Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Reward Systems and Legal Issues Overview Reward Systems Legal Issues

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Traditional Pay Salary and salary increases are based on –Position –Seniority

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Reasons for Introducing CP 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 CP plans help to recruit and retain top performers CP plans project good corporate image

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Possible Problems Associated with CP Poor performance management system Rewarding counterproductive behavior Insignificant rewards The reward becomes the driver Extrinsic vs. intrinsic motivation Disproportionately large rewards for executives

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Selecting a CP Plan: Issues to consider A.Culture of organization B.Strategic direction of organization

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 CP systems for different organizational cultures: Traditional organizations –Piece rate –Sales commissions –Group incentives Involvement organizations –Profit sharing –Skill-based pay

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 B: 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 Productivity –Individual Piece rate Sales commissions –Group Gainsharing Group incentives Teamwork –Team sales commissions –Gainsharing –Competency based pay

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Rewards can include: Pay Recognition –Public –Private –Status Time Trust & Respect Challenge Responsibility Freedom Relationships

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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)

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 How to Make Rewards Work (continued) Rewards should be: –Visible –Contingent –Timely –Reversible

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Pay Structures Job Evaluation Broad-banding

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Pay structures An organization’s pay structure  Classifies jobs  Into categories  Based on their relative worth  Is designed by job evaluation methods

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Job evaluation Method of data collection –Determine the worth of various jobs to –Create a pay structure Consideration of –KSAs required for each job –Value of job for organization –How much other organizations pay

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Types of job evaluation methods: Ranking Classification Point

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Job evaluation methods: Ranking Create job descriptions Compare job descriptions Rank jobs

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Advantages of using Ranking method Requires little time Minimal effort needed for administration

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Disadvantages of using Ranking method Criteria for ranking may not be clear: Distances between each rank may not be equal

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Job evaluation methods: Classification A series of classes or grades are created Each job is placed within a job class

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Advantages of using Classification method Jobs can be quickly slotted into structure Employees accept method because it seems valid

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Disadvantages of using Classification method Requires extensive time and effort for administration Differences between classification levels may not be equal

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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%

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Disadvantages of using Point method Requires extensive administrative –Time –Effort

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Does job evaluation method matter? –Fairness –Evaluators Impartial Objective

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Compensation surveys Information on –Base pay –All other types of compensation Conducted in-house or by consultants, such as: or

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Broad-banding: Pay structure collapses job classes into fewer categories Advantages: 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Legal Issues: Overview Performance Management and the Law Some Legal Principles Affecting PM Laws Affecting PM

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Some Legal Principles Affecting PM: Overview Employment-at-will Negligence Defamation Misrepresentation Adverse Impact Illegal Discrimination

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Employment-at-will Employment relationship can be ended at any time by –Employer –Employee Exceptions –Implied contract –Possible violation of legal rights

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Negligence If organization documents describe a system and It is Not implemented as described, Employee can challenge evaluation, charging negligence

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Defamation Disclosure of performance information that is –Untrue and –Unfavorable

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Misrepresentation Disclosure of performance information that is –Untrue and –Favorable

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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)

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 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

Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 Legal Issues: Summary Performance Management and the Law Some Legal Principles Affecting PM Laws Affecting PM