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1. Herman Aguinis, University of Colorado at Denver
Reward Systems and Legal IssuesReward Systems and Legal Issues
OverviewOverview
• Reward Systems
• Legal Issues

2. Herman Aguinis, University of Colorado at Denver
Reward Systems: OverviewReward 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

3. Herman Aguinis, University of Colorado at Denver
Traditional PayTraditional Pay
• Salary and salary increases are based on
– Position
– Seniority

4. Herman Aguinis, University of Colorado at Denver
Contingent Pay (CP)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

5. Herman Aguinis, University of Colorado at Denver
Reasons for Introducing CPReasons 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

6. Herman Aguinis, University of Colorado at Denver
CP plans help improve motivation when: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

7. Herman Aguinis, University of Colorado at Denver
Possible Problems Associated with CPPossible 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

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

9. Herman Aguinis, University of Colorado at Denver
A. Culture of organization:A. Culture of organization: Types of organizationsTypes of organizations
• Traditional
– Top-down decision making
– Vertical communication
– Jobs that are clearly defined
• Involvement
– Shared decision making
– Lateral communications
– Loosely defined roles

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

11. Herman Aguinis, University of Colorado at Denver
B: CP Plans to enhance Strategic Directions: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

12. Herman Aguinis, University of Colorado at Denver
Putting Pay in ContextPutting 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

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

14. Herman Aguinis, University of Colorado at Denver
How to Make Rewards WorkHow 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)

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

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

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

18. Herman Aguinis, University of Colorado at Denver
Job evaluationJob 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

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

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

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

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

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

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

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

26. Herman Aguinis, University of Colorado at Denver
Job evaluation methods:Job evaluation methods: Point methodPoint 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%

27. Herman Aguinis, University of Colorado at Denver
Advantages of using Point methodAdvantages 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

28. Herman Aguinis, University of Colorado at Denver
Disadvantages of using Point methodDisadvantages of using Point method
• Requires extensive administrative
– Time
– Effort

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

30. Herman Aguinis, University of Colorado at Denver
Compensation surveysCompensation 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

31. Herman Aguinis, University of Colorado at Denver
Broad-banding: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

32. Herman Aguinis, University of Colorado at Denver
Reward Systems: SummaryReward 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

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

34. Herman Aguinis, University of Colorado at Denver
Performance Management and the LawPerformance Management and the Law
• Performance management systems are legally
sound, if they are fair:
– Procedures are standardized
– Same procedures are used with all employees

35. Herman Aguinis, University of Colorado at Denver
Some Legal Principles Affecting PM:Some Legal Principles Affecting PM:
OverviewOverview
• Employment-at-will
• Negligence
• Defamation
• Misrepresentation
• Adverse Impact
• Illegal Discrimination

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

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

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

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

40. Herman Aguinis, University of Colorado at Denver
Adverse Impact / Unintentional DiscriminationAdverse 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

41. Herman Aguinis, University of Colorado at Denver
Illegal Discrimination or Disparate TreatmentIllegal 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

42. Herman Aguinis, University of Colorado at Denver
Employee claim of illegal discrimination: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)

43. Herman Aguinis, University of Colorado at Denver
Employer response to claim of illegal discriminationEmployer 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

44. Herman Aguinis, University of Colorado at Denver
Laws Affecting PM: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

45. Herman Aguinis, University of Colorado at Denver
Laws in the United Kingdom: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

46. Herman Aguinis, University of Colorado at Denver
Laws in the United States of AmericaLaws 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

47. Herman Aguinis, University of Colorado at Denver
Characteristics of Legally Sound PM SystemsCharacteristics 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

48. Herman Aguinis, University of Colorado at Denver
Characteristics of Legally Sound PM SystemsCharacteristics 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

49. Herman Aguinis, University of Colorado at Denver
Characteristics of Legally Sound PM SystemsCharacteristics 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

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