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

2. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

3. Traditional Pay
• Salary and salary increases are based on
– Position
– Seniority
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4. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

5. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

6. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

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

9. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

11. 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
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• 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

12. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

13. Rewards can include:
• Pay
• Recognition
– Public
– Private
– Status
• Time
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•
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Trust & Respect
Challenge
Responsibility
Freedom
Relationships
Herman Aguinis, University of Colorado at Denver

14. 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)
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

15. How to Make Rewards Work (continued)
• Rewards should be:
–
–
–
–
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Visible
Contingent
Timely
Reversible
Herman Aguinis, University of Colorado at Denver

16. Pay Structures
• Job Evaluation
• Broad-banding
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Herman Aguinis, University of Colorado at Denver

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

18. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

19. Types of job evaluation methods:
• Ranking
• Classification
• Point
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Herman Aguinis, University of Colorado at Denver

20. Job evaluation methods: Ranking
• Create job descriptions
• Compare job descriptions
• Rank jobs
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Herman Aguinis, University of Colorado at Denver

21. Advantages of using Ranking method
• Requires little time
• Minimal effort needed for administration
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Herman Aguinis, University of Colorado at Denver

22. Disadvantages of using Ranking method
• Criteria for ranking may not be clear:
• Distances between each rank may not
be equal
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Herman Aguinis, University of Colorado at Denver

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

24. Advantages of using Classification method
• Jobs can be quickly slotted into structure
• Employees accept method because it seems
valid
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Herman Aguinis, University of Colorado at Denver

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

26. 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%
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

27. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

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

30. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

32. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

34. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

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

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

38. Defamation
• Disclosure of performance information that is
– Untrue and
– Unfavorable
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39. Misrepresentation
• Disclosure of performance information that is
– Untrue and
– Favorable
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Herman Aguinis, University of Colorado at Denver

40. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

41. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

42. 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)
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

43. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

44. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

45. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

46. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

47. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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

49. 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
Prentice Hall, Inc. © 2006
Herman Aguinis, University of Colorado at Denver

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