The Organizational Reward System

2. TheOrganizationalRewardSystem Chapter 12

3. 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

4. Defining the System • Organizational reward system • Concerned with selection of types of rewards to be used by organization • Organizational 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 • Examples – Job satisfaction and feelings of accomplishment • Extrinsic rewards – Directly controlled and distributed by organization and more tangible than intrinsic rewards • 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

5. Intrinsic versus Extrinsic Rewards 12-5

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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 pay-for- 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

12. 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 across-the-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-for-performance program has yet been developed 12-12

13. Preconditions for Implementing pay-for-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

14. Preconditions for Implementing Pay-for-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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Determinants of Employee Satisfaction and Dissatisfaction 12-22

23. 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

24. Components of Employee Compensation 12-24

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. History of Minimum Wage Rates 12-31

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. Model of the Consequences of Pay Dissatisfaction 12-38

39. 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

40. 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

41. 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

42. 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

43. 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

44. Model of the Determinants of Pay Satisfaction 12-44

45. 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

46. 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