The
Organizational
Reward
System
Chapter 12
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Chapter Overview
• Defining the System
• Selection of Rewards
• Relating Rewards to Performance
• Job Satisfaction and Rewards
• Employee Compensation
• The Role of the Human Resource Manager in
the Reward System
• Summary of Learning Objectives
12-3
Defining the System
•
Organizational reward system
•
•
Organizational rewards
•
•
Examples – Job satisfaction and feelings of accomplishment
Extrinsic rewards – Directly controlled and distributed by
organization and more tangible than intrinsic rewards
•
•
Rewards that result from employment the organization;
includes all types of rewards, both intrinsic and extrinsic
Intrinsic rewards – Internal to individual and are normally derived
from involvement in certain activities or tasks
•
•
Concerned with selection of types of rewards to be used by
organization
Examples – Pay and hospitalization benefits
Although differing, intrinsic and extrinsic rewards are closely
related
•
Often an extrinsic reward provides recipient with intrinsic
rewards
12-4
Intrinsic versus Extrinsic Rewards
12-5
Selection of Rewards
•
Management must recognize what employees perceive as
meaningful rewards
• Pay is usually the first, and sometimes the only, reward
most people think about
• However, rewards should be viewed in the larger
perspective as anything employees value
• May include things such as
• Office location
• Allocation of certain pieces of equipment
• Assignment of preferred work tasks
• Informal recognition
12-6
Selection of Rewards
• Returns benefiting organization through
distribution of awards can be realized only if
desires of employees are known
• Organizations should learn what employees
perceive as meaningful rewards, which is not
necessarily what management perceives
• Traditionally, managers have assumed they
are fully capable of deciding just what
rewards employees need and want
• Unfortunately, this is often not true
• Studies have shown that employees tend to
rank lack of recognition as the most probable
reason good employees quit their jobs
12-7
Selection of Rewards
•
Another false assumption is exemplified by fact that most
organizations offer same mix of rewards to all employees
• Studies show that many variables can influence
employee preferences for certain rewards. They
include
• Age
• Sex
• Marital status
• Number of dependents
• Years of service
• For example, older employees are usually much more
concerned with pension and retirement benefits than
are younger employees
12-8
Selection of Rewards
•
When selecting types of rewards to offer, intrinsic benefits
that might accrue as a result of the rewards need to be
considered
• Managers and employees alike consider only tangible
benefits associated with a reward
•
External factors that place limitations on an organization’s
reward system also exist
•
These factors (usually beyond the control of the
organization) include such things as
• Organization’s size
• Environmental conditions
• Stage in product life cycle
• Labor market
12-9
Relating Rewards to Performance
•
Free enterprise system is based on the premise that
rewards should depend on performance
•
Performance–reward relationship is desirable at
• Organizational or corporate level
• Individual level
•
Employees will be motivated when they believe such
motivation will lead to desired rewards
• Many formal rewards provided by organizations are not
related to performance
• These rewards are almost always determined by
organizational membership and seniority; they include
• Paid vacations
• Insurance plans
• Paid holidays
12-10
Relating Rewards to Performance
•
Other rewards, such as promotion, can and should be related to
performance
•
Opportunities for promotion may occur only rarely
•
When available, higher positions may be filled
• On basis of seniority
• By someone outside the organization
•
Primary organizational variable used to reward employees and
reinforce performance is pay
•
Even though many U.S. companies have some type of payfor- performance program, most do a poor job of relating the
two
•
Surveys repeatedly show that employees do not have much
confidence about a positive relationship exists between the
two
•
Evidence shows that paying for performance is working at the
highest levels in many companies
12-11
Relating Rewards to Performance
•
Why is the practice not more widespread?
• Not easy to do; much easier to give everybody the
same thing, as evidenced by the ever-popular acrossthe-board pay increase
• Relating rewards to performance requires that
performance be accurately measured, and this is
often not easily accomplished
• Requires discipline to actually relate rewards to
performance
• Many union contracts require that certain rewards be
based on totally objective variables, such as seniority
•
No one successful formula for implementing a pay-forperformance program has yet been developed
12-12
Preconditions for Implementing payfor-Performance Program
•
Trust in management
• If employees are skeptical of management, it is difficult
to make a pay-for-performance program work
•
Absence of performance constraints
• Jobs must be structured so that an employee’s
performance is not hampered by factors beyond his or
her control
•
Trained supervisors and managers
• Supervisors and managers must be trained in setting
and measuring performance standards
•
Good measurement systems
• Performance should be based on criteria that are job
specific and focus on results achieved
12-13
Preconditions for Implementing Payfor-Performance Program
•
Ability to pay
• Merit portion of the salary increase budget must be
large enough to get the attention of employees
•
Clear distinction among cost of living, seniority, and merit
• In absence of strong evidence to the contrary,
employees will naturally assume a pay increase is a
cost-of- living or seniority increase
•
Well-communicated total pay policy
• Employees must have a clear understanding of how
merit pay fits into the total pay picture
•
Flexible reward schedule
• It is easier to establish a credible pay-for-performance
plan if all employees do not receive pay adjustments on
the same date
12-14
Job Satisfaction and Rewards
•
•
•
An employee’s general attitude toward the job
•
Organizational reward system often has a significant impact on level
of employee job satisfaction
•
Manner in which extrinsic rewards are dispersed can affect intrinsic
rewards (and satisfaction) of recipients
There are five major components of job satisfaction:
•
Attitude toward the work group
•
General working conditions
•
Attitude toward the company
•
Monetary benefits
•
Attitude toward management
Other components include
•
Employee’s state of mind about the work itself
•
Life in general
•
Health, age
•
Level of aspiration, social status, and political and social activities
12-15
Job Satisfaction and Rewards
• Organizational morale – Employee’s feeling of
being accepted by and belonging to a group of
employees
• Through common goals
• Confidence in desirability of those goals
• Desire to progress toward the goals
• Morale is the by-product of a group
• Job satisfaction is more an individual state of
mind
• Two concepts are interrelated in that job
satisfaction can contribute to morale and
morale can contribute to job satisfaction
12-16
The Satisfaction–Performance
Controversy
•
“The path of least resistance” – Attempts to explain belief
that a satisfied employee is necessarily a good employee
• If a performance problem exists, increasing an
employee’s happiness is far more pleasant than
discussing with the employee his or her failure to meet
standards
•
Although happiness eventually results from satisfaction,
the latter goes much deeper and is far less tenuous than
happiness
•
Two propositions concerning the satisfaction-performance
theory exist
• Traditional view is that satisfaction causes performance
• Satisfaction is the effect rather than the cause of
performance
12-17
The Satisfaction–Performance
Controversy
•
Performance leads to rewards that result in a certain level
of satisfaction
• Rewards constitute a necessary intervening variable in
the relationship
•
Another position considers both satisfaction and
performance to be functions of rewards
• Satisfaction results from rewards, but current
performance also affects subsequent performance if
rewards are based on current performance
•
Research evidence generally rejects the more popular
view that satisfaction leads to performance
• It does provide moderate support for the view that
performance leads to satisfaction
12-18
The Satisfaction–Performance
Controversy
• Evidence also strongly indicates that
• Rewards constitute a more direct cause of
satisfaction than does performance
• Rewards based on current performance
enhance subsequent performance
• Reviews of studies in the area stating that job
satisfaction and job performance are related do
not support a strong relationship
• Found that “the best estimate of the true
population correlation between satisfaction
and performance is relatively low”
• Lay people often tend to believe strongly that
satisfied employees are more productive at work
12-19
The Satisfaction–Performance
Controversy
•
•
It has been clearly established that job satisfaction does have a
positive impact on
•
Turnover
•
Absenteeism
•
Tardiness
•
Accidents
•
Grievances
•
Strikes
Experience, gender, and performance can have a moderating
effect on these relationships
•
•
Organizations prefer satisfied employees simply because
they make the work environment more pleasant
Although a satisfied employee is not necessarily a high
performer, there are numerous reasons for cultivating employee
satisfaction
12-20
Other Factors Affecting Job Satisfaction
•
Wide range of both internal and external factors affect an
employee’s level of satisfaction
•
Surveys have found that the top drivers of employee job
satisfaction were
•
•
Pay, and benefits
•
Job security, and feeling safe in the work environment
•
Flexibility to balance work and life
Job satisfaction and motivation are not synonymous
•
•
Motivation is a drive to perform
Organizational reward systems can influence both job satisfaction
and employee motivation
•
It affects job satisfaction by making the employee more or
less comfortable as a result of the rewards received
•
It influences motivation primarily through the perceived value
of the rewards and their contingency on performance
12-21
Determinants of Employee Satisfaction
and Dissatisfaction
12-22
Employee Compensation
•
Compensation
•
All extrinsic rewards that employees receive in exchange for
their work
•
Composed of base wage or salary, any incentives or
bonuses, and any benefits
• Base wage or salary – Hourly, weekly, or monthly pay
employees receive for their work
• Incentives – Rewards offered in addition to the base
wage or salary and are usually directly related to
performance
• Benefits – Rewards employees receive as a result of their
employment and position with the organization
(Examples: Paid vacations, health insurance, and
retirement plans)
•
Pay
•
Refers only to actual dollars employees receive in exchange
for work
12-23
Components of Employee
Compensation
12-24
Compensation Policies
•
Policies must deal with following issues:
• Minimum and maximum levels of pay – Taking into
consideration
• Worth of job to organization
• Organization’s ability to pay
• Government regulations
• Union influences
• Market pressures
• General relationships among levels of pay (e.g.,
between senior management and operating
management, operative employees, and supervisors)
• Division of total compensation dollar (i.e., what portion
goes into base pay, incentive programs, and benefits)
12-25
Compensation Policies
• Organizations must also make decisions
concerning
• How much money will go into pay increases
for the next year
• Who will recommend them
• How raises will generally be determined
• Another important decision concerns whether
pay information will be kept secret or made
public
12-26
Pay Secrecy
•
Many organizations have a policy of not disclosing pay-related
information
•
•
•
Information about pay system as well as individual pay
received
Justification for pay secrecy
•
To avoid any discontent that might result from employees’
knowing what everybody else is being paid
•
Many employees, especially high achievers, feel very
strongly that their pay is nobody else’s business
Drawbacks of pay secrecy
•
Difficult for employees to determine whether pay is related to
performance and does not eliminate pay comparisons
•
May cause employees to overestimate pay of their peers and
underestimate pay of their supervisors
•
Can create feelings of dissatisfaction
•
Employees may become suspicious
12-27
Pay Secrecy
•
Some companies actually forbade employees to discuss
and/or disclose their pay
• In 1992, the National Labor Relations Board (NLRB)
ruled that forbidding employees to discuss their pay
constitutes a violation of the National Labor Relations
Act
• Women’s groups in U.S. and UK have begun to
challenge pay-secrecy rules stating that they
perpetuate income gap between men and women
•
A compromise on issue of pay secrecy is to disclose pay
ranges for various job levels within the organization
• Clearly communicates general ranges of pay for
different jobs, but it does not disclose exactly what any
particular employee is making
12-28
Fair Labor Standards Act (FLSA)
• Commonly called Wage and Hour Act
• Primary requirements are that
• Individuals employed in interstate commerce
or in organizations producing goods for
interstate commerce must be paid a certain
minimum wage
• They be paid time-and-a-half for hours over
40 worked in one week
• Section 218 of the FLSA permits states,
localities, and collective bargaining agreements
to set a higher standard than the federal
minimum
• FLSA places restrictions on the employment of
individuals between ages 14 and 18
12-29
Fair Labor Standards Act (FLSA)
• Possible exemptions
• Amendments to law have reduced number of
exemptions, but careful study is necessary to
determine an organization’s obligations
• Discussions of compensation systems often use
the terms exempt and nonexempt personnel
• Nonexempt employees are covered by the
FLSA; they must be paid overtime and are
subject to minimum wage
• Exempt employees are not covered by the
FLSA and include executive, administrative,
and professional employees
12-30
History of Minimum Wage Rates
12-31
Davis–Bacon Act and
Walsh–Healey Public Contracts Act
•
•
Davis–Beacon Act
•
Requires that contractors and subcontractors on federal
construction contracts in excess of $2,000 pay prevailing
wage rates for locality of project
•
Prevailing wage rate is determined by secretary of labor
•
Has normally been the same as prevailing union rate for the
area
•
Overtime of time-and-a-half – For more than 40 hours per
week
Walsh–Healey Public Contracts Act
•
Requires that organizations manufacturing or furnishing
materials, supplies, articles, or equipment in excess of
$10,000 to the federal government pay at least the minimum
wage for the industry as determined by the secretary of labor
•
Defense Authorization Act of 1986 stipulated overtime as
being hours worked over 40 in a week
12-32
Federal Wage Garnishment Law
and Equal Pay Act
•
•
Federal Wage Garnishment Law
•
Garnishment – A legal procedure by which an employer is
empowered to withhold wages for payment of an employee’s
debt to a creditor
•
Law limits amount of an employee’s disposable earnings that
can be garnished in any one week and protects employee
from discharge because of garnishment
•
Law did not substantially alter state laws on this subject
Equal Pay Act
•
Illegal to pay different wages to men and women for jobs that
require equal skill, effort, and responsibility and are
performed under similar conditions
•
Does not prohibit payment of wage differentials based on
seniority systems, merit systems that measure earnings by
quantity and quality of production, or systems based on any
factor other than sex
12-33
Union Contracts
• If an organization is unionized, the wage
structure is usually largely determined through
collective bargaining process
• Because wages are a primary concern of
unions, current union contracts must be
considered in formulating compensation
policies
• Union contracts can even affect nonunionized
organizations
• For example, the wage rates and increases
paid to union employees often influence
wages paid to employees in nonunion
organizations
12-34
Impact of Comparable Worth
•
Theory holds that while true worth of jobs to employer may
be similar, some jobs (especially those held by women) are
often paid a lower rate than other jobs (often held by men)
•
Drawback
• Determining worth of the jobs in question is difficult
• How should job worth be established?
•
U.S. courts have generally rejected cases based on
comparable worth claims
•
Although comparable worth has generally floundered in
court, it has received considerable attention
• At the collective bargaining table
• In the political arena
12-35
The Importance of Fair Pay
•
Little doubt exists that inadequate pay can have a very negative
impact on an organization
•
Pay dissatisfaction can influence employees’ feelings about their
jobs in two ways:
•
Can increase desire for more money
•
Can lower attractiveness of the job
•
An employee who desires more money is likely to engage in
actions that can increase pay
•
These actions might include
•
Joining a union
•
Looking for another job
•
Performing better
•
Filing a grievance
•
Going on strike
12-36
The Importance of Fair Pay
•
All of the consequences (except performing better) are
generally undesirable by management
•
Better performance results only in those cases where pay
is perceived as being directly related to performance
•
When job decreases in attractiveness, the employee is
more likely
• To be absent or tardy
• To quit
• To become dissatisfied with the job itself
12-37
Model of the Consequences of Pay
Dissatisfaction
12-38
Pay Equity
•
Equity theory of motivation holds that
• Employees have a strong need to maintain a balance
between what they perceive as their inputs to their jobs
and what they receive from their jobs in the form of
rewards
• Employees who perceive inequities will take action to
eliminate or reduce them
• Pay equity concerns whether employees believe they
are being fairly paid
• For example, if an employee believes he or she is
underpaid, that employee will likely reduce
expended effort by working more slowly, taking off
early, or being absent
• Similarly, if an employee believes she or he is being
overpaid, that employee is likely to work harder or
for longer hours
12-39
Pay Equity
•
Several dimensions of equity to be considered when
looking at pay equity
• Internal equity – Addresses what an employee is
being paid for doing a job compared to what other
employees in the same organization are being
paid to do their jobs
• External equity – Addresses what employees in
other organizations are being paid for performing
similar jobs
• Individual equity – Addresses issue of rewarding
individual contributions; is very closely related to
the pay-for-performance question
• Organizational equity – Addresses how profits are
divided up within the organizations
12-40
Pay Equity
•
Employee interpretations of pay equity are based on their
perceptions
• Organizations should make these perceptions as
accurate as possible
•
An employee can also feel good about one or more equity
dimensions and feel bad about others
• For example, an employee may feel good about his or
her pay in comparison to what friends working in other
organizations are making
• She or he may also believe the company profits are
fairly distributed within the company
• However, this same person may be very unhappy
about his or her pay relative to several other people in
the same organization
12-41
Pay Satisfaction Model
•
Based on the idea that employees will be satisfied with
their pay when their perception of what their pay is and of
what they think it should be agree
• Happens when employees feel good about internal and
external equity of their pay
•
Present pay is a primary factor influencing an employee’s
perception of equity
• Person’s wage history and perception of what others
are getting also have an influence
• For example, employees who have historically
received high pay tend to lower their perception of
present pay
• Similarly, the higher the pay of friends and peers,
the lower one’s individual pay appears to be
•
These factors account for the fact that two people may
view the same level of pay in a very different manner
12-42
Pay Satisfaction Model
•
An employee’s perception of what pay should be depends on
several other factors, including
•
Job inputs
• Includes all the experience, skills, and abilities an
employee brings to the job in addition to the effort the
employee puts into it
•
The perceived inputs and outcomes of friends and peers
• Refer to the individual’s perception of what friends and
peers put into their jobs and what kind of pay they get in
return
•
Nonmonetary outcomes
• Refer to the fact that certain nonmonetary rewards can
sometimes substitute for pay, at least up to a point
•
It makes allowances for employees who believe their pay
exceeds what they think it should be
•
Research has shown that in such cases, people often
experience feelings of guilt, inequity, and discomfort
12-43
Model of the Determinants of Pay
Satisfaction
12-44
The Role of the Human Resource
Manager in the Reward System
•
Role of human resource manager in overall organizational
reward system is to assist in its design and to administer
the system
• Administering the system – Carries responsibility of
ensuring that system is fair to all employees and that it
is clearly communicated to all employees
• Ensuring that the system is fair places burden of
minimizing reward inequities and employee’s
perceptions of reward inequities squarely on the human
resources manager
•
Little doubt exists that organizations need to do a better
job of explaining and communicating their compensation
system to employees
• Many tools and techniques are available to assist
human resource managers in designing and
administering compensation systems
12-45
Summary of Learning Objectives
•
Define organizational rewards
•
Distinguish between intrinsic and extrinsic rewards
•
List several desirable preconditions for implementing a
pay-for-performance program
•
Define job satisfaction and list its five major components
•
Summarize the satisfaction–performance relationship
•
Define compensation, pay, incentives, and benefits
•
List several pieces of government legislation that have had
a significant impact on organizational compensation
•
Explain the equity theory of motivation
•
Discuss internal, external, individual, and organizational
equity
12-46