Reward Systems and Legal Issues

Overview
• Reward Systems
• Legal Issues

Herman Aguinis, University of Colorado at Denver

 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

 Traditional Pay

• Salary and salary increases are based on

– Position
– Seniority

Herman Aguinis, University of Colorado at Denver

 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

 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

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

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

Selecting a CP Plan: Issues to consider

A. Culture of organization
B. Strategic direction of organization

Herman Aguinis, University of Colorado at Denver

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

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

B: CP Plans to enhance Strategic Directions:
• Employee development • Productivity
– Skill based pay – Individual
• Piece rate
• Customer service • Sales commissions
– Competency based pay – Group
– Gainsharing • Gainsharing
• Group incentives
• Overall Profit • Teamwork
– Executive pay – Team sales commissions
– Profit or stock sharing – Gainsharing
– Competency based pay

Herman Aguinis, University of Colorado at Denver

 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

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

Herman Aguinis, University of Colorado at Denver

 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

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

Herman Aguinis, University of Colorado at Denver

 Pay Structures

• Job Evaluation
• Broad-banding

Herman Aguinis, University of Colorado at Denver

 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

 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

 Types of job evaluation methods:

• Ranking
• Classification
• Point

Herman Aguinis, University of Colorado at Denver

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

Herman Aguinis, University of Colorado at Denver

 Advantages of using Ranking method

• Requires little time

• Minimal effort needed for administration

Herman Aguinis, University of Colorado at Denver

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

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

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

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

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

 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

 Disadvantages of using Point method

• Requires extensive administrative

– Time
– Effort

Herman Aguinis, University of Colorado at Denver

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

Herman Aguinis, University of Colorado at Denver

 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

Herman Aguinis, University of Colorado at Denver

 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
 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

 Legal Issues: Overview

• Performance Management and the Law

• Some Legal Principles Affecting PM
• Laws Affecting PM

Herman Aguinis, University of Colorado at Denver

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

 Some Legal Principles Affecting PM:
Overview

• Employment-at-will
• Negligence
• Defamation
• Misrepresentation
• Adverse Impact
• Illegal Discrimination

Herman Aguinis, University of Colorado at Denver

 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

Herman Aguinis, University of Colorado at Denver

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

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

 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

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

 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

 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

 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

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

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

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

 Legal Issues: Summary
• Performance Management and the Law
• Some Legal Principles Affecting PM
• Laws Affecting PM

Herman Aguinis, University of Colorado at Denver