Chapter 4: Organizational Context: Reward Systems PDF

CHAPTER 4 Organizational Context:...

CHAPTER 4 Organizational Context: Reward Systems LEARNING OBJECTIVES S All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. Discuss the theoretical background on money as a reward. F Present research evidence on the effectiveness of pay. O Describe some of the traditional methods of administering pay. Relate some forms of “new” pay and their value in helping attract and retain talented O employees. Explain how recognition is used as an organizational reward. R 4 Discuss the role of benefits as organizational rewards. P 0 1 Although reward systems are not necessarily found in the first part of organizational behav- ior textbooks, it is placed here for two very important reasons. First, in the social cognitive P 2 theory presented in Chapter 1 as the conceptual framework for this text, the environment IA © variable in the triadic reciprocal interaction model (along with the personal/cognitive and organizational behavior itself) consists of both the external and organizational contexts. The last chapter covered the structural design and culture of the organization, and especially in a social cognitive approach, the reward system covers the remaining major contextual vari- able for organizational behavior. Specifically, in social cognitive theory, reward conse- quences or contingencies play an important role in organizational behavior. For example, Bandura has noted that human behavior cannot be fully understood without considering the regulatory influence of rewards,1 and basic research has found that reward systems have a significant impact on employees’ perception of organizational support and leadership.2 Although behavioral management is not covered until the last part of the book (Chapter 12), it can be said now that the organization may have the latest technology, well-designed struc- tures, 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. One way to put this importance of organizational rewards as simply as possible is to remem- ber: you get what you reward!3 The second major reason for putting organizational reward systems up front is to emphasize the emerging importance of human capital introduced in Chapter 1. Because Copyright 2015. Information Age Publishing. 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.4 Since humans represent such a significant cost to organizations, more attention is being given to analyzing the return on this human capital. The importance of reward systems is now recognized as being a vital dimension of the organizational envi- ronment, and that is why it is included here to conclude the introductory environmental con- text for the study and application of organizational behavior. EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT AN: 999823 ; Fred Luthans.; Organizational Behavior: An Evidence-Based Approach, 13th Ed. Account: s3563253.main.ehost  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 73 Certainly the tendency with most people, and often in actual organizational practice, is to equate organizational reward systems only with money. Obviously, money is the domi- nant reward and will be given first and foremost attention in this chapter. The theory, research, and analysis of all the ways money can be administered by today’s organizations is given detailed attention. However, this is followed by the potentially powerful, and importantly much less costly, recognition rewards system.5 Finally, the costly, but often not effective, use of benefits is presented. PAY: THE DOMINANT ORGANIZATIONAL REWARD Organizations provide rewards to their personnel in order to try to motivate their perfor- mance and encourage their loyalty and retention. Organizational rewards take a number of S different forms including money (salary, bonuses, incentive pay), recognition, and bene- F fits. This first part examines money as the most dominant reward system in today’s orga- nizations. O O The Theoretical Background on Money as a Reward R 5 Money has long been viewed as a reward and, at least for some people, it is more 1 important than anything else their organization can give them. Some surveys of employees P rank money at the top of their list of motivators6 and others rank it lower. It seems to vary 0 widely with the individual and the industry. However, as the well-known scholar and con- P 2 sultant Manfred Kets de Vries declared, “It’s easy to say money isn’t everything as long as we have enough of it. Unfortunately, though, the typical scenario is that the more money IA © we have, the more we want.”7 Also, commenting on money, Steven Kerr, the well-known organizational behavior scholar and executive at both GE and Goldman Sachs referenced in the last chapter, noted that “Nobody refuses it, nobody returns it, and people who have more than they could ever use do dreadful things to get more.”8 By the same token, a large majority (82 percent) of employees in the United States and worldwide (76 percent) indi- cated they would take a pay cut to pursue their dream job.9 Money Can Explain Behavior Money provides a rich basis for studying behavior at work because it offers explana- tions for why people act as they do.10 For example, Mitchell and Mickel have noted that money is a prime factor in the foundation of commerce, that is, people organize and start businesses to make money.11 Money is also associated with four of the important symbolic attributes for which humans strive: achievement and recognition, status and respect, free- dom and control, and power.12 In fact, in most of the management literature dealing with money, researchers have focused on money as pay and the ways in which pay affects moti- vation, 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. As well-known moneymaker Donald Trump has said, “Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.”13 As a result of this perspective, money has been of interest to organi- zational behavior theorists and researchers who have studied the linkages between pay and performance by seeking answers to questions such as: How much of a motivator is money? EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  74 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT How long lasting is its effects? What are some of the most useful strategies to employ in using money as a motivator?14 Money has also played an integral role in helping develop theories of organizational behavior. For example, if employees are interested in money, how much effort will they expend in order to earn it, and how much is “enough”? It is like the philosopher Arthur Schopenhauer once said, “Wealth is like seawater, the more we drink the thirstier we become.”15 Moreover, if people work very hard but do not receive the rewards they expect, how much of a dampening effect will this have on their future efforts? Answers to these types of questions have helped develop some of the most useful theories of motivation, which will be covered in Chapter 6. An Agency Theory Explanation S Another important perspective on money as a reward is provided by agency theory, a F widely recognized finance and economics approach to understanding behavior by individ- uals and groups both inside and outside the corporation. Specifically, agency theory is con- O cerned 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 O system is used to align these interests and goals. The theory draws its name from the fact that the people who are in control of large corporations are seldom the owners; rather, in R 5 almost every case, they are agents who are responsible for representing the interests of the P 1 owners. 0 Agency theory seeks to explain how managers differ from owners in using pay and other forms of compensation to effectively run the organization. For example, the owners P 2 of a corporation might be very interested in increasing their own personal wealth, and so IA © they would minimize costs and work to increase the stock value of the enterprise. In con- trast, their agents, the managers, might be more interested in expending corporate resources on activities that do not directly contribute to owner wealth. Agency theory also examines the role of risk and how owners and managers may vary in their approach to risk taking. For example, owners may be risk aversive and prefer conservative courses of action that minimize their chances of loss. 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.16 Finally, agency theory exam- ines the differences in time horizons between owners and managers. Owners may have lon- ger 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 recog- nized 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 finan- cial and accounting envelope to the point of breaking to inflate profits, cover losses and make their own performances better.”17 There are also other analyses critical of agency theory predictions such as the spectacular rise and sudden fall of Nortel (the large multina- tional Canada-headquartered telecommunications company) that illustrates “excesses of EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 75 actors within, and contradictions of the system of corporate governance implied by the agency model.”18 Despite these limitations, there is still considerable evidence that agency theory provides useful insights into pay as a reward.19 This becomes increasingly clear when research on the effectiveness of pay is examined. Research on the Effectiveness of Pay Despite the tendency in recent years to downgrade the importance of pay as an organi- zational reward, there is ample evidence that money can be positively reinforcing for most people20 and, if the pay system is designed properly to fit the strategies,21 can have a pos- itive impact on individual, team, and organizational performance.22 For example, many organizations use pay to motivate not just their upper-level executives but everyone S throughout the organization. For example, recently in the oil industry where personnel are extremely well paid, the CEO of Exxon Mobil was compensated $40.3 million,23 new F petroleum engineering graduates earned about $80,000, and experienced “roughnecks” out on the offshore rigs earned around $100,000.24 Moreover, these rewards may not always O have to be immediately forthcoming. Many individuals will work extremely hard for rewards that may not be available for another 5 or 10 years. As Kerr has noted: O Such attractive rewards as large salaries, profit sharing, deferred compensation, stock R 5 grants and options, executive life and liability insurance, estate planning and financial 1 counseling, invitations to meetings in attractive locations, and permission to fly first P class or use the company plane, are typically made available only to those who reach the 0 higher organizational levels. Do such reward practices achieve the desired results? In P 2 general, yes. Residents and interns work impossible hours to become M.D.s, junior law- yers and accountants do likewise to become partners, assistant professors publish so IA © they won’t perish, and Ph.D. students perform many chores that are too depressing to recount here to obtain their doctorates.25 Additionally, not only is money a motivator, but, as was said in the introductory com- ments, the more some people get, the more they seem to want. The idea here is that once money satisfies basic needs, people can use it to get ahead, a goal that is always just out of their reach, so they strive for more. Conversely, there is evidence that shows that if an orga- nization 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.26 There is recent basic research indicating that reward systems have a strong influence on employee trust in the workplace.27 In other words, employee morale and other psychological variables such as trust are very fragile, and when employees feel they are not being compensated fairly, this can impact on their performance and hurt the bottom line. Even in the midst of the recent financial crisis, a large sample of firms indicated they were taking deliberate measures to reward their people with special bonuses and stock awards to boost their morale and con- fidence.28 There is also considerable evidence showing that money means different things to dif- ferent people.29 Moreover, sometimes these “individual differences” end up affecting group efforts. For example, one study examined pay and performance information among baseball players.30 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 EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  76 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT pay spread on a team, the more poorly the players performed. These findings led to the con- clusion that pay distributions have significant negative effects on player performance. Perhaps a better gauge of the effect of pay on performance of baseball teams may be total payroll. This reflects the overall salaries of the players; and if pay is indeed a motiva- tor, would not a well-paid group outperform their less-well-paid counterparts? Again in application to baseball, for example, the New York Yankees have had the highest payroll in recent years, and their performance in these years has been good. 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.”32 Additionally, Lawler has argued that the rewarding of team performance is more important than the size of the pay differences among the indi- vidual players. S The question of pay ranges and their impact on productivity is one that merits more F consideration as organizations seek to determine the effectiveness of pay on performance. A case in point is the huge pay package most CEOs of large firms receive, but the perfor- O mance 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 O 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 R 5 public poll indicated that a vast majority (87 percent) believe that executives “had gotten 1 rich at the expense of ordinary workers.”34 P Although money was probably overemphasized in classical management theory and 0 motivation techniques, the pendulum now may have swung too far in the opposite direc- P 2 tion. Money remains a very important but admittedly complex potential motivator. In terms of Maslow’s well-known hierarchy of needs covered in Chapter 6, money is often equated IA © only with the most basic requirements of employees. It is viewed in the material sense of buying food, clothing, and shelter. Yet, as indicated in the earlier comments, money has a symbolic as well as an economic, material meaning. It can provide power and status and can be a means to measure achievement. In the latter sense, as Chapter 12 will discuss in detail, a recent meta-analysis of 72 studies found money to be a very effective positive reinforcement intervention strategy to improve performance.35 Beyond Maslow, more sophisticated analyses of the role of money are presented in cognitive terms. For example, a number of years ago some organizational psychologists concluded, based on their laboratory studies, that the use of extrinsic rewards such as money decreased the intrinsic motivation of subjects to perform a task.36 Extrinsic and intrinsic motivation will be given specific attention in Chapter 6, but for now it is sufficient to know that the intrinsic motivation 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.”37 Although these studies used other rewards besides money, and the controversy still continues between the behav- ioral and cognitive schools of thought as outlined in Chapter 1, it is becoming clear that the real key in assessing the use of monetary rewards is not necessarily whether they satisfy inner needs but rather how they are administered. In order for money to be effective in the organizational reward system, the system must be as objective and fair as possible38 and be administered contingently on the employee’s exhibiting critical performance behaviors.39 This has been made particularly clear by Kerr, who notes that an effective pay system for rewarding people has to address EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 77 three considerations. 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.40 Traditional Methods of Administering Pay Traditionally, organizations have used two methods of administering pay: base pay and merit pay. These methods are then sometimes supplemented by pay-for-performance plans and “new pay” programs that extend, and in some cases radically revise, the tradi- tional approaches. Base Pay Approach FS O Base wages and salary is the amount of money that an individual is paid on an hourly, weekly, monthly, or annual basis. For example, a person working on a part-time basis may O earn $12.00 an hour. This is the hourly wage for that position. Most managers are paid on 5 an annual salary basis, and the sum is broken down into weekly, biweekly, or monthly R amounts. As another example, a new college graduate may be offered $36,000, which P 1 comes to just over $692 a week before taxes and other deductions. 0 Base pay is often determined by market conditions. For example, graduating engineers P 2 may be paid $55,000 annually whereas engineering managers with 10 years of experience earn $110,000. If base pay is not in line with the market rate, organizations may find that IA © they are unable to hire and retain many of their personnel. At the same time, one of the major problems with base pay forms of compensation is that they tend to be most compet- itive at the entry level and are often less competitive thereafter. So an engineering manager who is making $105,000 may be $5,000 off the market when compared to what other engi- neering managers within the same region and similar job requirements are making, but the individual may also find that firms paying higher salaries prefer to develop their own man- agement talent internally and do not hire from outside. In any event, most organizations have some form of merit pay system that is used to give annual salary increases, thus rais- ing the base pay and preventing personnel from getting too far out of step with the market. 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 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. This approach ensures that those who are making lower salaries get larger percentage increases, whereas those earning higher salaries get a flat merit raise. For example, under the combination merit pay just described, a lower-level manager with a base salary of $50,000 will get an additional $3,000 (6 percent of $50,000), whereas a top-level manager with a base salary of $150,000 will get $5,000. EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  78 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT The intent of merit pay is to reward and thus motivate and retain the star performers. One seasoned compensation expert describes the process as follows: Differentiation is the name of the game now when it comes to rewards. By differentiat- ing, companies are increasingly willing to pay more money to employees who are accomplishing the most for the organization—at all levels in their companies. We believe that in any organization there are three kinds of employees: the middle group, which is the largest and gets the job done; those that truly make a difference; and some small percentage at the bottom that are not getting the job done for a variety of reasons. Make sure you take care of those that make a difference. Make sure you take care of the middle group—pay them fairly. The bottom group is the group you should constantly keep trading so, hopefully, you can hire more stars.41 Unfortunately, merit pay also has a number of major shortcomings. One of the prob- S lems 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 F 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 O 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 peo- O ple, production-line and salespeople being good examples, is easily measured, but the work R 5 output of others, such as accountants, engineers, and other staff specialists, office person- nel, and managers/supervisors, may be quite difficult to objectively measure. Recent Web- P 1 enabled employee software may help the measurement of performance. For example, Brit- 0 ish Airways installed software that ensures a customer service rep’s time in the break room P 2 or on personal calls doesn’t count, but customer complaint resolutions and sales revenue are measured for merit pay.42 IA © A second major problem is that merit pay can end up being “catch-up” pay. For exam- ple, 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 com- mon in enterprises that suffer salary compression brought on by the need to pay higher sal- aries 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. 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. How- ever, because of the problems of linking merit pay directly with performance, many orga- nizations have created specific pay-for-performance plans. Pay for Performance There are two basic types of “pay-for-performance” plans: individual incentive plans and group incentive plans. 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.43 EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 79 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. Individual Incentive Pay Plans Like the piece rate incentive plan of the pioneering scientific managers, today’s indi- vidual incentive plans also pay people based on output or even quality. For example, at Woolverton Inn’s hotels, housekeepers are given a 40-item checklist for each room. Those who meet 95 percent of the criteria over six months of random checks receive an extra week’s salary. Most salespeople work under an individual incentive pay plan earning, for example, 10 percent commission on all sales. At Lincoln Electric in Cleveland, Ohio, there is an individual incentive plan in effect that, over the years, has helped some factory work- S ers earn more than $100,000 annually.44 F 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 O a combination payment plan in which the individual receives a guaranteed amount of money, regardless of how the person performs. So a salesperson might be paid 10 percent O of all sales with a minimum guarantee of $2,000 per month. Another popular approach is to give the person a combination salary/incentive such as $26,000 plus 5 percent of all R 5 sales. A third approach is to give the person a “drawing account” against which the indi- P 1 vidual can take money and then repay it out of commissions. An example would be a sales- 0 person 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 P 2 account, and then as sales pick up the person will repay the draw from the 10 percent com- IA © missions received. The Use of Bonuses Another common form of individual incentive pay is bonuses. According to Forbes, one of the highest bonuses in recent years was earned by former CEO of real estate invest- ment trust, Annaly Capital Management, Michael Farrell. Already on an annual salary of $3 million, Farrell was paid a handsome bonus of $29 million which represented.25 per- cent of stockholder’s equity—the key performance metric used in the plan.45 Although this bonus package is extremely large, successful managers and individuals who can generate large accounts for a firm can also expect sizable bonuses. For example, the PaineWebber Group recruited a top-producing brokerage team from one of its competitors by offering the group a signing bonus of $5.25 million and an additional $2 million if they bring more customers to PaineWebber.46 In the roller-coaster economy, most companies are moving to bonus pay based on performance rather than fixed pay increases. A survey of a wide array of firms found that 10.8 percent use bonuses compared to only 3.8 percent ten years before,47 but The Wall Street Journal report during the financial crisis indicated that pay raises of any kind would sink in the coming years.48 The Use of Stock Options Another form of individual incentive pay is the stock-option plan. This plan is typi- cally used with senior-level managers and gives them the opportunity to buy company EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  80 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT 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.49 During the boom period a decade ago, many firms depended greatly on stock options to lure in and keep top talented managers and entrepreneurs. However, if these lucrative options were not exercised, when the economy had a meltdown, these stock values in many cases were halved or less. For example, Ora- cle’s stock was off 57 percent from its high when CEO Lawrence J. Ellison exercised his option and lost more than $2 billion, but he still made $706 million, more than the economy of Grenada and one of the biggest single year payoffs in history.50 More recently, there are reports of increasing numbers of firms trying to counteract unprofitable stock options held by top managers by exchanging the options for cash and/or issuing new options with a bet- ter chance of becoming profitable. The organizations doing this feel it is necessary to keep and motivate top talent, but of course the stockholders (and general public) object because S nobody makes good their losses when stocks decline.51 Potential Limitations O F Although bonuses and stock options remain popular forms of individual pay, there are O potential problems yet to be overcome. A general problem inherent in these pay plans may have led to the excesses and ethical breakdowns experienced by too many firms in recent R 5 years. For example, as an editor for the Financial Times observed, “If we treat managers as P 1 financially self-interested automatons who must be lured by the carrot of stock options and beaten with the stick of corporate governance, that attitude will become self-fulfilling.”52 0 There is research evidence supporting such observations. A study found that the heads P 2 (CEOs) of corporations holding stock options leads to high levels of investment outlays IA © 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.53 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 sec- ond 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. Also, there may be considerable differences along customer and industry lines with sales- people operating under the same incentive plan. For example, the New York Times sales force had considerable heterogeneity among clients that resulted in substantial earnings inequity and failure to pay for performance. When the plan was restructured and custom- ized for each area, the sales force perceived the new plan as fairer and more motivational.54 Finally, especially in light of the ethical issues brought out recent years, the pay for performance, unfortunately, does not add the qualifier, pay for performance with integrity. As explained by one analysis of executive compensation: The omission—evident from compensation committee reports in top companies’ proxy statements—is striking. Corporations, after all, face unceasing pressures to make the numbers by bending the rules, and an integrity miss can have catastrophic conse- EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 81 quences, including indictments, fines, dismissals, and collapse of market capitalization. Furthermore, performance with integrity creates the fundamental trust—inside and out- side the company—on which corporate power is based. A board should explicitly base a defined portion of the CEO’s cash compensation and equity grants on his or her suc- cess in handling the foundational task of fusing high performance with high integrity at all levels of the company.55 Bonuses are also proving unpopular in some situations such as educational compensa- tion. 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 per- form on these tests.56 Finally, individual incentive plans may pit employees against one another that may promote healthy competition, or it may erode trust and teamwork.57 One S way around this potential problem is to use group incentive plans. Group Incentive Pay Plans O F O As Chapter 11 will discuss in detail, there has been a growing trend toward the use of teams. There is increasing evidence that teams and teamwork can lead to higher productiv- R 5 ity, better quality, and higher satisfaction than do individuals working on their own.58 As a 1 result, group incentive pay plans have become increasingly popular.59 One of the most P common forms of group pay is gainsharing plans.60 These plans are designed to share with 0 the group or team the net gains from productivity improvements such as reduced product P 2 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 IA © become more efficient and have more money to reward its personnel. The first step in putting a gainsharing plan into effect is to determine the costs associ- ated with producing the current output. For example, if a computer manufacturer finds that it costs $30 million to produce 240,000 printers, the cost per printer is $125, and these data will be used as the base for determining productivity improvements. Costs and output are then monitored, while both the workers and the managers are encouraged to generate cost- saving ideas and put more effort into producing more with better quality. Then, at some predetermined point, such as six months, costs and output are measured and productivity savings are determined. For example, if the firm now finds that it costs $14 million to pro- duce 125,000 printers, the cost per unit is $112. There has been a savings of $13 per printer or $1,625,000. These gainsharing savings are then passed on to the employees, say, on a 75:25 basis. A number of organizations use gainsharing in one form or another. At Owens Corning, for example, the company instituted a gainsharing plan designed to reduce costs and increase productivity in the production of fiberglass. Savings in the manufacturing cost per pound are then shared with the employees. In another example, Weyerhaeuser, the giant forest and paper products company, employs what it calls “goalsharing” in its container board packaging and recycling plants. The company’s objective is to enlist the workforce in a major performance improvement initiative designed to achieve world-class perfor- mance by reducing waste and controllable costs and increasing plant safety and product quality. Although the research evidence to date is somewhat mixed and complex, there is definitive evidence that gainsharing plans can have a significant impact on employee sug- gestions for improvement.61 EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  82 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT Another common group incentive plan is profit sharing. Although these plans can take a number of different forms, typically 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).62 A third type of group incentive plan is the employee stock ownership plan or 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 S 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 com- F pany. Regarding the effect an ESOP can have on employee engagement and intrapreneur- O ship, 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 O 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 R 5 their firm as part of the incentives package. Also, when the media company Tribune filed 1 for bankruptcy, it exposed the risks to employees who had bought into the ESOP, espe- P cially retirees and those who were promised deferred compensation.64 Potential Limitations P 2 0 IA © As noted earlier, group incentives plans are becoming increasingly popular. However, they may have a number of shortcomings. One is that they often distribute rewards equally, even though everyone in the group may not be contributing to the same degree. So all of a team or defined group may get a gain-sharing bonus of $2,700, regardless of how much each did to help bring about the productivity increases and/or reduced costs. A second shortcoming is that these 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. So their motiva- tional effect on day-to-day performance may, at best, be minimal. A third shortcoming is that 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. 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 compen- sation. Realizing that base pay, merit pay, and both individual and group forms of incentive pay all have limitations, organizations are now beginning to rethink their approach to pay as an organizational reward and formulate new approaches that address some of the chal- lenges they are facing in today’s environment.65 For example, especially labor-intensive firms such as Marriott Hotels, which annually pays billions to their people, have undergone an examination of their reward systems to align with associates’ needs, improve attraction and retention, enhance productivity, and in general increase the return invested in people.66 The result has been the emergence of what are sometimes called “new pay” techniques. EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 83 New Pay Techniques As noted earlier in this section, the standard base-pay technique provides for minimum compensation for a particular job. It does not reward above-average performance nor penalize below-average performance. Pay-for-performance plans correct this problem. In fact, in many cases, such as those in which pay is tied directly (i.e., contingently) to mea- sured performance, pay-for-performance plans not only reward high performance but also punish low performance. Sometimes, of course, these plans are unfair in the sense that some jobs may be easy to do or carry very high incentives, thus allowing employees to eas- ily earn high rates of pay, whereas in other cases the reverse is true. Similarly, in a group incentive arrangement in which all members are highly productive, the personnel will max- imize their earnings, but in groups where some individuals are poor performers, everyone in the group ends up being punished. S Despite the downside to some of these pay-for-performance plans and the fact that they have been around for many years, they have become quite popular and can be consid- F ered new pay techniques. Examples include especially the group or team incentives such as gain-sharing, profit sharing, employee stock-ownership plans, and stock-option plans. O Although recently the extremely high incentive pay packages are under attack by unions, shareholders, and the general public (e.g., there have been resolutions banning stock O options for senior executives at firms such as American Express and AOL Time Warner), R 5 surveys have found that a large majority of Fortune 1000 firms are using them.67 Addition- ally, as organizations undergo continual changes brought about by technology, globaliza- P 1 tion, legislation, and economic problems, many enterprises are rethinking and redesigning 0 their pay plans to reflect the demands of the new environment. For example, attention has P 2 been given to the role that reward systems play in knowledge management.68 Others have called for the implementation of “smart reward” systems, characterized as being aligned IA © with the core values of an organization, utilizing evidence-based metrics to measure the success of reward systems, a stronger emphasis on making sure that employees are engaged at all levels, and less concern with design and more emphasis on communication and delivery of rewards.69 A summary of other pay approaches which have emerged include the following:70 1. Commissions beyond sales to customers. As with all of these new pay plans, the com- missions 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. 2. 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 Nation- wide Insurance, management bonuses are tied to their people’s satisfaction scores. 3. 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. 4. 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 given to individuals who have taken addi- EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  84 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT tional training, the assumption being that their performance will increase in the future as a result of their newly acquired knowledge or skills.71 5. 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 communi- cation skills). 6. 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. 7. Broadbanding. This approach has more to do with the design of the pay plan than do the others. Formally defined as a compensation strategy, broadbanding “is the prac- S tice of collapsing the traditional large number of salary levels into a small number of salary grades with broad pay ranges.”72 So, for example, rather than having three lev- F els 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 O 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 O supervisor’s salary puts the individual in the next highest salary level. Broadbanding R 5 sends a strong message that the organization is serious about change and flexibility, not only in the structural and operational processes but also in its reward system. Sim- P 1 ply put, with broadbanding the organization puts its money where its mouth is. P 2 0 These new pay techniques are certainly needed to meet new paradigm challenges. If organizations expect customer satisfaction, leadership, satisfied employees, quality, team- IA © work, knowledge sharing, skill development, new competencies (e.g., technical, cross-cul- tural, and social), and employee growth without promotions, then they must reward these as suggested by the new pay techniques. Once again, you get what you reward. RECOGNITION AS AN ORGANIZATIONAL REWARD Pay is an unquestionably important form of reward. However, it is not the only way in which organizations can reward their people. In addition to money, forms of recognition to identify and reward outstanding performance can be a vital, but too often overlooked, part of the organizational reward system. When people are asked what motivates them, money is always prominently featured on their list. However, both formal organizational recogni- tion and social recognition used systematically by supervisors and managers is very important to their people and their day-to-day behaviors and performance effectiveness. For example, 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.73 Recognition Versus Money There are a number of reasons why recognition may be as important as, or even more important than, money as a reward for today’s employees. One of the most obvious is that enterprises typically have pay systems that are designed to review performance and give EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 85 incentive payments only once or twice a year. So if someone does an outstanding good job in July, the manager may be unable to give the person a financial reward until after the annual performance review in December. Nonfinancial rewards, on the other hand, such as genuine social recognition, can be given at any time. It is these more frequent nonfinancial rewards that have a big impact on employee productivity and quality service behaviors. Recognition rewards can take many different forms, can be given in small or large amounts, and in many instances are controllable by the manager. For example, in addition to social recognition and formal awards, a manager can give an employee increased responsibility. The human resource manager for Orient-Express Hotels, Inc. notes, “I’m a big believer in empowerment. I always tell employees, ‘I’m the HR expert; you’re the expert at what you do.’ I put the power in their hands and say ‘I trust you.’ That pays off.”74 The employee may find this form of recognition motivational, and the result is greater pro- ductivity and quality service to customers. As a follow-up, the manager can then give this S employee even greater responsibility. Unlike many financial forms of reward, there is no limit to the number of people who can receive this type of reward or how often it is given. F One expert on rewards puts it this way: O You can, if you choose, make all your employees … eligible for nonfinancial rewards. You can also make these rewards visible if you like, and performance-contingent, and O you needn’t wait for high level sign-offs and anniversary dates, because nonfinancial R 5 rewards don’t derive from the budget or the boss, and are seldom mentioned in employ- ment contracts and collective bargaining agreements. Furthermore … if you P 1 inadvertently give someone more freedom or challenge than he can handle, you can 0 take it back. Therefore, organizations can be bold and innovative in their use of non- monetary rewards because they don’t have to live with their mistakes.75 P 2 Research shows that there are many types of recognition that can lead to enhanced per- IA © formance and loyalty.76 One of these that is receiving increased attention is recognition of the fact that many employees have work and family responsibilities and when the organi- zation helps them deal with these obligations, loyalty increases. This finding is particularly important in light of findings such as a survey that found 25 percent of the most sought after employees (highly educated, high-income professionals) reported they would change jobs for a 10 percent increase in salary and 50 percent would move for a 20 percent raise.77 These data are not an isolated example. Another survey of the attitudes and experi- ences of a large number of employees in business, government, and nonprofit organiza- tions around the United States revealed the following: (1) only 30 percent feel an obligation to stay with their current employer; (2) individuals who are highly committed to their orga- nization 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 sat- isfied 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.78 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 solv- ing (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.79 EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  86 PART 1 ENVIRONMENTAL AND ORGANIZATIONAL CONTEXT Although research on the complexities of the relationship of satisfaction and commit- ment with outcomes will be given attention in Chapter 5, it is interesting to note here that groups such as the National Association for Employee Recognition have concluded that practicing human resource professionals and managers still seem to underestimate how useful recognition can be in motivating employees to achieve goals. Moreover, recognition as a reward does not have to be sophisticated or time consuming. In fact, many firms that are now working to improve their recognition systems all use fairly basic and easy-to- implement programs. Steps such as the following need to be set up to effectively manage a formal and informal recognition program:80 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. S 2. Educate the managers so that they use recognition as part of the total compensation package. F 3. Make recognition part of the performance management process, so that everyone begins to use it. O 4. Have site-specific recognition ceremonies that are featured in the company’s commu- nication outlets such as the weekly newsletter and the bimonthly magazine. O 5. Publicize the best practices of employees, so that everyone knows some of the things R 5 they can do in order to earn recognition. 6. Let everyone know the steps that the best managers are taking to use recognition P 1 effectively. 0 7. Continually review the recognition process in order to introduce new procedures and P 2 programs and scrap those that are not working well. 8. Solicit recognition ideas from both employees and managers, as they are the ones IA © who are most likely to know what works well—and what does not. Examples of Effective Formal Recognition Systems Chapter 12 on behavioral performance management focuses on social recognition as an effective contingent reinforcer that supervisors/managers can use as a style in interper- sonal relations. Research has clearly demonstrated that this improves employee perfor- mance.81 In this chapter on the role rewards play in the organizational context, formal recognition programs implemented by organizations are the primary focus, along with money and benefits (covered next). Formal recognition is a vital part of the reward system that makes up the environmental component of the social cognitive framework for under- standing and effectively managing organizational behavior (see Chapter 1). Today there are a wide number of formal recognition systems that are being effec- tively used by organizations nationwide. Many of these are the result of continual modifi- cation, as organizations have altered and refined their reward systems to meet the changing needs of their workforce. However, all effective programs seem to have two things in com- mon. First, they are designed to reward effective employee performance behavior and enhance employees’ satisfaction and commitment. In other words, effective recognition systems lead to improved employee performance and retention. Second, they are designed to meet the specific and changing needs of the employees. Simply put, a recognition system that worked in the past or in one enterprise may have little value in another. 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. Thus, recognition programs often EBSCOhost - printed on 3/20/2023 2:03 AM via LOUISIANA STATE UNIVERSITY AT SHREVEPORT. All use subject to https://www.ebsco.com/terms-of-use  CHAPTER 4 ORGANIZATIONAL CONTEXT: REWARD SYSTEMS 87 vary widely from company to company—and many of them are highly creative. For exam- ple, one expert on implementing recognition systems offers the following creative, but practical, suggestions:82 1. Select a pad of Post-it Notes in a color that nobody uses and make it your “praising pad.” Acknowledge your employees for work well done by writing your kudos on your praising pad. 2. Hire a caterer to bring in lunch once a week. Besides showing your respect and appre- ciation, this encourages mingling and the sharing of information, knowledge, ideas, and innovative solutions. 3. To get a team motivated during an important project, have them design a simple logo for the assignment. This will give the team not only a sense of camaraderie and cohe- sion, but also group identification and focus. FS These tidbits represent useful suggestions, but many companies have gone much fur- ther by designing formal recognition systems that align their overall objectives (increased O productivity, reduced cost, better-quality products and customer service, and even higher profitability) and employee performance behaviors. For example, at Dierbergs Family O Market, a supermarket chain in Missouri, the firm has created what it calls the “Extra Step” program. This formal recognition program is designed to reward employees who are pro- R 5 active in meeting customer needs. The objective of the program is twofold: make the com- 1 pany a place where employees love to work and keep customers coming back. In achieving P this, the company rewards workers who go out of their way to do things for customers. For 0 example, in one case, a customer left some of her purchases at one of the stores during a P 2 snowstorm. The store manager did not want any of the employees going out in the inclem- ent weather, so he called a cab and paid the driver to deliver the packages she had left IA © behind. In another case, an employee on his way to work recognized a good customer try- ing to change a flat tire. He went over, introduced himself as working for Dierbergs, and changed the tire for the customer. These “extra steps” are rewarded by Dierbergs in a number of ways, including gift cer- tificates, movie passes, and even lunch with the chief executive officer. They also help the company achieve its objectives of increased revenues through word-of-mouth advertising (the best form, at no cost) and repeat business, customer satisfaction, and employee pro- ductivity and retention. Customer feedback has been overwhelmingly complimentary, and the firm’s turnover rate is very low, in an industry where labor turnover is extremely high. For its efforts, Dierbergs was given an Award for Best Business Practices for Motivating and Retaining Employees. Dierbergs is not alone. A growing number of firms are finding that well-structured and implemented employee recognition reward systems yield very positive cost-benefit results. In particular, formal recognition systems have become important in the hotel