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Chapter 10

Reward Systems
and Legal Issues

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1.pdf

P e r f o r m a n c e m a n ag e m e n t t h i r d e d i t i o n

h e r m a n ag u i n i s www.pearsonhighered.com

ISBN-13: ISBN-10:

978-0-13-255638-5 0-13-255638-3

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Overview

Reward Systems
Legal Issues

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Reward Systems: Overview

Traditional and Contingent Pay (CP) Plans

Reasons for Introducing CP Plans

Possible Problems Associated with CP

Selecting a CP Plan

Putting Pay in Context
Pay Structures

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Traditional Pay

Salary and salary increases are based on

Position

Seniority

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Contingent Pay (CP)

Salary and salary increases are based on:

Job performance

Also called: Pay for Performance
If not added to base pay, called:

Variable pay

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Reasons for Introducing CP (1)

Performance management is more effective when rewards are tied to results.
CP Plans force organizations to:

Clearly define effective performance

Determine what factors are necessary

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Reasons for Introducing CP (2)

Supervisors and employees are better able to understand what really matters.
CP plans enhance employee motivation to accomplish goals that match organizational needs.

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Reasons for Introducing CP (3)

CP plans help to recruit and retain top performers.
CP plans projects good corporate image.

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CP Plans Help Improve Motivation When:

Employees see clear link between their efforts and resulting performance. (Expectancy)

Employees see clear link between their performance level and rewards received. (Instrumentality)

Employees value the rewards available. (Valence)

motivation =

expectancy x instrumentality x valence

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Possible Problems Associated with CP

Poor performance management system
Rewarding counterproductive behavior

(Rewarding A while hoping for B)

Rewards are not considered significant
Managers are not accountable

(The reward becomes the driver)

Extrinsic vs. intrinsic motivation
Disproportionately large rewards for executives

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Selecting a CP Plan: Issues to Consider

Culture of organization

Strategic direction of organization

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Culture of Organization: Types of Organizations

Traditional

Top-down decision making

Vertical communication

Jobs that are clearly defined

Involvement

Shared decision making

Lateral communications

Loosely defined roles

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CP Systems for Different Organizational Cultures

Traditional organizations

Piece rate

Sales commissions

Group incentives

Involvement organizations

Profit sharing

Skill-based pay

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CP Plans to Enhance
Strategic Directions

Employee development

Skill-based pay

Customer service

Competency-based pay

Gainsharing

Overall profit

Executive pay

Profit or stock sharing

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CP Plans to Enhance Strategic Directions (1)

Productivity

Individual

Piece rate

Sales commissions

Group

Gainsharing

Group incentives

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CP Plans to Enhance Strategic Directions (2)

Teamwork

Team sales commissions

Gainsharing

Competency-based pay

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Putting Pay in Context

A reward increases the chance that:

Specific behaviors and results will be repeated, or
Employee will engage in new behavior and produce better results.

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Rewards Can Include:

Pay
Recognition

Public

Private

Status
Time
Sabbaticals

Trust and Respect
Challenge
Responsibility
Freedom
Relationships

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How to Make Rewards Work

Define and measure performance first and then allocate rewards.
Only use rewards that are available.
Make sure all employees are eligible.
Rewards should be both

Financial

Nonfinancial

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How to Make Rewards Work (Continued)

Rewards should be:

Visible

Contingent

Timely

Reversible

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Pay Structures

Job Evaluation
Broad-banding

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Pay Structures

An organization’s pay structure

Classifies jobs

Into categories

Based on their relative worth

Is designed by job evaluation methods

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Job Evaluation

Method of data collection

Determine the worth of various jobs

Create a pay structure

Consideration of

KSAs required for each job

Value of job for organization

How much other organizations pay

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Types of Job Evaluation Methods

Ranking
Classification
Point

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Ranking

Create job descriptions
Compare job descriptions
Rank jobs

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Advantages of Using Ranking Method

Requires little time
Minimal effort needed for administration

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Disadvantages of Using Ranking Method

Criteria for ranking may not be clear.
Distances between each rank may not be equal.

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Classification

A series of classes or grades are created.
Each job is placed within a job class.

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Advantages of Using Classification Method

Jobs can be quickly slotted into structure
Employees accept method because it seems valid.

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Disadvantages of Using Classification Method

Requires extensive time and effort for administration
Differences between classification levels may not be equal

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Point Method

Identify compensable factors (job characteristics)
Scale factors (e.g. on a scale of 1 through 5)
Assign a weight to each factor so the sum of the weights for all factors = 100 percent

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Advantages of Using Point Method

Establishes worth of each job relative to all other jobs within organization
Comprehensive measurement of relative worth of each job in organization
Easy to rank jobs when total points are known for each job

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Disadvantages of Using Point Method

Requires extensive administrative

Time

Effort

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Does Job Evaluation Method Matter?

Fairness

Evaluators

Impartial

Objective

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Compensation Surveys

Information on

Base pay

All other types of compensation

Conducted in-house or by consultants, such as:

www.salary.com or www.haypaynet.com

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Broad-Banding

Most commonly used pay structure
Pay structure collapses job classes into fewer (less than five) categories

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Advantages of Broad-Banding

Provides flexibility in rewarding people
Reflects changes in organization structure
Provides better base for rewarding growth in competence
Gives more responsibility for pay decisions to managers
Provides better basis for rewarding career progression

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Reward Systems: Summary

Traditional and Contingent Pay (CP) Plans

Reasons for Introducing CP Plans

Possible Problems Associated with CP

Selecting a CP Plan

Putting Pay in Context
Pay Structures

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Legal Issues: Overview

Performance Management and the Law
Some Legal Principles Affecting PM
Laws Affecting PM

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Performance Management and the Law

Performance management systems are usually legally sound if…

Procedures are standardized

Same procedures are used with all employees

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Some Legal Principles Affecting PM: Overview

Employment-at-will
Negligence
Defamation
Misrepresentation
Adverse Impact
Illegal Discrimination

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Employment-at-Will

Employment relationship can be ended at any time by:

Employer

Employee

Exceptions:

Implied contract

Possible violation of legal rights

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Negligence

If organization documents describe a system

and

It is not implemented as described,

Employee can challenge evaluation, charging negligence.

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Defamation

Disclosure of performance information that is

Untrue and

Unfavorable

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Misrepresentation

Disclosure of performance information that is

Untrue and

Favorable

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Adverse Impact / Unintentional Discrimination

PM system has unintentional impact on a protected class.
Organization must demonstrate:

A specific KSA is a business requirement for the job

All affected employees are evaluated in the same way

Organization should review ongoing performance score data by protected class to implement corrective action as necessary.

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Illegal Discrimination or Disparate Treatment

Raters assign different scores to employees based on factors that are NOT related to performance.
Employees receive different treatment as result of such ratings.
Employees can claim they were intentionally and illegally treated differently due to their status.

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Employee Claim of Illegal Discrimination

Direct evidence of discrimination, or
Evidence regarding the following:

Membership in protected class

Adverse employment decision

Performance level deserved reward/different treatment

How others were treated (not in protected class)

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Employer Response to Claim of Illegal Discrimination

Legitimate and nondiscriminatory reason for action
Related to performance

Note: Good performance management system and subsequent performance-related decision, used consistently with all employees, provide defense

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Difference Between
Legal and Illegal Discrimination

LEGAL discrimination discriminates among employees based on their level of performance.

ILLEGAL discrimination is based on variables that should not usually be related to performance.

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Laws Affecting PM

During past few decades, several countries have passed laws prohibiting discrimination based on:

Race or Ethnicity
Sex
Religion
National Origin
Age
Disability status
Sexual orientation

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Laws in the United Kingdom

Equal Pay Act of 1970
Race Relations Act of 1976
Sex Discrimination Act of 1975
Disability Discrimination Act of 1995
Employment Equality (Sexual Orientation) Regulations 2003
Employment Equality (Religion or Belief) Regulations 2003

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Laws in the United States of America

Equal Pay Act of 1963
Civil Rights Act of 1964
Age Discrimination in Employment Act of 1967 (as amended in 1986)
Americans with Disabilities Act of 1990

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Characteristics of Legally Sound PM Systems

Organization:

The system is formally explained and communicated to all employees.

The system includes a formal appeals process.

Procedures are standardized and uniform for all employees within a job group.

The system includes procedures to detect potentially discriminatory effects or biases and abuses in the system.

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Characteristics of Legally Sound PM Systems

Management

Supervisors are provided with formal training and information on how to manage the performance of their employees.

Performance information is gathered from multiple, diverse, and unbiased raters.

The system includes thorough and consistent documentation including specific examples of performance based on first-hand knowledge.

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Characteristics of Legally Sound PM Systems

Employees

Performance dimensions and standards are:

Clearly defined and explained to the employee,

Job-related, and

Within the control of the employee.

Employees are given

Timely information on performance deficiencies and

Opportunities to correct them.

Employees are given a voice in the review process and treated with courtesy and civility throughout the process.

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Legal Issues: Summary

Performance Management and the Law
Some Legal Principles Affecting PM
Laws Affecting PM

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Quick Review

Reward Systems
Legal Issues

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Herman Aguinis, University of Colorado at Denver

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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