Unit- 10.Reward system and legal issues

Herman Aguinis, University of Colorado at Denver

Reward Systems and

Legal Issues

Prof. Preeti BhaskarSymbiosis Centre for Management

Studies, NOIDA

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

Prentice Hall, Inc. © 2006

Traditional Pay

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


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 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:

• 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

valencePrentice Hall, Inc. © 2006

Possible 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 consider

A. Culture of organizationB. Strategic direction of

organization


A. 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


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:

• 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

payPrentice Hall, Inc. © 2006

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


Rewards can include:

• Pay• Recognition

– Public– Private– Status

• Time

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


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– Non-financial

(continued)Prentice Hall, Inc. © 2006

How to Make Rewards Work (continued)

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


Pay Structures

• Job Evaluation• Broad-banding


Pay structures

An organization’s pay structureClassifies jobs

Into categoriesBased on their relative worth

Is designed by job evaluation methods


Job 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:

• Ranking• Classification• Point


Job evaluation methods: Ranking

• Create job descriptions• Compare job descriptions • Rank jobs


Advantages of using Ranking method• Requires little

time• Minimal effort

needed for administration


Disadvantages of using Ranking method

• Criteria for ranking may not be clear:

• Distances between each rank may not be equal

Job evaluation methods: Classification

• A series of classes or grades are created

• Each job is placed within a job class


Advantages of using Classification method

• Jobs can be quickly slotted into structure

• Employees accept method because it seems valid


Disadvantages of using Classification method

• Requires extensive time and effort for administration

• Differences between classification levels may not be equal


Job evaluation methods: 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 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 method

• Requires extensive administrative– Time– Effort

Does job evaluation method matter?

– Fairness– Evaluators

•Impartial•Objective


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


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: 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: Overview

• Performance Management and the Law

• Some Legal Principles Affecting PM

• Laws Affecting PM


Performance 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:Overview

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

Discrimination


Employment-at-will

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

• Exceptions– Implied contract– Possible violation of legal rights


Negligence

• If organization documents describe a system

and• It is Not implemented as

described,• Employee can challenge

evaluation, charging negligence


Defamation

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


Misrepresentation

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


Adverse 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 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:

• 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 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:

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:

• 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 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 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: Summary

• Performance Management and the Law

• Some Legal Principles Affecting PM

• Laws Affecting PM


Education

Unit- 10.Reward system and legal issues