HRM Chapter 8 – Rewarding Employees PDF

HRM chapter 8 – Rewarding Employees Lecture: Reward influences attraction, retention and motivation. Learning objectives Evaluate the importance of pay level from the perspective of attraction, retention and motivation. Describe three different approaches to devel...

HRM chapter 8 – Rewarding Employees Lecture: Reward influences attraction, retention and motivation. Learning objectives Evaluate the importance of pay level from the perspective of attraction, retention and motivation. Describe three different approaches to developing pay structures. Examine the processes through which performance-related pay influences attraction, retention and motivation Evaluate which benefits organizations should offer in addition to those that they are legally obliged to. Evaluate whether pay should be secret (or transparent) depending on individual and structural factors. 3 Structure of this topic 1. Why is reward management important? 2. How do organizations develop pay structures? 3. Should we use financial incentives to motivate people to work harder? 4. What benefits should we offer in addition to those we are legally obliged to? 5. Should we encourage people to be open and transparent about their pay levels? Video 2: Key concepts in Reward Management What are rewards?  Financial and nonfinancial elements used to compensate employees for their time, effort and commitment. It includes: o Base Pay o Incentives o Benefits Why should we care about reward management? Attraction Retention Motivation They enable organizations to fulfill their ethical and legal responsibilities to ensure that employees are fairly compensated for the work that they do. Key Decisions in reward management: Influences on reward decisions: 1. Competition and market forces 2. Organization’s philosophy 3. Legal responsibilities 4. Strategy 5. Ability to pay (budgetary constraints) Takeaways: Rewards are important because they influence employee attraction, retention and motivation. These are important not only for employees but also for organizations to fulfill their ethical and legal responsibilities and deliver on their strategic goals. Decisions about what and how to rewards people are influenced by multiple factors boith within and outside of the organization. Part 3 – Pay Structure: Pay structure is the hierarchical organization of jobs in terms of pay Job structure: o Hierarchy of jobs in the organization Pay level: o The average pay range for a specific job in the organization. Whole job ranking What does your organization do, and which jobs are most important for this? o Rank based on what is best and how much budget you have Point-factor Method Creating a pay structure based on job evaluation of positions in the organization Compensable factors: those factors organizations use to evaluate jobs and choose to pay for o Allocate points to each compensable factor for each job  o Allocate weight to each compensable factor o Outcome: point value for each job. Factor-Comparison Method Pay comparisons of the same position in the market Pay survey of benchmarking, or key, jobs. What is a comparable position? o Industry, type of organization, geographic location. Ina tight labor market it may be attractive to pay more Which method is best? Using whole job ranking is a bad idea (quick but difficult to justify to employees to accept) Point factor and Factor comparison methods often used together o Context determines which one is emphasized more o Firm specificity; industry; employee mobility. Key Takeaways: Three approaches to designing a pay structure: o Whole job ranking ▪ Quick and intuitive, not advisable o Point-factor method ▪ Internally coherent; job evaluation based on compensable factors o Factor-comparison method ▪ Benchmarking jobs, compare against the market. Part 4 – Performance-Related Pay 2 groups – Consolidated and Non-consolidated Sorting Effect influences 1. Attraction: People who want their pay differentiated by performance will be more attracted to organizations offering PRP 2. Retention  Low performers receive lower pay so are more likely to leave the organization (and high performers to stay). Incentive Effect influences 3. Motivation Signals to individuals that their effort is valued and appreciated and provides direction in what they should focus effort on Three characteristics of motivation 1. Intensity of effort 2. Direction of effort 3. Persistence of effort Evidence for the incentive effect All types of bonuses correlate to an increase in productivity Verbal rewards are free, and also increase productivity Productivity dropped when incentive was removed, but more so for cash based incentives. Conclusion: Short-term incentives increased intensity did not encourage persistence. Why? Direction of motivation Intrinsic (internal rewards) Extrinsic (external reward) Takeaways Performance-related pay influences attraction and retention through the sorting effect and motivation trough the incentive effect Individual PRP may not always have desired effects because it encourages intensity of effort but not always persistence and may undermine intrinsic motivation. Part 5 – Benefits Benefits have financial value but are rewarded in forms other than cash. Statutory benefits – set out by law (at national level) Organizational benefits – specific to each organization and a source of competitive advantage Goals of Benefits: Influences on organizational benefits: 1. Strategic goals of benefits 2. National characteristics 3. Workforce demographics  4. External influences Flexible benefits: Employees may choose among a variety of benefits, or choose among varying levels of benefits Research suggests that flexible benefits increase satisfaction and awareness of benefits. Ex: Takeaways: Organizational benefits are a key source of competitive advantage They are influenced by national, strategic, demographic and external factors The rise in flexible benefits offer the opportunity for employees and organizations to adapt to these changing influences. Part 6 – Pay Secrecy: Pay secrecy is a pay communication policy that limits employees access to pay-related information and discourages discussions among employees about pay issues. In many countries it is illegal to forbid employees from sharing pay information, but this type of pay secrecy is still prevalent in the private sector, and there are other types of pay secrecy that are legal. Transparency vs Secrecy: But it also depends on multiple factors, including: 1. Type of pay secrecy 2. Whether people prefer pay disclosure or not 3. How pay levels are determined 1. Types of pay secrecy Distributive pay nondisclosure: o Restricting the amount of information the organization shares about employee pay levels. Pay communication restriction: o Stopping employees from talking about their pay Procedural pay nondisclosure: o Restricting the amount of information organization shares about employee pay decisions It depends on...type of pay secrecy Restricting pay communication and information on pay procedures is generally seen as more malevolent (i.e. with negative intentions) On the other hand, when companies are more open about procedures for making pay decisions, this is seen as more benevolent (i.e. with positive intentions) It depends on...how pay is determined Pay secrecy is generally negatively related to performance butparticularly when......pay is determined relative to others (e.g. forced ranking)...and when performance is objectively measured (e.g. based on sales or outputs) Takeaways: In general, the benefits of pay transparency outweigh the benefits of pay secrecy But it depends on the type of secrecy, individuals’ preferences, and how their pay is determined Pay secrecy can refer to restricting information about the amount of pay, restricting communication about pay and information about how decisions are made. ------------------------------------------------------- Book: Rewarding Employees: When employees understand the principles on which their pay is based, they are more likely to view their pay as fair. And pay fairness, in turn, affects employee performance and their intention to stay with their employer. In general, a well-designed compensation system should address three interrelated goals: 1. attract high-quality job applicants, 2. motivate employees to be high performers, 3. encourage long-term employee retention. To accomplish these goals, organizations work with four components of an overall compensation package: 1. base pay, 2. short-term incentives (incentives that operate over one year or less), 3. long-term incentives (multi-year incentives), 4. benefits. These components are differentially effective in achieving organizational goals A high base pay and generous benefits do a good job of attracting and retaining employees. But because base pay and benefits are generally based on organizational membership and not job performance, they play a limited role in employee motivation. Short-term incentive systems (e.g., performance bonuses) do a good job of attracting and motivating quality performers, but generally have only moderate ability to retain employees over the long run – the exact opposite of long-term incentive systems (e.g., stock ownership) As a result, it’s difficult (if not downright impossible) to design a compensation package that is equally effective at achieving all three goals (attracting, motivating and retaining). That’s why organizations are always tinkering with their compensation packages – they are trying to find the right mix that addresses their current problems. 1. Base Pay:  include a salary range. How do you decide on that range? At the end of the day, you want to offer wages that reflect what the market demands and what the job is worth to your company. External Based Wage-Setting: Comparisons with the Market: A very simple, straightforward answer to the question we asked is, “I’d look at the market.” Market comparisons are most useful when organizations are filling jobs from the outside – jobs that have counterparts in other organizations. These jobs include executive assistants, entry-level accountants, nurses, and many others. Academics call these firm-general jobs, meaning that the skills and responsibilities associated with these jobs are common across organizations. Matching to Which Market? Tricky! Market Matching or Market Leading? The other important issue to consider is whether you want your salaries to be about the same as other companies or higher than other companies. Around 85% of companies “match the market” and align their base pay with the market median, but some companies deliberately set base pay at higher levels than prevailing rates in the market That could be a wise move, because higher pay attracts higher-quality employees who are more productive, need less supervision, and are less likely to engage in company theft. Internal Based Wage Setting: Comparisons Across Jobs: Market comparisons are less useful when you have firm-specific jobs that are unique to your company. So, the longer people remain with your company, the more difficult it becomes to use the external market to estimate the value of their contributions. Organizations try to overcome this problem by establishing job ladders – sequences of jobs. They hire people from outside the firm into the lowest rungs on these ladders. As employees acquire more firm-specific skills, they progress up the job ladder and move into progressively higher salary ranges. These promotions are an important way that organizations recognize and reward high performance. Job Evaluation:  Once we’re past the bottom rungs of those job ladders, an external market comparison is usually inadequate for determining base salaries. Instead, an internal job evaluation process can be used along with market pricing to determine a job’s “worth” to a company. Job evaluation follows a similar process. In job evaluation, we are trying to determine the relative value of dissimilar jobs – jobs in which people have different skills and perform different tasks. Job evaluation processes determine the worth of each job by establishing a hierarchy of jobs within the organization, so that employers can maintain internal equity in terms of how jobs are compensated. Senior managers could just rank the jobs, from high to low, based on their relative worth, difficulty, or overall value to the organization. Pay would be assigned to parallel that value ranking. But managers’ judgments of “overall value” are pretty subjective, and the task of assigning an appropriate rank gets harder as the number of jobs multiplies. So instead of relying on judgments of overall value, organizations identify a set of dimensions (compensable factors) that are common to all jobs. The dimensions organizations use to evaluate jobs include o educational requirements, o experience requirements, o levels of responsibility, o physical demands, o working conditions. In the point-factor job evaluation method, an organization first differentially weights dimensions to reflect its strategic goals. At the end of this process, there is a score for every job in the organization. Jobs with a similar value are grouped together, and these groups are ranked according to their relative value. All we know is that jobs at the top of this rank ordering (i.e., jobs that are more valuable to the organization) should be paid more than jobs at the bottom of this rank ordering. To assign actual wages to this rank ordering, the organization looks for jobs within this range that are firm-general (and therefore have a market rate). These firm-general jobs are used as benchmark jobs, and the organization “slots” its other jobs into the pay hierarchy by comparing them with the benchmark jobs. Wages of the firm-general benchmark jobs are tied to the market, and then wages of the firm- specific jobs are tied to the wages of the benchmark jobs. In this way, a company can try to ensure that pay rates are both internally and externally equitable. If our description of job evaluation makes it sound awfully cumbersome (and trust us, we’ve only scratched the surface!), that’s because job evaluation is cumbersome! Job evaluation can use up a lot of company time and resources, and the resulting wage structure is pretty rigid. As a result, there is a trend toward a more flexible wage-setting system called job levelling (or job grading). It’s not that different from a point-based job evaluation. But rather than evaluating every individual job on every compensable factor, the organization uses the compensable factors to define a series of job levels (or grades). Then, to set a wage for an individual job, the company compares the unique job description against the most relevant grade description. Merit Pay: Merit pay is an increase in base pay that a person receives based on individual performance. It’s usually expressed as a percentage. For example, your manager might tell you that, based on your annual performance review, you will be receiving a 5% increase in your base pay. Merit pay is a common part of organizational systems, maybe even ubiquitous, but that doesn’t mean it’s effective. merit pay increases tend to be too small. There are definitely better ways to motivate employees than the limited options afforded by merit pay. Incentives:  Organizations work around the inflexibility of base pay and merit pay by using incentives. Incentives can boost job performance and improve the quality and creativity of employees’ work. But (there is always a but!) These systems only work when employees perceive them as fair: when the process is transparent, and decisions are unbiased and based on accurate information. Managers play an important role in establishing and maintaining a clear link between employees’ performance and their pay. more than 90% of organizations use some kind of short-term incentives 50–60% of organizations use long-term incentives And it’s very common for organizations to use several different kinds of incentives simultaneously. Short-Term Incentives: 1. Individual Bonuses popular form of short-term incentive. The organization only pays the bonus when employees meet performance criteria. There are no guarantees for the next pay period. Employees have to re-earn the bonus every time. make sure that you are delivering the right mix of secure base pay and risky performance-based pay. The overall pay package must meet local legal standards (i.e., a minimum wage) and should be enough to meet employees’ basic needs (i.e., a living wage). 2. Group Bonuses Group bonuses are incentives based on a team’s performance; they encourage team members to collaborate because team members are mutually dependent on one another. Gainsharing is one particular type of group bonus system, in which the financial gains a company achieves from improved productivity are shared with employees.  3. Dysfunctional Effects of Bonus Systems Bonuses can be a terrific way to focus employees’ attention on a goal, but goal- directed behavior has its own costs. Employees may be so focused on goal achievement that they neglect other parts of their work – or they may fixate on reaching the goal at all costs. These scandals are good reminders to not overuse incentives. A dramatic performance spike that looks too good to be true may signal an ineffective incentive system, not an effective one. One large analysis of Danish firms found that the number of employees taking prescription medication for anxiety and depression more than doubled after their employers launched pay systems that linked performance to financial rewards. Dysfunctional effects are most likely to happen with nondiscretionary bonuses. Nondiscretionary bonuses are planned; the organization sets specific criteria that must be met for employees to earn a bonus. Knowing those criteria, and anticipating a financial payoff, some employees might be tempted to “game” the system. In contrast, discretionary bonuses are not promised in advance. The organization determines (after the fact) that exceptional performance warrants a bonus. 4. Nonmonetary Rewards Bonus systems are usually based on a cash payout, but that’s not the only way that organizations can reward employees. Personal praise, attention from leaders, and opportunities to lead projects – many executives describe these nonmonetary rewards as more powerful than the usual monetary incentives. When managers and coworkers' express gratitude, the workplace experiences a lot of benefits – lower employee stress levels, stronger employee relationships, and lower employee turnover. But expressing gratitude takes practice. In one survey, more than 80% of employees agreed that receiving gratitude makes them work harder, but only 10% managed to express gratitude to their colleagues on a regular basis Long-Term Incentives: Incentives can also have a longer-term focus so that they can retain valuable employees – employees need to stay with the company to enjoy the payout. 1. Profit-Sharing Plans; Employees are promised a payment beyond base pay that is based on company profits. Most importantly, in a profit-sharing plan, employees need to boost organizational profit (return on assets, net income) – it’s not just about being more productive or reducing waste. A lot of things can get between an employee’s effort and organizational profit – advertising effectiveness, the general state of the economy, and so on. That’s why profit-sharing plans (and other long-term incentive systems) are more about retention; 2. Stock Options Stock options used to be exclusively reserved for rewarding managers and executives. The idea was that these senior people were the ones who made the big decisions and set the policies that would have the most impact on the stock price. Now stock options are viewed as a retention tool, and more frequently made available to employees at every level of the organizational hierarchy. Companies that engage a wide range of employees in their stock option plans include Genentech (a biotechnology company), Intuit (a financial software company), and the Cheesecake Factory (a restaurant chain known for its diverse range of yummy cheesecakes) 3. Employee Stock Ownership Plans In an employee stock ownership plan (ESOP), the company contributes shares of its stock to a trust, tax free. The trust holds the stock in individual employee accounts, and employees earn stock based on pay and seniority. The trust distributes stock to employees when they separate from the company (e.g., retire or resign), and employees can sell their stock back to the company for a cash payment. Employee ownership has been linked to better company performance and higher employee pay; employees experience job security because they (as a group) own the business Managers recommend a share entitlement for their team members based on their performance. Benefits: Benefits are all the inducements and services that an employer gives an employee, outside of direct financial compensation. Employers offer a whole pile of benefits that they hope will attract and retain talent; these benefits might include flexible work arrangements, health and well-being programs, dependent care services, or other programs that employees value. However, the term “voluntary” might be misleading. In some contexts, some voluntary benefits are so common that they have become institutionalized, and employees will expect those benefits to be part of their pay package. So, benefits vary a lot – across organizations, and across national contexts. Still, there are a few broad trends you should be aware of. 1. Shifting Employee Preferences More generally, a new menu of benefits is emerging that focuses directly on employees’ health and well-being. You need to be aware of it: ex -> new programs regarding mental health and meditation. 2. Customized Benefits It’s important to ensure that your benefits align with your employees’ actual needs and preferences. Without accurate information about employee needs, organizations can offer expensive benefits for years and have no positive impact on employee attraction or retention. Employees are then given a specified number of credits they may use to “buy” additional benefits they would like. For example, depending on whether employees spend more of their work time in the office or at home, they might prefer to allocate their benefit credits toward a gym membership, at-home gym equipment, or a personal fitness app subscription. 3. Getting Your Money’s Worth It’s not unusual for benefits to make up 30–33% of an employer’s total compensation costs.  Some smart employers are starting to offer one-on-one meetings during which a representative explains the company’s benefits or to distribute easy-to-read benefit summaries that break down the dollar value of the company’s benefits. The more employees understand the value of voluntary benefits offered by their employer, the more they appreciate what is provided, and the more likely they are to reciprocate with higher organizational commitment and retention. Communicate, Communicate, Communicate: From the very first lines of this chapter, we’ve emphasized how important it is that employees understand their employer’s pay system. The most generous incentive system in the world won’t motivate employees if they can’t see how their behavior leads to rewards The most comprehensive benefit package won’t retain employees if they don’t understand the value of those benefits. It’s a two-step process: Employee understanding of a well-designed pay system leads to perceptions of pay fairness and pay fairness in turn affects employee performance and their intention to stay with their employer. When employees have too little information, they begin to suspect that pay levels are unfair, and worse, they conclude that the pay-setting system itself is unfair` 380,000 employees and found that 57% of people who are paid at the market rate believe they are underpaid, and 42% of people who are paid above the market rate believe they are underpaid. It’s perceived underpayment that makes people walk out the door. Payscale estimates that people who think they are underpaid (accurately or inaccurately) are 50% more likely than other employees to seek a new job in the next 6 months. Semco and Buffer are extreme examples, but there is an overall trend toward greater pay transparency.  Organizations might not provide detailed salary information at the level of individual employees, but they are communicating more information about wage-setting procedures and organizational wage distributions. Evidence is accumulating that transparency increases trust in management, enhances employee engagement and effort, and reduces employee turnover In a well-designed pay system, pay differences reflect the differential value employees bring to the business. And when those pay systems are transparent, it’s easy for employees to identify the coworkers who are being rewarded for high levels of expertise. As a result, employees can be more effective in looking for help when they need it. Pay transparency is also credited with reducing the size of gender pay gaps (pay differences between men and women). We don’t want to oversell pay transparency: Unfair pay discrepancies will still pop up in a transparent system. But transparency makes those discrepancies more visible, so they can be corrected more quickly. If your organization endorses pay transparency, you will have a lot of flexibility about what you can share with employees about the company’s pay system. But even if your organization sits in the pay secrecy camp, there’s still a lot you can do to help employees view the system as fair. Clearly explain the benefits that your organization makes available to employees. And don’t miss any opportunities to say thank you! A well-timed expression of gratitude from the boss is an incredibly powerful motivational tool that most managers underutilize. You can implement gratitude without organizational approval, it won’t deplete your budget, and you can use it again and again without wearing it out. What’s Next? Thank you for reading this chapter so carefully! (See, we try to practice what we preach.) In this chapter, we focused on motivating employees with a well-designed pay system. But sometimes, despite your best efforts, employees may not perform to the company standards. In the next chapter, we’ll discuss the “tough calls” managers sometimes must make about disciplining and terminating employees.