Chapter 10

Reward Systems
and Legal Issues

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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  Trust and
 Recognition Respect
• Public  Challenge
• Private  Responsibility
 Status  Freedom
 Time  Relationships
 Sabbaticals

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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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publishing as Prentice Hall
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