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
A.
B.
Selecting a CP Plan: Issues to
consider
Culture of organization
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
 Sales commissions


Gainsharing
 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
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)
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

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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:
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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



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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
