MADM 701 - Module 2, Reward Systems

Money is also associated with four of the important symbolic attributes for which humans strive:

Achievement and recognition, status and respect, freedom and control, and power.

Mandated Benefits

1. Social Security. 2. Medicare Taxes/Benefits. 3. Workers' Compensation. 4. Family and Medical Leave Act of 1993. 5. Unemployment Insurance Laws.

What 2 things do all effective rewards programs have in common?

1. They are designed to reward effective employee performance behavior and enhance employees' satisfaction and commitment; effective recognition systems lead to improved employee performance and retention. 2. They are designed to meet the specific and changing needs of the employees; This is why many firms have gone through a trial-and-error approach before they have settled into a unique system that works best today for their employees.

Child Care Benefits

Child care benefits are extremely popular and many of the "best places to work" such as the software development firm SAS have on-site day care. One of the primary benefits of this program is the elimination of day care costs, which can run well over $100 a week, as well as spending quality time with the child before, during, and after work, or, in the case of the TV-monitored systems, during the workday.

Elder Care Benefits

Elder care takes a number of different forms. One of the most common is referral services, which can be used by an employee who has a disabled parent or one who needs constant care. Another form is long-term health care insurance, which provides for nursing homes or at-home care.

Other Pay Approaches: Rewarding New Goals

In addition to being based on the traditional profit, sales, and productivity goals, rewards under this approach are aimed at all relevant employees (top to bottom) contributing to goals such as customer satisfaction, cycle time, or quality measures.

Profitsharing Plans

Some portion of the company's profits is paid into a profit-sharing pool, and this is then distributed to all employees. Sometimes this is given to them immediately or at year-end. Some plans defer the profit share, put it into an escrow account, and invest it for the employee until retirement. To date, research on the impact of profit sharing on performance via improved employee attitudes has been mixed. However, one study of engineering employees did find that favorable perceptions of profit sharing served to increase their organizational commitment (loyalty).6

Base Pay Approach

The amount of money that an individual is paid on an hourly, weekly, monthly, or annual basis. Most managers are paid on an annual salary basis, and the sum is broken down into weekly, biweekly, or monthly amounts. Base pay is often determined by market conditions.

Efficiency Wage Theory

The incentive for managers to pay their employees more than the market-clearing wage in order to increase their productivity or efficiency, or reduce costs associated with employee turnover. Means of hiring and leveraging the best talent.

Time-Off Benefits

The more traditional time benefit is vacation time. In most organizations employees are entitled to at least one week of vacation with pay after being with the firm for one year, and by the end of five years, most are given at least two weeks and, in some cases, as many as four. Moreover, some firms will pay, say, 1.5 times the person's weekly salary for every week of vacation that the individual forgoes, and some employers allow people to accumulate vacation time and, at some point, pay them for any unused time

Agency Theory

Theory draws its name from the fact that the people who are in control of large corporations are seldom the owners; rather, in almost every case, they are agents who are responsible for representing the interests of the owners. The owners of a corporation might be very interested in increasing their own personal wealth, and so they would minimize costs and work to increase the stock value of the enterprise. In contrast, their agents, the managers, might be more interested in expending corporate resources on activities that do not directly contribute to owner wealth. Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents. -Agency theory attempts to explain resolve disputes over priorities between principals and their agents. -Resolving the differences in expectations is called "reducing agency loss." -Performance-based compensation is one way that is used to achieve a balance between principal and agent.

Pay Cuts

There is evidence that shows that if an organization reduces its pay, morale may suffer. So pay may need to continue to escalate. One researcher, for example, interviewed more than 330 businesspeople and found that employee morale can be hurt by pay cuts because the employees view this is an "insult" that impacts on their self-worth and value to the organization.2

Life Cycle Benefits

These are based on a person's stage of life and include such things as child care and elder care.

Other Pay Approaches: Competency Pay

This approach goes beyond skill pay by rewarding the more abstract knowledge or competencies of employees, such as those related to technology, the international business context, customer service, or social skills.

Gallup Organization, Don Clifton

"I've never met an employee who was suffering from too much recognition."

Attitudes and Experiences : Survey Data

(1) only 30 percent feel an obligation to stay with their current employer; (2) individuals who are highly committed to their organization tend to do the best work; (3) workers who are discontent with their jobs are least likely to be productive; (4) employees in large organizations (100 or more people) tend to be less satisfied than their peers in small enterprises; (5) lower-level employees are less satisfied than those in higher-level positions; and (6) the things that the respondents would like their companies to focus on more include being fair to employees, caring about them, and exhibiting trust in them.

Other Benefits

- Concierge services - Tuition assistance - Noninsured benefit programs - medicines and medical assistance - Prepaid legal plans - advise, wills and estates, investment counseling

Pension Benefits

- Private pension plans - generally made by both employee and employer - Individual Retirement Accounts (IRAs) and 401(k) - Tax-deferred basis, salary deferral agreements - Investment options can include mutual stock funds and bonds

Time-Off Benefit

-Paid Time Off and time saving benefits -Vacation time - one week after one year - Paid religious holidays - Paid sick leave - Pay for unused time off

What objectives does money help people attain?

1. Physical (clothing, automobiles, houses) 2. Psychological (status, self-esteem, feeling of achievement)

What are the traditional methods of pay administration?

1. Base Salary 2. Merit Pay

2 Types of Pay for Performance Plans

1. Individual Incentive Plans. 2. Group Incentive Plans.

Limitations of Group Incentive Plans

1. Not everyone may be contributing equal work although incentives may be equally distributed. 2. Late realization of incentives (E.G. ESOP). So their motivational effect on day-to-day performance may, at best, be minimal. 3. Employees come to "expect" rewards as part of their base salary. If the group or firm fails to earn them, as has been the case in recent years, motivation and productivity may suffer because the employees feel they are not being paid a fair compensation. In groups where some individuals are poor performers, everyone in the group ends up being punished.

Steps to set up a formal and informal recognition program?

1. When introducing new recognition procedures and programs, take advantage of all communication tools including Intranet and other knowledge-sharing networks—let everyone know what is going on. 2. Educate the managers so that they use recognition as part of the total compensation package. 3. Make recognition part of the performance management process, so that everyone begins to use it. 4. Have site-specific recognition ceremonies that are featured in the company's communication outlets such as the weekly newsletter and the bimonthly magazine. 5. Publicize the best practices of employees, so that everyone knows some of the things they can do in order to earn recognition. 6. Let everyone know the steps that the best managers are taking to use recognition effectively. 7. Continually review the recognition process in order to introduce new procedures and programs and scrap those that are not working well. 8. Solicit recognition ideas from both employees and managers, as they are the ones who are most likely to know what works well—and what does not.

CEOs Salaries

A case in point is the huge pay package most CEOs of large firms receive, but the performance of their firms certainly did not justify the millions of dollars of compensation. The result of such disparities is that a growing number of corporate shareholders are demanding that the chief executive officer pay be tied to a multiple of the lowest worker's pay, thus controlling the range between the lowest and highest paid person in the organization.33 A public poll indicated that a vast majority (87 percent) believe that executives "had gotten rich at the expense of ordinary workers."

Wellness Programs

A special type of benefit program that focuses on keeping employees from becoming physically and/or mentally ill. Another wellness practice is to encourage employees to exercise by giving them a financial payment such as $1 for every mile they jog during the year. So a person who jogs three miles a day at the company gym will earn $15 a week. As indicated earlier in the chapter, some also encourage their people to keep their weight under control, and individuals who are too heavy are paid to lose the extra weight. For example, a firm may pay $10 for every pound an employee loses.

Life, Disability, and Health Insurance

Another major category of traditional benefits consists of insurance coverage. Virtually all large (but less than half of those with 10 or fewer employees) companies offer health insurance to their employees and pay a major portion of the premiums for this coverage. However, about three-quarters (and growing) of U.S. employers do require employee participants to share the health costs via deductibles, coinsurance, copayments, and other means. - Majority offer health insurance and may major portion of premiums for the coverage - ¾ US employers make employees typically required to pay deductibles, coinsurance, copays - Life insurance often based on individual salary - Disability insurance available for minimum premium - Have become an expected benefit - Patient Protection and Affordable Care Act (ObamaCare) - make insurance affordable, limit discrepancies, required to maintain minimum essential coverage, competitive health insurance for individuals to buy. Does not require businesses to provide health benefits to workers - Employers can face penalties if they don't make affordable coverage available if over # employees - Dependent coverage up to age 26 - Expanding to include prescription drugs, vision care, mental health, and dental car

Other Pay Approaches: Commissions Beyond Sales to Customers

As with all of these new pay plans, the commissions paid to sales personnel are aligned with the organization's strategy and core competencies. As a result, besides sales volume, the commission is determined by customer satisfaction and sales team outcomes such as meeting revenue or profit goals.

BENEFITS AS ORGANIZATIONAL REWARDS

Benefits constitute a large percentage of most company's expenses. In recent years these costs have been escalating. For example, over the past decade premiums for health coverage alone have increased well over 75 percent and the employees normally pay only a small portion of that cost. Benefit costs to employers range between 30 to 35 percent of wages and salaries. So a company that is paying an employee $70,000 annually is spending an additional $22,000 in benefits including life and health insurance, a pension plan, mandated government benefits such as Social Security, vacation time, and so forth.

Potential Limitations of Bonus Systems

Bonuses are also proving unpopular in some situations such as educational compensation. Delegates to the National Education Association convention, for example, rejected the idea of linking job performance to bonuses. One reason is that the association believes that a bonus system will discourage people from teaching lower-ability students or those who have trouble on standardized tests, as bonuses would be tied to how well students perform on these tests. Finally, individual incentive plans may pit employees against one another that may promote healthy competition, or it may erode trust and teamwork.

Effective Pay Systems Need 3 Addresses (Kerr)

First, the organization must ask itself what outcomes it is seeking. Examples include higher profits, increased sales, and greater market share. Second, the enterprise must be able to measure these results. Third, the organization must tie its rewards to these outcomes. The problem for many of today's organizations is that they do still not know what they want to achieve or are unable to measure the results.

Other Pay Approaches: Broadbanning

Formally defined as a compensation strategy, broadbanding "is the practice of collapsing the traditional large number of salary levels into a small number of salary grades with broad pay ranges." So, for example, rather than having three levels of supervisors whose salary ranges are $25,000 to $40,000, $35,000 to $55,000, and $50,000 to $80,000, the company will have one supervisory salary grade that extends from $25,000 to $80,000. This allows a manager to give a salary increase to a supervisor without having to first get approval from higher management because the supervisor's salary puts the individual in the next highest salary level.

Potential Limitations of Reward Systems

In addition to these underlying problems, another obstacle is that reward systems such as pay for performance are practical only when performance can be easily and objectively measured. In the case of sales, commissions can work well. In more subjective areas such as most staff support jobs and general supervision, they are of limited, if any, value. A second problem is that individual incentive rewards may encourage only a narrow range of behaviors. For example, a salesperson seeking to increase his or her commission may spend less time listening to the needs of the customer and more time trying to convince the individual to buy the product or service, regardless of how well it meets the buyer's needs. Lastly, ethical issues brought out recent years, the pay for performance, unfortunately, does not add the qualifier, pay for performance with integrity.

The Use of Bonuses

In the roller-coaster economy, most companies are moving to bonus pay based on performance rather than fixed pay increases. Successful managers and individuals who can generate large accounts for a firm can also expect sizable bonuses.

Agency Theory: Risk Taking

Managers may be greater risk takers who are willing to accept losses in return for the increased opportunity for greater profits and market share; when their decisions are incorrect, the impact may be less than it would be on the owners and thus not greatly diminish their willingness to take risks.

Medicare Taxes

Mandated benefits. Federal government taxes levied on employees and employers; this federal government-mandated program pays both a retirement benefit and Medicare benefits, although payments will vary depending on a number of factors such as the age at which the person elects to start receiving payments.

Family and Medical Leave Act of 1993

Mandated benefits. Requires all organizations with 50 or more employees to grant any worker who has been employed there for at least one year an unpaid leave of up to 12 weeks for childbirth, the adoption of a child, to care for a family member with a serious health problem, or because of a personal health problem. During this period, all of the employee's existing health benefits must remain intact, and the individual must be allowed to return to the same or an equivalent job after the leave.

Social Security

Mandated benefits. The initial purpose of Social Security was to provide limited income to retired people to supplement such things as their personal savings, private pensions, and part-time work earnings. Both employees and employers are required to pay a Social Security tax.

Unemployment Insurance Laws

Mandated benefits. These laws provide benefits if an individual is unable to work through no fault of their own. The benefits derive from tax on employers that can range from 0.1% to 5% to taxable payroll.

Workers Compensation

Mandated benefits. This is insurance that covers individuals who suffer a job-related illness or accident, regardless of fault. For example, suppose a manager trains all employees to wear safety goggles when at their machines. One employee does not and experiences an eye injury on the job. The company would still be responsible to provide workers' compensation benefits. Employers pay the cost of this insurance.

Merit Pay Approach

Merit pay is typically tied to some predetermined criteria. For example, a company may give all of its employees a cost-of-living allowance and then allocate additional funds for those who are judged "meritorious." The intent of merit pay is to reward and thus motivate and retain the star performers. In a way, merit pay is supposed to be a form of "pay for performance." Individuals who do superior work are given increases greater than the rest of their colleagues. However, because of the problems of linking merit pay directly with performance, many organizations have created specific pay-for-performance plans. The amount of merit pay can take one of two forms: a flat sum, such as $3,000, or a percentage of the base salary, such as 6 percent. In some cases companies use a combination of the two, such as giving everyone who qualifies for merit pay an additional 6 percent up to a maximum amount of $5,000.

Merit Pay Downsides

One of the problems is that the criteria for determining merit are often nebulous because the organization does not clearly spell out the conditions for earning this pay. An example is a firm that decides to give merit to its best employees as described above. Unless the criteria for "best" are objectively spelled out, most of those who do not get merit money will feel left out because they believe they are among the best. A second, and related, problem is that it can often be difficult to quantify merit pay criteria. In particular, the work output of some people, production-line and salespeople being good examples, is easily measured, but the work output of others, such as accountants, engineers, and other staff specialists, office personnel, and managers/supervisors, may be quite difficult to objectively measure. A second major problem is that merit pay can end up being "catch-up" pay. For example, everyone may be given a 2 percent across-the-board raise and then those whose pay is extremely low are given merit to get them closer to market value. This approach is common in enterprises that suffer salary compression brought on by the need to pay higher salaries to hire new personnel at the lower levels. Over time, the salary range between new hires and those who have been with the organization for, say, five years may be totally eliminated. So unless the longer-tenured employees are given more money, there is the likelihood that they will look for jobs at companies that are willing to pay them more based on their job experience

Downsides: Flexible, Cafeteria-Style Benefits

Organizations have also found that these plans can be somewhat expensive to administer because there are many different types of benefit packages, and someone has to keep track of what each person has chosen. Additionally, employees are usually allowed to make changes in their package on an annual basis, further complicating the problem of administering the benefits and the accompanying tax implications. Finally, even though employees seem to like cafeteria-style benefit plans, there is no assurance that they always make rational decisions.For example, young employees with families may opt to deal only with more immediate concerns such as better hospital coverage for their spouse and children and completely ignore the benefits of contributing to a retirement program for their future.

Employee Assistance Programs (EAP)

Originally designed to assist employees who had problems with alcohol. In recent times, EAPs deal with drug abuse and now have generally expanded into marital problems and financial planning. The purpose of these programs is to provide help to employees in dealing with personal problems that can negatively impact their lives and their job performance. The use of EAPs should be kept confidential so that employees are not hesitant to use the service for fear of career repercussions.

Agency Theory: Time Horizons

Owners may have longer time horizons because their goal is to maximize their value over time. Managers may have much shorter time horizons because their job tenure may require good short-term results, in addition to the fact that their bonuses or merit pay may be tied closely to how well they (or the corporation) performed in the last four quarters. This last point about managers trying to look good in the short run is given as one of the major reasons for the 2008 economic crisis. For example, Cascio and Cappelli conclude in their analysis by noting that even one of the founding fathers of agency theory recognized that "Where questionable ethics intersect with company and individual incentives, managers may end up cheating on practices such as budgeting because it makes their lives easier." They go on to note that "every scandal has involved executives pushing the financial and accounting envelope to the point of breaking to inflate profits, cover losses and make their own performances better."

Individual Incentive Pay Plans : Types of Arrangements

Pay for some jobs is based entirely on individual incentives. However, because of the risk factor, in the very turbulent economy of recent years many companies have instituted a combination payment plan in which the individual receives a guaranteed amount of money, regardless of how the person performs. One :A salesperson might be paid 10 percent of all sales with a minimum guarantee of $2,000 per month. Two : Another popular approach is to give the person a combination salary/incentive such as $26,000 plus 5 percent of all sales. Three : A third approach is to give the person a "drawing account" against which the individual can take money and then repay it out of commissions. An example would be a salesperson who is paid a flat 10 percent of all sales and can draw against a $25,000 account. If the first couple of months of the year are slow ones, the individual will draw on the account, and then as sales pick up the person will repay the draw from the 10 percent commissions received.

Individual Incentive Pay Plans : Background

Pay people based on output or even quality. Individual incentive plans have been around for many years. They were particularly popular during the height of the scientific management movement over a hundred years ago in the form of piece rate incentive plans. For example, in those early days a person loading iron ingots in a steel mill could earn as much as 7 cents per long ton (2,200 pounds) under an incentive plan. As a result, a highly skilled loader could make 50 percent more money per day than an individual who was being paid a basic day rate. So individuals who were willing to work hard and had the necessary stamina could opt for incentive pay that was determined by the amount of iron ore they were able to load each day

Overall Salaries: Baseball Example

Perhaps a better gauge of the effect of pay on performance of baseball teams may be total payroll. Compensation expert Edward Lawler echoes these sentiments, noting that there is a strong relationship between the total payroll of teams and how many games they win. "In a world of free agency, it takes a high payroll to attract and retain top talent. Thus, teams with the highest payrolls usually end up in the World Series."Additionally, Lawler has argued that the rewarding of team performance is more important than the size of the pay differences among the individual players.

Gainsharing Plans

Plans designed to share with the group or team the net gains from productivity improvements such as reduced product damage, customer complaints, accidents, or shipping errors. The logic behind these plans is that if everyone works to reduce cost and increase productivity, the organization will become more efficient and have more money to reward its personnel.

Creativity for Competitive Advantage

Recognizing creativity is becoming increasingly necessary for competitive advantage. One recent estimate is that professionals (e.g., software developers and other knowledge workers) whose primary responsibilities include innovating, designing, and problem solving (i.e., the creative class), make up an increasing percentage of the U.S. workforce. To get peak performance from its creative workforce, the widely respected and successful software company SAS rewards excellence with challenges, values the work over the tools, and minimizes hassles.

Potential Limitations of Stock Options & Bonuses

Self-fulfilling; A study found that the heads (CEOs) of corporations holding stock options leads to high level of investment outlays and brings about extreme corporate performance (big gains and big losses). The results thus indicate that stock options prompt CEOs to take high-variance risks (not simply larger risks), but importantly it was also found that option-loaded CEOs deliver more big losses than big gains.

Other Pay Approaches: Skill Pay

This approach recognizes the need for flexibility and change by paying employees based on their demonstrated skills rather than the job they perform. Although it is currently used with procedural production or service skills, the challenge is to apply this concept to the more varied, abstract skills needed in new paradigm organizations (e.g., design of information systems, cross-cultural communication skills).

Other Pay Approaches: Rewarding Leadership Effectiveness

This pay approach is based on factors beyond just the financial success of the organization. It also includes an employee-satisfaction measure to recognize a manager's people-management skills. For example, at Nationwide Insurance, management bonuses are tied to their people's satisfaction scores.

The Use of Stock Options

This plan is typically used with senior-level managers and gives them the opportunity to buy company stock in the future at a predetermined fixed price. The basic idea behind the plan is that if the executives are successful in their efforts to increase organizational performance, the value of the company's stock will also rise.4

True or False: For most organizations, pay dominates the organizational reward system.

True. There is considerable evidence that pay is vital not only for hiring and retaining talented employees, but also if properly administered for its positive impact on desirable outcomes such as productivity, quality, and customer service.

True or False: The challenge for managers is to administer rewards properly.

True; In particular, this means setting up pay systems that allow employees to know the outcomes that are to be rewarded, that measure these outcomes as fairly and objectively as possible, and that tie monetary incentives directly to the results.

Employee Stock Ownership Plan (ESOP)

Under an ESOP the employees gradually gain a major stake in the ownership of the firm. The process typically involves the company taking out a loan to buy a portion of its own stock in the open market. Over time, profits are then used to pay off this loan. Meanwhile the employees, based on seniority and/or performance, are given shares of the stock, a key component of their retirement plan. As a result, they eventually become owners of the company. Regarding the effect an ESOP can have on employee engagement and intrapreneurship, Todd Carroll, CFO of Marlin Network, commented, "It's been pretty amazing to watch how people have stepped up and started acting like owners."63 However, because accounting rules now require more oversight, many companies such as Aetna and Time Warner are reducing the number of employees who are eligible to receive ownership in their firm as part of the incentives package. Also, when the media company Tribune filed for bankruptcy, it exposed the risks to employees who had bought into the ESOP, especially retirees and those who were promised deferred compensation.

Flexible, Cafeteria-Style Benefits

Under this arrangement, the organization will establish a budgeted amount that it is willing to spend per employee, and the individual is then allowed to decide how to spend this money. There is evidence that these cafeteria-style programs can lead to increased satisfaction and reduced turnover. For example, some employees may want more life insurance because they have a young family, whereas others may prefer to spend more on health insurance coverage because they have a spouse with a debilitating illness.

Newer Types of Benefits

Wellness programs and assistance with family related responsibilities.

Pay Spread: Baseball Example

With statistical methods used to control for such things as total team payroll, team talent, and market size,31 the data were analyzed from 1,644 players on 29 teams over a nine-year period. It was found that, all other things being equal, the greater the pay spread on a team, the more poorly the players performed. These findings led to the conclusion that pay distributions have significant negative effects on player performance.

Other Pay Approaches: Pay for Knowledge Workers in Teams

With the increasing use of teams, pay is being linked to the performance of knowledge workers or professional employees who are organized into virtual, product development, interfunctional, or self-managed teams. In some cases, part of this pay is initially give to individuals who have taken additional training, the assumption being that their performance will increase in the future as a result of their newly acquired knowledge or skills.

True or False: Formal recognition is a vital part of the reward system that makes up the environmental component of the social cognitive framework for understanding and effectively managing organizational behavior

Yes.