Chapter 10 - Reward Systems and Legal Issues

Learning Objectives

10.1 Distinguish between traditional and contingent pay plans and how each of these reward systems relates to the performance management system.

10.2 Understand the reasons for the popularity of contingent pay plans.

10.3 Describe how contingent pay plans can help improve employee motivation and performance.

10.4 Be aware of reasons why contingent pay plans can fail.

10.5 Design a contingent pay plan taking into account key variables such as the organization’s culture and strategic business objectives.

10.6 Understand that pay is only one of many tools that can be used to motivate employees.

10.7 Use rewards effectively so they produce the intended effects.

10.8 Know the principles of how to design an organization’s pay structure including the conduct of a job evaluation.

10.9 Understand the advantages of a broad-banding approach to designing a pay structure.

10.10 Understand the role played by five legal principles in the implementation of performance management systems: employment at will, negligence, defamation, misrepresentation, and adverse impact.

10.11 Identify when a performance management system is causing illegal discrimination.

10.12 Know what type of evidence employees need to provide to prove illegal discrimination and what type of evidence employers need to provide to prove lack of illegal discrimination.

10.13 Know the impact of key laws prohibiting discrimination based on race, sex, religion, age, disability status, and sexual orientation on the design and implementation of performance management systems.

10.14 Design a performance management system that is legally sound.

Chapter Outline

Performance Management: Reward Systems and Legal Issues

Overview
1. Reward Systems
2. Legal Issues
1. Reward Systems: Overview
• Traditional and Contingent Pay (CP) Plans
o Reasons for Introducing CP Plans
o Possible Problems Associated with CP
o Selecting a CP Plan
• Putting Pay in Context
• Pay Structures

Traditional and Contingent Pay (CP) Plans
• Traditional Pay
o Salary and salary increases are based on
 Position
 Seniority
• Contingent Pay
o Salary and salary increases are based on job performance
o Also called: Pay for Performance
o If not added to base pay, called variable pay

Reasons for Introducing CP Plans
• 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
 Why does Avon use CP plans?
 Why would a struggling company (e.g. Corning, Inc.) implement CP?

• CP plans can help improve motivation when:
 Employees see a clear link between their efforts and resulting performance (Expectancy)
 Employees see a clear link between their performance level and rewards received (Instrumentality)
 Employees value the rewards available (Valence)
motivation = expectancy x instrumentality x valence

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
 How were problems at Green Giant and Sears related to CP?

Selecting a CP Plan:  Issues to consider
A. Culture of organization
B. Strategic direction of organization

A. Culture of organization
Types of organizations
– Traditional
o Top-down decision making
o Vertical communication
o Jobs that are clearly defined
– Involvement
o Shared decision making
o Lateral communications
o Loosely defined roles
CP systems that work well in:
–    Traditional organizations
• Piece rate
• Sales commissions
• Group incentives
–    Involvement organizations
• Profit sharing
• Skill-based pay

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
 When can stock sharing lead to danger (Enron, WorldCom, etc.)?

Putting Pay in Context
• A reward is something that increases the chances that:
o Specific behaviors and results will be repeated, or
o Employee will engage in new behavior and produce better results

• Rewards can include:
o Pay
o Recognition
o Public
o Private
o Status
o Time
o Trust and Respect
o Challenge
o Responsibility
o Freedom
o Relationships
 Which of these rewards were available in your last job?  In your current job?
 If you are considering a change, what rewards are you planning to seek in your next job?

• How to Make Rewards Work
o Define and measure performance first and then allocate rewards
o Only use rewards that are available
o Make sure all employees are eligible
o Rewards should be both
o Financial
o Non-financial
o Rewards should be:
 Visible
 Contingent
 Timely
 Reversible
 What rewards make the SAS Institute a special place to work?
 How might the Lake Federal Bank rewards improve performance?

Pay Structures
• Job Evaluation
• Broad-banding

An organization’s pay structure
• Classifies jobs into categories based on their relative worth
• Is designed by job evaluation methods

Job Evaluation
• Method of data collection
o Determine the worth of various jobs
o Create a pay structure
• Consideration of
o KSAs required for each job
o Value of job for organization
o How much other organizations pay for similar jobs

Types of job evaluation methods
• Ranking
• Classification
• Point

Ranking Method
 Create a job description: job duties, KSAs, working conditions
 Compare job descriptions in terms of value to organization
 Rank jobs from most valuable to least valuable

Advantages of using ranking method
• Requires little time
• Minimal effort needed for administration

Disadvantages of using ranking method
• Criteria for ranking may not be clear (evaluators may not share frame of reference)
• Distances between each rank may not be equal (pay differences may not reflect unequal distances)

Classification Method
• A series of classes or grades are created
 Unique label
 Detailed description of work performed
• Each job is placed within a job class
 How are jobs in the US Federal Government classified?

Advantages of using classification method
• Jobs can be quickly slotted into structure
• Employees accept method because it seems valid  

Disadvantages of using classification method
• Requires extensive time and effort for administration
• Differences between classification levels may not be equal

Point Method
• Identify compensable factors (job characteristics)
o Add value to organization
o Organization is willing to pay
• Scale factors (e.g., on a scale of 1 – 5)
o Clear narrative description of each score on scale
• Assign a weight to each factor so the sum of the weights for all factors = 100%

Advantages of using point method
• Helps to establish worth of each job relative to all other jobs within organization
• Involves comprehensive measurement of relative worth of each job in organization
• Ranking of jobs is easy to do once total points are known for each job

Disadvantages of using point method
• Requires extensive administrative
o Time
o Effort

Does job evaluation method matter?
• Fairness
• Evaluators
o Impartial
o Objective
 How did the study comparing job evaluation methods work out? Discuss implications for HR managers.

Compensation surveys
• Information on base pay
• All other types of compensation, such as
o Bonuses
o Benefits
• Conducted in-house or by consultants, such as:
 www.salary.com or www.haypaynet.com

 Broad-banding
Pay structure that collapses job classes into fewer ( 5) categories

o 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
 What does the Institute of Personnel Development (IPD) study say about broad-banding?

Reward Systems: Summary
• Traditional and Contingent Pay (CP) Plans
o Reasons for Introducing CP Plans
o Possible Problems Associated with CP
o Selecting a CP Plan
• Putting Pay in Context
• Pay Structures

2. Legal Issues: Overview
• Performance Management (PM) and the Law
• Some Legal Principles Affecting PM
• Laws Affecting PM

Performance Management and the Law
• Performance management systems are legally sound, if they are fair:
o Procedures are standardized
o Same procedures are used with all employees

Some Legal Principles Affecting PM: Overview
• Employment-at-will
• Negligence
• Defamation
• Misrepresentation
• Adverse Impact
• Illegal Discrimination

Employment-at-will
• Employment relationship can be ended at any time by
o Employer
o Employee
• Exceptions
o Implied contract
o Possible violation of legal rights
 How could a good performance management system have protected Aloha Airlines?

Negligence
1. If organization documents describe a system and  it is Not implemented as described, employee can challenge evaluation, charging negligence

Defamation
• Disclosure of performance information that is untrue and unfavorable

Misrepresentation
• Disclosure of performance information that is untrue and favorable

 How could a good performance management system have protected the employer from being charged with either defamation or misrepresentation in the California case involving the vice-principal?

Adverse Impact or Unintentional Discrimination
• PM system has unintentional impact on a protected class
• Organization must demonstrate
o Specific KSA is a business requirement for the job
o All affected employees are evaluated in the same way
 Should firefighters meet a physical strength requirement?
o Organization should review ongoing performance score data by protected class to implement corrective action as necessary

Illegal Discrimination or Disparate Treatment (in PM context)
• Raters assign different scores to employees based on factors that are NOT related to performance
• Employees receive different treatment as a result of such ratings
• Employees can claim they were intentionally and illegally treated differently due to their status

– Employee claim of illegal discrimination
o Direct evidence of discrimination, or
o 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)

– Employer response to claim of illegal discrimination
o Legitimate and non-discriminatory reason for action
o Related to performance

Note:  Good performance management system and subsequent performance-related decision, used consistently with all employees, provides defense

Laws Affecting PM
During the past few decades, several countries have passed laws prohibiting discrimination based on:
• Race or Ethnicity
• Sex
• Religion
• National Origin
• Age
• Disability status
• Sexual orientation

Examples of some of these laws:

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

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

Characteristics of Legally Sound Performance Management Systems
• Organization
o The system is formally explained and communicated to all employees
o The system includes a formal appeals process
o Procedures are standardized and uniform for all employees within a job group
o The system includes procedures to detect potentially discriminatory effects or biases and abuses in the system

• Management
o Supervisors are provided with formal training and information on how to manage the performance of their employees
o Performance information is gathered from multiple, diverse, and unbiased raters
o The system includes thorough and consistent documentation including specific examples of performance based on first-hand knowledge

• Employees
o Performance dimensions and standards are:
 Clearly defined and explained to the employee
 Job-related
 Within the control of the employee
o Employees are given
 Timely information on performance deficiencies 
 Opportunities to correct them
o Employees are given a voice in the review process and treated with courtesy and civility throughout the process

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

 What factors carried the most weight in litigation involving performance management systems, according to research regarding 295 U. S. Circuit Court decisions?

Worked Solutions for End-of-Chapter Cases

Answers for Case Study 10.1 Making the Case for a CP Plan at Architects, Inc.
(Suggested points: 2, [10.3])

The response to this question will vary; however, the answer should have the following components:

A good contingent pay (CP) or pay for performance plan helps to enhance employee motivation to accomplish goals that are in sync with organizational needs.  More specifically, CP plans have the potential to help people change behavior and improve performance.  Recent survey results have indicated that performance management systems are more effective when results are directly tied to the reward system.  CP plans force organizations to clearly define effective performance and to determine what factors are likely to lead to effective performance.

Answers for Case Study 10.2 Selecting a CP Plan at Dow AgroSciences
(Suggested points: 10, [10.5])

The responses to this question will vary; however, the answer should have the following components:

Based on the company’s culture that promotes individuals, teams, and innovation, the best form of CP Plan would be a group incentive program such as profit sharing where employees are paid based on performance of a group or team based on whether the group has exceeded a specific financial goal.  Another option could include a stock option plan.

Answers for Case Study 10.3 Possible Illegal Discrimination at Tractors, Inc.
(Suggested points: 10, .5[10.11], .5[10.14])

Upon reviewing the performance management system at Tractors, Inc., the following items could potentially lead to legal challenges:

• Because there are no set standards for assigning scores to performance standards, evaluators may assign scores differently to various employees based on factors that are not performance-related, such as race and national origin.  In contrast, legal discrimination, an essential characteristic of a good performance management system, differentiates employees based on performance-related factors.  Therefore, the company should develop standards and procedures, as well as training for evaluators, on how to consistently rate employees.

• Another area of concern is the timeliness of the performance appraisals.  Employees should be given timely information on performance deficiencies and opportunities to correct them.  Tractors, Inc. could be considered negligent because the system is described to have employee evaluations done on the employee’s anniversary date and, in many cases, three to six months lapse before the employee receives the evaluation.  This can be corrected by implementing set policies and procedures, proper training of managers on system procedures, and enforcing the policies.

• Similar to the first point, it has been alleged that females are passed up for promotions that are given to male counterparts that are less qualified.  In one instance, it is stated that the employee received potentially discriminating remarks relating to attendance as the female employee needed to consistently leave on time because she is a single mom and must leave to take her children to various after school activities.  Again, policies and procedures should be in place to stress identifying and discussing performance only issues.  Derogatory remarks such as the ones made in this example could be considered illegal discrimination.

Additional Cases and Worked-Solutions

Case Study: Golden Arches Pizza and Burgers (GAPB)

Golden Arches Pizza and Burgers (GAPB) is an established international fast food chain serving a variety of pizzas and hamburgers.  GAPB restaurants cater to families on the go, providing fast-turnover indoor seating with a small playground area for the children. GAPB also provides drive-up windows for families and individuals who eat their dinners and snacks while driving to their next destination.  The atmosphere is fast-paced, with emphasis on prompt and friendly customer service, cleanliness, and provision of identical food, regardless of location.

As awareness of proper diet guidelines has spread, GAPB has noticed a slight decrease in business.  The strategic business plan has been revised to emphasize better nutrition with the introduction of salads and more vegetables on the pizzas.   Management has noticed that many of the newer employees do not seem to care as much about keeping up the GAPB reputation for customer service and cleanliness. 

GAPB line employees are usually teenagers or immigrants who are willing to work low wage jobs in exchange for flexible hours while they handle school and other responsibilities.  It is not unusual for a restaurant to experience a 200% turnover rate every year.  Over the years, as a way of dealing with such high turnover, management has designed every position in the restaurant to be as routine as possible, so that training can be accomplished quickly and employees put to work on the food assembly lines as rapidly as possible. 

The Board of Directors has hired you to help them develop a new pay plan that would assist them to improve employee motivation and performance in keeping with the strategic plan and culture of the organization.
 
In the context of Module 11, discuss the key features of your recommended plan and critically evaluate your response.
(Suggested points: 10, .2[10.3], .4[10.5], .2[10.7], .2[10.10])

Answer (sample response):

This is a traditional organization, with top-down decision making, vertical communication, and clearly defined jobs.  To begin with, management needs to define and measure performance first  and then allocate rewards.  All line employees should be eligible for these rewards.

Management has a variety of kinds of rewards available, some of which include pay systems.  Contingent pay can improve motivation and performance when: 1) employees can see a clear link between their efforts and the resulting performance; 2) employees can see a clear link between their performance level and rewards they receive; and 3) employees value the rewards.

The most effective kinds of contingent pay in a traditional organization are piece rate, sales commissions, and group incentives.  Sales commissions do not seem to fit this particular case, since employees are not responsible for making sales; the sales come to them if the ambience, service, taste, and price are acceptable.  Piece rate might work to increase production, but that doesn’t seem to be a problem in this case.  Group incentives, such as bonuses, would be welcome to both immigrant and young employees; there would need to be a direct correlation between the customer service and/or cleanliness factor desired and the pay.  For example, the manager might have a variety of incentives available, ranging from cash to gift certificates, which could be awarded immediately to employees demonstrating good customer service and, during a shift, to a team that was demonstrating an ongoing vigilance about keeping all the customer and kitchen areas clean. Such incentives should be awarded intermittently and efforts should be made to ensure that no adverse impact is experienced by any group of employees protected by law.

To enhance the strategic directions of improved customer service, cleanliness, and productivity, it will also be helpful to focus on other group incentives and non-monetary rewards to individuals and teams.  For example, from the case we know that the employees value flexible hours.  Instead of providing this as an expected aspect of the job, management could use this flexibility to reward individuals and/or teams for improved customer service and restaurant cleanliness.  Public and private recognition for specific acts of good customer service will also help to increase these specific behaviors. 

Although not discussed in the strategic plan, it is difficult to maintain a company culture when turnover is so high.  Management may want to find ways to reward good employees and encourage them to stay with the company over a longer period of time.  It is possible that increasing challenge and responsibility for individuals and teams may enhance company loyalties and reinforce the company culture of customer service and cleanliness.  Perhaps after employees are competent at single jobs they can be rewarded and encouraged by cross-training in other positions (since challenge is a reward), with some moving up to team leader roles, which provide the rewards of status, trust, respect, and responsibility.

Case Study:  Belles Feuilles North America (BFNA)

Belles Feuilles North America (BFNA) is the United States and Canada branch of Belles Feuilles Construction Group, an international construction company with branches throughout the world.  The Roads Group of BFNA has built highways and bridges throughout North America.

Joe Salazar and Carol Pryblowski have worked as civil engineers at BFNA since they graduated from the Colorado School of Mines in 1993.  Their careers have paralleled each other, as first one, then the other, was hired into the Design Unit.  Both have served as project engineers in Construction Units overseeing highway construction on projects of similar size and complexity.  Each has received good to excellent evaluations from a succession of supervisors.  Friendly competitors, they have attended similar training sessions and enjoy an occasional social lunch together. 

When the opportunity to apply for a promotion to supervisor of an engineering unit came up, they both applied.  Joe was hired.  Carol is bewildered because she truly believed she was better qualified for the position.  A friend encourages her to see a work discrimination lawyer because Carol’s description of the process leads the friend to believe that illegal discrimination has occurred.

1. Based on the information in the case, evaluate whether Carol will be able to provide the lawyer with all the information necessary to prove illegal discrimination.
(Suggested points: 10, [10.12])

2. You are the HR Director at BFNA.  Discuss the main characteristics of the performance management system that you have implemented to withstand legal challenges such as Carol’s.
(Suggested points: 5, [10.14])

Answers:

1. Carol will need to show that she is a member of a protected class (female).

She will also need to show that she suffered an adverse employment decision as a result of a performance evaluation and that her performance warranted a positive decision. 

She will have to show that the promotion was given to someone who is not a member of the same protected class (Joe, who is not female.) 

According to the case, Carol and Joe received similar performance evaluations.  In addition, there is no evidence that performance evaluations were considered in the decision regarding who got the promotion.  Thus, Carol may experience difficulty providing the lawyer with enough evidence to pursue a case of illegal discrimination.

2. (Sample answer follows.)

At the organizational level
Procedures are standardized and uniform for all employees within a job group, such as engineers.

The system includes procedures to detect potentially discriminatory effects or biases and abuses in the system.  For example, where there are only a few of a specific group, we carefully monitor whether personnel decisions and performance ratings have an adverse impact on members of that group.  In the case of clerical employees, for example, which are predominantly female, we monitor whether there is an adverse impact on the males in the system.

The system includes a formal appeals process, where an employee can go beyond his or her supervisor to get a decision that, hopefully, is more objective.

The system was formally explained and communicated to all employees.

From a management standpoint
Overall, the system includes thorough and consistent documentation. Initially, we provided supervisors with formal training and information on how to manage the performance of their employees. This training is repeated and updated every two years. In general, performance information is gathered from multiple, diverse, and unbiased raters (such as peers, supervisor, customers when appropriate, and other employees) who provide specific examples of performance based on first-hand knowledge. 

Employees
Performance dimensions and standards are clearly defined and explained to the employee, job-related, and within the employee’s control.  Employees are given a voice in the review process and treated with courtesy and civility throughout the process.  Employees are given timely information on performance deficiencies and opportunities to correct any deficiencies.

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