Reward Systems and Legal Issues Overview Reward Systems

Reward Systems and Legal Issues Overview Reward Systems n Legal Issues n

Reward Systems: Overview n Traditional and Contingent Pay (CP) Plans • Reasons for Introducing CP Plans • Possible Problems Associated with CP • Selecting a CP Plan Putting Pay in Context n Pay Structures n

Traditional Pay n Salary and salary increases are based on • Position • Seniority

Contingent Pay (CP) n Salary and salary increases are based on • Job performance Also called: Pay for Performance n If not added to base pay, called: n • Variable pay

Reasons for Introducing CP (1) Performance management is more effective when rewards are tied to results n CP Plans force organizations to: n • Clearly define effective performance • Determine what factors are necessary

Reasons for Introducing CP (2) n n 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 n CP plans project good corporate image n

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 n n n 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 n Traditional • Top-down decision making • Vertical communication • Jobs that are clearly defined n Involvement • Shared decision making • Lateral communications • Loosely defined roles

CP systems for different organizational cultures: n Traditional organizations • Piece rate • Sales commissions • Group incentives n Involvement organizations • Profit sharing • Skill-based pay

B. CP Plans to enhance Strategic Directions: (1) n Employee development • Skill-based pay n Customer service • Competency-based pay • Gainsharing n Overall profit • Executive pay • Profit or stock sharing

B. CP Plans to enhance Strategic Directions: (2) n Productivity • Individual • Group Piece rate n Sales commissions n n Gainsharing n Group incentives n Teamwork • Team sales commissions • Gainsharing • Competency based pay

Putting Pay in Context A reward increases the chance that n n Specific behaviors and results will be repeated, or Employee will engage in new behavior and produce better results

Rewards can include: n n Pay Recognition • Public • Private n n Status Time n n n Trust & Respect Challenge Responsibility Freedom Relationships

How to Make Rewards Work Define and measure performance first and then allocate rewards n Only use rewards that are available n Make sure all employees are eligible n Rewards should be both n • Financial • Non-financial (continued)

How to Make Rewards Work (continued) n Rewards should be: • Visible • Contingent • Timely • Reversible

Pay Structures Job Evaluation n Broad-banding n

Pay Structures An organization’s pay structure Ø Classifies jobs ØInto categories ØBased on their relative worth Ø Is designed by job evaluation methods

Job Evaluation n Method of data collection • Determine the worth of various jobs • Create a pay structure n Consideration of • KSAs required for each job • Value of job for organization • How much other organizations pay

Types of job evaluation methods: Ranking n Classification n Point n

Job evaluation methods: Ranking n n n Create job descriptions Compare job descriptions Rank jobs

Advantages of using Ranking method n n Requires little time Minimal effort needed for administration

Disadvantages of using Ranking method n n Criteria for ranking may not be clear: Distances between each rank may not be equal

Job evaluation methods: Classification n n A series of classes or grades are created Each job is placed within a job class

Advantages of using Classification method n n Jobs can be quickly slotted into structure Employees accept method because it seems valid

Disadvantages of using Classification method n n Requires extensive time and effort for administration Differences between classification levels may not be equal

Job evaluation methods: Point method n n n 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 n n n 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 n Requires extensive administrative • Time • Effort

Does job evaluation method matter? • Fairness • Evaluators Impartial n Objective n

Compensation surveys n Information on • Base pay • All other types of compensation n Conducted in-house or by consultants, such as: www. salary. com or www. haypaynet. com

Broad-banding n n Most commonly used pay structure Pay structure collapses job classes into fewer (≤ 5) categories

Advantages of Broad-banding n n n 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 n Traditional and Contingent Pay (CP) Plans • Reasons for Introducing CP Plans • Possible Problems Associated with CP • Selecting a CP Plan Putting Pay in Context n Pay Structures n

Legal Issues: Overview Performance Management and the Law n Some Legal Principles Affecting PM n Laws Affecting PM n

Performance Management and the Law n 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 n Negligence n Defamation n Misrepresentation n Adverse Impact n Illegal Discrimination n

Employment-at-will n Employment relationship can be ended at any time by • Employer • Employee n Exceptions • Implied contract • Possible violation of legal rights

Negligence If organization documents describe a system and n It is Not implemented as described, n n Employee can challenge evaluation, charging negligence

Defamation n Disclosure of performance information that is • Untrue and • Unfavorable

Misrepresentation n Disclosure of performance information that is • Untrue and • Favorable

Adverse Impact / Unintentional Discrimination n n 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 n n n 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: n n 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 n n 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 n n 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 n. Sex n. Religion n. National Origin n. Age n. Disability status n. Sexual orientation n

Laws in the United Kingdom: n n n 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 n n 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 n 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 n 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

n Characteristics of Legally Sound PM Systems Employees • Performance dimensions and standards are: Clearly defined and explained to the employee, n Job-related, and n Within the control of the employee n • Employees are given Timely information on performance deficiencies and n Opportunities to correct them n • 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 n Some Legal Principles Affecting PM n Laws Affecting PM n

Quick Review Reward Systems n Legal Issues n