Reward Systems and Legal Issues

Overview

 Reward Systems
 Legal Issues
 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
 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 (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
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
Reasons for Introducing CP (3)
 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 valence
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
 Selecting a CP Plan: Issues to
consider
A. Culture of organization
B. 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:(1)
 Employee development
• Skill-based pay
 Customer service
• Competency-based pay
• Gainsharing
 Overall profit
• Executive pay
• Profit or stock sharing
B. CP Plans to enhance Strategic
Directions:(2)
 Productivity
• Individual • Group
 Piece rate  Gainsharing
 Sales commissions  Group

incentives
 Teamwork
• Team sales commissions
• Gainsharing
• Competency based pay
 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  Trust &
 Recognition Respect
• Public  Challenge
• Private  Responsibility
 Status  Freedom
 Time  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)
 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 structure
 Classifies jobs

Into categories
 Based on their relative
worth
 Is designed by job evaluation
methods
 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
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
 Most commonly used pay
structure
 Pay structure collapses job
classes into fewer (≤ 5)
categories
 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
 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
 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
 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
 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
 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
 Legal Issues: Summary
 Performance Management
and the Law
 Some Legal Principles
Affecting PM
 Laws Affecting PM
 Quick Review
 Reward Systems
 Legal Issues