The Organizational Reward System

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The Organizational Reward System

• Chapter 12

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Learning Objectives

1. Define organizational rewards.
2. Distinguish between intrinsic and extrinsic
   rewards.
3. List several desirable preconditions for
   implementing a pay-for-performance program.
4. Define job satisfaction and list its five major
   components.
5. Summarize the satisfactionperformance
   relationship.

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Learning Objectives (cont.)

1. Define compensation, pay, incentives, and
   benefits.
2. List several pieces of government legislation
   that have had a significant impact on
   organizational compensation.
3. Explain the equity theory of motivation.
4. Discuss internal, external, individual, and
   organizational equity.

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Defining the System

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

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Defining the System

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

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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.

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Intrinsic versus ExtrinsicRewards
Table 12.1
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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

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Selection of Rewards

• External factors that place limitations on an
  organizations reward system also exist
• These factors (usually beyond the control of the
  organization) include such things as
• Organizations size
• Environmental conditions
• Stage in product life cycle
• Labor market

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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

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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

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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

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Job Satisfaction and Rewards

• Job satisfaction
• An employees general attitude toward the job
• Organizational morale
• An employees 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.

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Five Major Components of Job Satisfaction
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Other Components of Job Satisfaction
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The SatisfactionPerformance Controversy

• Two propositions concerning the
  satisfaction-performance theory exist
• Satisfaction causes performance
• Satisfaction is the effect rather than the cause
  of performance

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The SatisfactionPerformance Controversy

• Rewards constitute a more direct cause of
  satisfaction than does performance
• Rewards based on current performance enhance
  subsequent performance

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Determinants of Employee Satisfaction and
Dissatisfaction
Figure 12.1
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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.

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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.

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Employee Compensation

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

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Components of Employee Compensation
Table 12.2
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Compensation Policies

• Minimum and maximum levels of pay
• taking into consideration the worth of the job to
  the organization
• the organizations ability to pay
• government regulations
• union influences
• market pressures

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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

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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

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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 elses business

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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

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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

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DavisBacon Act

• DavisBeacon 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

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WalshHealey Public Contracts Act

• WalshHealey 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

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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

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History of Minimum Wage Rates
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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

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Federal Wage Garnishment Law

• Federal Wage Garnishment Law
• Law limits amount of an employees 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
  employees debt to a creditor

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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

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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

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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

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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

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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

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Model of the Consequences of Pay Dissatisfaction
Figure 12.2
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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

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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.

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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.

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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

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Pay Satisfaction Model

• An employees 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

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Pay Satisfaction Model

• The perceived inputs and outcomes of friends and
  peers
• Refer to the individuals 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

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Model of the Determinants of Pay Satisfaction
Figure 12.3
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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