Reward Systems and Legal Issues {Lecture Notes}

Prentice Hall, Inc. © 2006

Herman Aguinis, University of Colorado at Denver

Reward Systems and Legal IssuesReward Systems and Legal IssuesOverviewOverview

• Reward Systems• Legal Issues



Reward Systems: OverviewReward 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



Traditional PayTraditional Pay

• Salary and salary increases are based on– Position– Seniority



Contingent Pay (CP)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



Reasons for Introducing CPReasons for Introducing CP

• 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

• CP plans help to recruit and retain top performers• CP plans project good corporate image



CP plans help improve motivation when: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



Possible Problems Associated with CPPossible Problems Associated with CP

• Poor performance management system• Rewarding counterproductive behavior• Insignificant rewards• The reward becomes the driver • Extrinsic vs. intrinsic motivation• Disproportionately large rewards for executives



Selecting a CP Plan: Issues to considerSelecting a CP Plan: Issues to consider

A. Culture of organization

B. Strategic direction of organization



A. Culture of organization: A. Culture of organization: Types of organizationsTypes of organizations

• Traditional– Top-down decision making– Vertical communication– Jobs that are clearly defined

• Involvement– Shared decision making– Lateral communications– Loosely defined roles



CP systems for different organizational cultures:CP systems for different organizational cultures:

• Traditional organizations– Piece rate– Sales commissions– Group incentives

• Involvement organizations– Profit sharing– Skill-based pay



B: CP Plans to enhance Strategic Directions:B: 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

• Productivity– Individual

• Piece rate• Sales commissions

– Group• Gainsharing• Group incentives

• Teamwork– Team sales commissions– Gainsharing– Competency based pay



Putting Pay in ContextPutting 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



Rewards can include:Rewards can include:

• Pay• Recognition

– Public– Private– Status

• Time

• Trust & Respect• Challenge• Responsibility• Freedom• Relationships



How to Make Rewards WorkHow 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– Non-financial

(continued)



How to Make Rewards Work How to Make Rewards Work (continued)(continued)

• Rewards should be:– Visible– Contingent– Timely– Reversible



Pay StructuresPay Structures

• Job Evaluation• Broad-banding



Pay structuresPay structures

An organization’s pay structureClassifies jobs

Into categoriesBased on their relative worth

Is designed by job evaluation methods



Job evaluationJob evaluation

• Method of data collection– Determine the worth of various jobs to– Create a pay structure

• Consideration of – KSAs required for each job– Value of job for organization– How much other organizations pay



Types of job evaluation methods:Types of job evaluation methods:

• Ranking• Classification• Point



Job evaluation methods: Job evaluation methods: RankingRanking

• Create job descriptions• Compare job descriptions • Rank jobs



Advantages of using Ranking methodAdvantages of using Ranking method

• Requires little time• Minimal effort needed for administration



Disadvantages of using Ranking methodDisadvantages of using Ranking method

• Criteria for ranking may not be clear:• Distances between each rank may not

be equal



Job evaluation methods: Job evaluation methods: ClassificationClassification

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



Advantages of using Classification methodAdvantages of using Classification method

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

valid



Disadvantages of using Classification methodDisadvantages of using Classification method

• Requires extensive time and effort for administration

• Differences between classification levels may not be equal



Job evaluation methods:Job evaluation methods: Point method Point method

• Identify compensable factors (job characteristics)• Scale factors (e.g. on a scale of 1 – 5)• Assign a weight to each factor so the sum of the

weights for all factors = 100%



Advantages of using Point methodAdvantages of using Point method

• Establish 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



Disadvantages of using Point methodDisadvantages of using Point method

• Requires extensive administrative– Time– Effort



Does job evaluation method matter?Does job evaluation method matter?

– Fairness– Evaluators

• Impartial• Objective



Compensation surveysCompensation 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



Broad-banding:Broad-banding:

Pay structure collapses job classes into fewer categories

Advantages:• 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



Reward Systems: SummaryReward 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



Legal Issues: OverviewLegal Issues: Overview

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



Performance Management and the LawPerformance Management and the Law

• Performance management systems are legally sound, if they are fair:– Procedures are standardized– Same procedures are used with all employees



Some Legal Principles Affecting PM:Some Legal Principles Affecting PM:OverviewOverview

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



Employment-at-willEmployment-at-will

• Employment relationship can be ended at any time by– Employer– Employee

• Exceptions– Implied contract– Possible violation of legal rights



NegligenceNegligence

• If organization documents describe a system

and• It is Not implemented as described,• Employee can challenge evaluation,

charging negligence



DefamationDefamation

• Disclosure of performance information that is– Untrue and– Unfavorable



MisrepresentationMisrepresentation

• Disclosure of performance information that is– Untrue and– Favorable



Adverse Impact / Unintentional DiscriminationAdverse Impact / Unintentional Discrimination

• PM system has unintentional impact on a protected class

• Organization must demonstrate:– 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



Illegal Discrimination or Disparate TreatmentIllegal 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



Employee claim of illegal discrimination: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)



Employer response to claim of illegal discriminationEmployer response to claim of illegal discrimination

• Legitimate and non-discriminatory reason for action• Related to performance

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



Laws Affecting PM: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



Laws in the United Kingdom: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



Laws in the United States of AmericaLaws 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



Characteristics of Legally Sound PM SystemsCharacteristics 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




• 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




• 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



Legal Issues: SummaryLegal Issues: Summary

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

Education

Reward Systems and Legal Issues {Lecture Notes}