Reward Systems and Legal Issues Overview

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Reward Systems and Legal IssuesOverview

• 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 project 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

1. Culture of organization
2. Strategic direction of organization

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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

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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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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

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B. CP Plans to enhance Strategic Directions(2)

• Productivity
• Individual
• Piece rate
• Sales commissions
• Teamwork
• Team sales commissions
• Gainsharing
• Competency based pay

• Group
• Gainsharing
• Group incentives

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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
• Recognition
• Public
• Private
• Status
• Time

• Trust Respect
• Challenge
• Responsibility
• Freedom
• Relationships

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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
• Non-financial
• (continued)

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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 organizations 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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Job evaluation methods 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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Job evaluation methods 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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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

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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

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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 (
  5) 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 legally sound,
  if they are fair
• Procedures are standardized
• Same procedures are used with all employees

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Some Legal Principles Affecting PMOverview

• 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
• 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 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

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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