may not justify extra effort. Uncertain.
  4. Measurable: revenue is objective and easy to measure. Met. But it ignores profit, margin and customer satisfaction, so it may reward discounting.
  5. Understood: revenue is a simple measure, so the scheme is probably easy to understand. Met, provided the bonus formula is communicated.
  6. Recommendation: pay the bonus sooner, perhaps with interim payments. Use a measure such as contribution that reflects price effects, and add a non-financial measure such as customer retention.

Answer: The scheme is simple and measurable, but it is weak on timeliness and only partly controllable. It also encourages revenue growth at the expense of margin. Shorten the payment delay and use a broader set of measures.

Example 2

A software firm rewards each developer on individual lines of code written. Projects now suffer from poor teamwork and many bugs. The board is considering a team bonus based on project delivery on time and customer satisfaction. Advise the board on the merits and risks of the change. (8 marks)

Show the solution
  1. Current problem: individual pay on lines of code rewards quantity, not quality. It discourages helping colleagues. This explains the bugs and poor teamwork.
  2. Merit of team bonus: development work is interdependent, so output is hard to trace to one person. A team reward encourages cooperation and shared responsibility.
  3. Merit of the measures: on-time delivery and customer satisfaction link to the strategy and reflect quality, which lines of code ignore.
  4. Risk: free-riding. A weak developer shares the bonus without contributing, which can demotivate strong performers.
  5. Risk: controllability. Delays may come from client changes, so the team may feel the target is unfair. Set targets that adjust for such factors.
  6. Suggested design: keep a fixed salary, add a team bonus for the main share, and add a smaller individual element based on peer review or quality checks. Pay it soon after project completion.

Answer: The team bonus fits interdependent work and better reflects quality and customers. The board should manage free-riding and controllability by keeping a small individual element and adjusting targets for client-driven changes.

Exam tips

  • Always apply criteria to the scenario. A bare list of Lawler points earns few marks.
  • Expect reward questions to sit inside the Section A case study or a 25-mark question, often linked to measures or agency issues. Read for hints about who controls what.
  • Give balanced answers. Show a benefit and a risk for each design choice, then make a clear recommendation.
  • Use the requirement words as headings and write to the reader named, such as the board or the remuneration committee, to earn professional skills marks.
  • Link reward to strategy. Say which behaviour the scheme encourages and whether that is what the business wants.

Practice questions from Performance and reward

Designing Effective Reward Schemes: frequently asked questions

What are the Lawler criteria in APM?

They are conditions a reward scheme should meet to motivate staff. In exam use, the main ones are that the scheme is understood, valued, controllable by the person, timely and measured fairly. Apply each to the case facts.

What is the difference between fixed and variable pay?

Fixed pay does not change with performance, such as a salary. Variable pay changes with results, such as a bonus or commission. Fixed pay gives security, while variable pay focuses effort on targets but can encourage short-term behaviour.

When should I reward teams instead of individuals?

Use team rewards when work is interdependent and individual output is hard to measure. Use individual rewards when each person's contribution is clear. You must mention free-riding for teams and weaker cooperation for individuals.

How do I evaluate a reward scheme in the exam?

Identify the strategy, then test the scheme against each criterion using scenario facts. Comment on the fixed and variable mix and whether it is individual or team based. Finish with specific improvements.