Chapter 4: Organizational Context: Reward Systems

Question 1

Why are rewards systems important?

Answer 1

• In social cognitive theory, reward consequences or contingencies play an important role in organizational behavior.
• An organization may have the latest technology, well-designed structures, and a visionary strategic plan, but unless the people at all levels are rewarded, all these other things may become hollow and not be carried out for performance improvement.
• emphasize the emerging importance of human capital
• Because intellectual/ human capital is now recognized as being central to competitive advantage in the new paradigm environment, attention must be given to rewarding this capital to sustain/ retain it and leverage it

Question 2

Money: four of the important symbolic attributes

Answer 2

1) achievement and recognition
2) status and respect
3) freedom and control
4) power

Question 3

Money affects:

Answer 3

motivation, job attitudes, and retention

In particular, money helps people attain both physical (clothing, automobiles, houses) and psychological (status, self-esteem, a feeling of achievement) objectives

Question 4

Agency Theory

Answer 4

• agency theory is concerned with the diverse interests and goals that are held by a corporation’s stakeholders (stockholders, managers, employees) and the methods by which the enterprise’s reward system is used to align these interests and goals
• widely recognized finance and economics approach to understanding behavior by individuals and groups both inside and outside the corporation
• The 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
• Agency theory also examines the role of risk and how owners and managers may vary in their approach to risk taking.

Question 5

Pay for Performance

Answer 5

• One study showed that the greater the pay spread, the worse the players performed
• 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
• A public poll indicated that a vast majority (87 percent) believe that executives “had gotten rich at the expense of ordinary workers
• overall, reward does not decrease intrinsic motivation

Question 6

Effective Pay System Requirements

Answer 6

1. The organization must clarify it’s goals (increased sales, higher profits, more market share).
2. Results must be measurable
3. Tie rewards to the outcomes

Question 7

Base Wages or Salary Approach

Answer 7

• the amount of money that an individual is paid on an hourly, weekly, monthly, or annual basis
• If base pay is not in line with the market rate, organizations may find that they are unable to hire and retain many of their personnel

Question 8

Merit Pay Approach

Answer 8

• employees a cost-of-living allowance and then allocate additional funds for those who are judged “meritorious.”
• the criteria for determining merit are often unclear
• difficult to quantify merit pay criteria

Question 9

Individual Incentive Pay Plans

Answer 9

• individual incentive plans also pay people based on output or even quality.
• Some might include a combination payment plan in which the individual receives a guaranteed amount of money, regardless of how the person performs
• provide a “drawing account” against which the individual can take money and then repay it out of commissions

Question 10

Bonuses

Answer 10

• Bonus pay for KPI’s met

- most companies are moving to bonus pay based on performance rather than fixed pay increases

Question 11

Stock Options

Answer 11

• Option to buy company stock in the future at a predetermined fixed price
• if the executives are successful in their efforts to increase organizational performance, stock price will also increase

Question 12

Pay for Performance - Potential Limitations

Answer 12

• one problem with bonuses and stock options is that they may have led to the excesses and ethical breakdowns experienced by too many firms in recent years
• The results of a study 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
• measurement of KPI is another limitation
• narrow range of behaviors focused on bonus KPI’s
• individual incentive plans may pit employees against one another that may promote healthy competition, or it may erode trust and teamwork

Question 13

Group Incentive Plans Types

Answer 13

• gainsharing plans
• profit sharing
• employee stock ownership plan (ESOP)

Question 14

Gainsharing Plans

Answer 14

• share with the group or team the net gains from productivity improvements such as reduced product damage, customer complaints, accidents, or shipping errors.
• if everyone works to reduce cost and increase productivity, the organization will become more efficient and have more money to reward its personnel
• The first step is to determine the costs associated with producing the current output
• Then, at some predetermined point, such as six months, costs and output are measured and productivity savings are determined
• These gainsharing savings are then passed on to the employees, say, on a 75:25 basis

Question 15

Profit-sharing Plans

Answer 15

• typically some portion of the company’s profits is paid into a profit-sharing pool then distributed to all employees.
• Some plans defer the profit share, put it into an escrow account, and invest it for the employee until retirement

Question 16

employee stock ownership plan (ESOP)

Answer 16

• 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.

Question 17

Group Incentive Plans Limitations

Answer 17

• often distribute rewards equally even if the contribution to the result is not the same
• rewards may be realized decades later as in the case of an employee’s profit-sharing or ESOP that is placed in a retirement account
• if group rewards are distributed regularly, such as quarterly or annually, employees may regard the payments as part of their base salary and come to expect them every year

Question 18

New Pay Techniques

Answer 18

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

Question 19

Commissions beyond sales to customers

Answer 19

• are aligned with the organization’s strategy and core competencies
• besides sales volume, the commission is determined by customer satisfaction and sales team outcomes such as meeting revenue or profit goals

Question 20

Rewarding leadership effectiveness

Answer 20

• includes an employee-satisfaction measure to recognize a manager’s people-management skills

Question 21

Rewarding new goals

Answer 21

• 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

Question 22

Pay for knowledge workers in teams

Answer 22

• part of this pay is initially given 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.

Question 23

Skill pay

Answer 23

• 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)

Question 24

Competency pay

Answer 24

• 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

Question 25

Broadbanding

Answer 25

• 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 (larger salary range)
• 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
• sends a strong message that the organization is serious about change and flexibility

Question 26

Recognition as an organizational reward

Answer 26

• In addition to money, forms of recognition to identify and reward outstanding performance
• both formal organizational recognition and social recognition used systematically by supervisors and managers is very important to their people and their day-to-day behaviors and performance effectiveness
• there is considerable research evidence that social recognition (informal acknowledgment, attention, praise, approval, or genuine appreciation for work well done) has a significant impact on performance at all levels and types of organizations

Question 27

Non-Financial Rewards

Answer 27

• Nonfinancial rewards can be given any time
• genuine social recognition
• increased responsibility

Question 28

Employee survey results

Answer 28

(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

Question 29

Steps to set up a formal and informal recognition program

Answer 29

1. Communicate it
2. Educate the managers on the program
3. Make recognition part of the performance management process
4. Have site-specific recognition ceremonies
5. Publicize the best practices of employees
6. Communicate what best managers are doing
7. Continually review the recognition process (add new items, scrap things that don’t work)
8. Solicit recognition ideas from both employees and managers

Question 30

efficiency wage theory

Answer 30

• firms can save money and become more productive if they pay higher wages and better benefits because they are able to hire and leverage the best talent.

Question 31

Mandated benefits

Answer 31

• Social Security
• Workers Compensation
• FMLA (Family and Medical Leave Act)

Question 32

Other major benefits

Answer 32

• medical, life and disability insurance
• pension
• time off benefit (PTO, vacation, sick, holidays)

Question 33

Newer Benefits

Answer 33

• wellness programs
• life cycle benefits (child or elder care)
• EAP (employee assistance program)
• cafeteria-style benefits

Question 34

intrinsic motivation

Answer 34

• was usually measured in the laboratory by time spent on a task following the removal of the reward
• However, through the years, there have been many criticisms of these studies, and a meta-analysis of 96 experimental studies concluded that “overall, reward does not decrease intrinsic motivation.”

Question 35

National Association for Employee Recognition have concluded

Answer 35

practicing human resource professionals and managers still seem to underestimate how
useful recognition can be in motivating employees to achieve goals.

Question 36

Steven Kerr’s comments on money

Answer 36

“Nobody refuses it, nobody returns it, and people who have more than they could ever use do dreadful things to get more.”