The Organizational Reward System

1. The Organizational Reward System Chapter 12

2. 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.

3. Learning Objectives (cont.) 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.

4. Defining the System • Organizational reward system • Organizational system concerned with the selection of the types of rewards to be used by the organization.

5. Defining the System • Organizational rewards • Rewards that result from employment with the organization • includes all types of rewards, both intrinsic and extrinsic.

6. Selection of Rewards • Intrinsic rewards • Rewards internal to the individual and normally derived from involvement in certain activities or tasks. • Extrinsic rewards • Rewards that are controlled and distributed directly by the organization and are of a tangible nature.

7. Intrinsic versus ExtrinsicRewards Table 12.1

8. 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 May include office location, allocation of certain pieces of equipment, assignment of preferred work tasks, and informal recognition

9. Selection of Rewards • 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

10. Relating Rewards to Performance 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

11. Relating Rewards to Performance Surveys repeatedly show that employees do not have much confidence that a positive relationship exists between the two Evidence shows that paying for performance is working at the highest levels in many companies

12. Preconditions for Implementing Pay-for-Performance Program Trust in management Absence of performance constraints Trained supervisors and managers Good measurement systems Ability to pay Clear distinction among cost of living, seniority, and merit Well-communicated total pay policy Flexible reward schedule

13. Job Satisfaction and Rewards • Job satisfaction • An employee’s general attitude toward the job • Organizational morale • An employee’s feeling of being accepted by and belonging to a group of employees through common goals, confidence in the desirability of those goals, and the desire to progress toward the goals.

14. Five Major Components of Job Satisfaction

15. Other Components of Job Satisfaction

16. The Satisfaction–Performance Controversy Two propositions concerning the satisfaction-performance theory exist Satisfaction causes performance Satisfaction is the effect rather than the cause of performance

17. The Satisfaction–Performance Controversy Rewards constitute a more direct cause of satisfaction than does performance Rewards based on current performance enhance subsequent performance

18. Determinants of Employee Satisfaction and Dissatisfaction Figure 12.1

19. Employee Compensation • Compensation • All the extrinsic rewards that employees receive in exchange for their work • base wage or salary, any incentives or bonuses, and any benefits. • Pay • Refers only to the actual dollars employees receive in exchange for their work.

20. Employee Compensation • Base wage or salary • Hourly, weekly, or monthly pay that employees receive for their work. • Incentives • Rewards offered in addition to the base wage or salary and usually directly related to performance.

21. Employee Compensation • Benefits • Rewards employees receive as a result of their employment and position with the organization.

22. Components of Employee Compensation Table 12.2

23. Compensation Policies • Minimum and maximum levels of pay • taking into consideration the worth of the job to the organization • the organization’s ability to pay • government regulations • union influences • market pressures

24. Compensation Policies • General relationships among levels of pay • between senior management and operating management, operative employees, and supervisors • The division of the total compensation dollar • what portion goes into base pay, incentive programs, and benefits

25. 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 • Also whether pay information will be kept secret or made public

26. Pay Secrecy Justification for pay secrecy To avoid any discontent that might result from employees’ knowing what everybody else is being paid Many employees feel very strongly that their pay is nobody else’s business

27. Pay Secrecy • 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

28. Pay Secrecy 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

29. Davis–Bacon 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 • Overtime of time-and-a-half – For more than 40 hours per week 12-29

30. Walsh–Healey Public Contracts Act • 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

31. Fair Labor Standards Act (FLSA) • Fair Labor Standards 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 and be paid time-and-a-half for hours over 40 worked in one week • places restrictions on the employment of individuals between ages 14 and 18

32. History of Minimum Wage Rates

33. Equal Pay Act • 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

34. Federal Wage Garnishment Law • Federal Wage Garnishment Law • 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 • Garnishment • A legal procedure by which an employer is empowered to withhold wages for payment of an employee’s debt to a creditor

35. Lilly Ledbetter Fair Pay Act of 2009 • Lilly Ledbetter Fair Pay Act of 2009 • addresses a Supreme Court ruling by eliminating any time limitations for pay discrimination claims

36. 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

37. 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

38. The Importance of Fair Pay • 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

39. The Importance of Fair Pay • 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

40. Model of the Consequences of Pay Dissatisfaction Figure 12.2

41. Pay Equity • Equity theory of motivation • 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

42. 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 an organization are being paid compared to employees in other organizations performing similar jobs.

43. Pay Equity • Individual equity • Addresses the rewarding of individual contributions; is very closely related to the pay-for-performance question. • Organizational equity • Addresses how profits are divided up within the organizations.

44. 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

45. Pay Satisfaction Model An employee’s perception of what pay should be depends on several factors: • 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

46. Pay Satisfaction Model • 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

47. Model of the Determinants of Pay Satisfaction Figure 12.3

48. 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