OB Chapter 4: Reward Systems

Base Pay approach

Base Pay: amount of money that an individual is paid on an hourly, weekly monthly, or annual basis • determined by market conditions • does not reward above-average performance or penalize below-average performance • problem: base pay tends to be most competitive at entry level and less competitive thereafter

Life-Cycle Benefits

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

Merit Pay approach

form of "pay for performance"... people who do superior work are given greater increases than their colleagues • pay can take one of these 2 forms: flat sum or % of base salary

Life, Disability, and Health Insurance

health benefits; company covers some insurance; companies make affordable coverage available for employees

Garnishing Plan

if everyone works to reduce cost & increase productivity, the organization will be more efficient and have more $$ to reward its employees • net gains (savings) are shared w/ employees

3) Rewarding new goals

rewards all relevant employees (any job level) that contribute to goals such as customer satisfaction, cycle time, or quality measures

6) Competency pay

rewards the more abstract knowledge or competencies of employees

Group Incentive Pay Plan

teamwork can lead to higher productivity, better quality, higher satisfaction than individuals working alone • garnishing plan • profit sharing • employee stock ownership plan (ESOP) • problems: often distribute rewards evenly even though everyone in the group may be contributing different amounts

Purpose of rewards

to motivate employees' performance and encourage their loyalty and retention

2) Rewarding leadership effectiveness

(based on factors beyond just financial successes of organization)... measures employee-satisfaction measure to recognize a manager's people-management skills

New Pay Techniques

1) Commissions beyond sales to customers 2) Rewarding leadership effectiveness 3) Rewarding new goals 4) Pay for knowledge workers in teams 5) Skill pay 6) Competency pay 7) Broadbanding

Benefits as rewards (Traditional)

1) Mandated Benefits 2) Life, Disability, and Health Insurance 3) Pension Benefits 4) Time-Off Benefit

Benefits as rewards (New)

5) Wellness Programs 6) Life-Cycle Benefits 7) Other Benefits 8) Flexible, Cafeteria-Style Benefits

7) Broadbanding

a small number of salary grades with broad pay ranges (instead of a large number of different salary levels)

Agency Theory

approach to understanding behavior of individuals & groups inside & outside the corporation • focuses on the corporations' interests/goals and the methods by which the company's reward system is used to align the interests/goals

Wellness Programs

focuses on keeping employees from becoming physically and/or mentally ill ex: coping with stress

1) Commissions beyond sales to customers

commission is determined by customer satisfaction and sales team outcomes (meeting revenue or profit goals) ... (instead of commission being solely based on sales volume)

Employee Stock Ownership Plan (ESOP)

employees gradually gain ownership of firm through stocks

Other Benefits

ex: concierge services, tuition assistance for college education or advanced degree, etc.

Time-Off Benefit

paid time off

Individual Incentive Pay Plan

pay people based on output or quality (ex: commission) • bonuses • stock-option plan: managers can buy company stock in the future at a predetermined fixed price; if executives are successful in performance, their stock value will rise) • limitations: only works when performance can be easily and objectively measured

5) Skill pay

pays employees based on their demonstrated skills rather than the job they perform (purpose is to apply this to more abstract stills needed)

Profit Sharing

portion of profits are put in a profit-sharing pool and distributed to employees

Pension Benefits

private pension plans

Mandated Benefits

required by law ex: Social Security, workers' compensation

Flexible, Cafeteria-Style Benefits

• firms offer employees flexible times for arriving & departing work • employees are allowed to put together their own package by choosing benefits that fit their personal needs (w/in a certain budget)

How does money affect behavior?

• helps people attain physical (clothing, cars, houses) and psychological (status, self-esteem) objectives • associated w/ 4 important attributes for which humans strive: achievement & recognition, status & respect, freedom & control, power

Research on effectiveness of pay

• money is a motivator: the more people get, the more they want • reward systems have a strong influence on employee trust in the workplace • money means different things to different people • money can be an effective positive reinforcement strategy to improve performance • for money to be an effective reward system, the system must be objective/fair and be administered solely on employee's performance

Importance of recognition

• social recognition (attention, praise, etc) has a positive impact on performance • financial rewards can only be given at certain times a year; nonfinancial rewards (recognition) can be given at any time • giving employees more responsibility and recognizing/helping workers with family obligations increases their loyalty to company