Week 5: Reward Management

Rewards (& 3 types)

Base pay (fixed pay for the job)

Incentives (short-term and long-term performance-linked pay)

Benefits (statutory and organizational)

Short-term incentives + 3 types

Incentives that pay out over one year or less

Individual bonuses (paid only when performance criteria are met; must be re-earned every period, unlike merit pay)

Group bonuses (based on team performance; encourage collaboration)

Non-monetary rewards (praise, recognition, attention from leaders)

Long-term incentives

Multi-year incentives; employees must stay to get the payout → mainly a retention tool

Profit-sharing plans (payment beyond base pay based on company profits)

Stock options (right to buy company shares in the future at a guaranteed price; vest after 3–5 years)

Employee stock ownership plans (ESOPs) (company puts shares in a trust for employees based on pay and seniority; paid out when they leave)

Why reward management matters and it’s 3 influences

Rewards influence three outcomes, which serve the organization's legal and ethical responsibilities and organizational goals (Kulik & Perry, 2023)

Attraction (drawing in quality applicants)

Retention (keeping employees)

Motivation (driving effort and performance)

5. Influences on reward decisions

Organization's philosophy (its values about how people should be paid)

Legal responsibilities (e.g., minimum wage, statutory benefits)

Strategy (what the organization is trying to achieve)

Competition and market forces (what other employers pay)

Ability to pay (budgetary constraints)

Pay structure

Hierarchical organization of jobs in terms of pay (Lussier & Hendon, 2022)

Job structure (hierarchy of the jobs in the organization)

Pay level (the average pay range for a specific job in the organization)

Three approaches to developing a pay structure

Whole job ranking (rank whole jobs by importance; quick and intuitive, not advisable)

Point-factor method (job evaluation based on compensable factors; internally coherent)

Factor-comparison method (benchmark jobs compared against the market)

Whole job ranking

Ranking entire jobs from most to least important to what the organization does, then assigning pay in that order (e.g., restaurant: busser €20k → owner €80k)

Pro (quick and easy)

Con (subjective, unfair; gets harder as the number of jobs grows)

Job evaluation

Process that determines the relative worth of dissimilar jobs by building a hierarchy of jobs → maintains internal equity; the basis of the point-factor method (Kulik & Perry, 2023)

Point-factor method

Pay structure built from job evaluation using compensable factors; internally coherent (Kulik & Perry, 2023)

Allocate points (to each compensable factor for each job)

→ Allocate weights (to each factor, reflecting the organization's strategic goals)

→ Outcome (a total point value for each job)

Compensable factors

Factors organizations use to evaluate jobs and choose to pay for (e.g., know-how, problem solving, accountability; textbook: education, experience, responsibility, physical demands, working conditions)

Factor-comparison method and 2 ways of calculating

Pay comparisons of the same position in the market; external comparison (Kulik & Perry, 2023)

Benchmarking (pay survey of benchmark, or key, jobs)

Comparable position (same industry, type of organization, geographic location)

Benchmark jobs

Key jobs that exist across organizations and have a market rate; their pay is tied to the market and firm-specific jobs are set in relative to them → internal and external equity

2 pay structure methods

Whole job ranking (a bad idea) – Just ranking jobs on importance top to bottom

Point-factor + factor-comparison (often used together; context decides which is emphasized: firm-specificity, industry, employee mobility)

Consolidated vs non-consolidated PRP

Consolidated (added to base pay, permanently raising salary based on performance; e.g., merit pay increase)

Non-consolidated (one-off payments in addition to base pay; individual or group)

Individual vs group PRP

Two types of non-consolidated PRP

Individual performance (piecework, commission, bonuses; goal: increase individual performance)

Group performance (team-based pay, profit-sharing, share ownership, gainsharing; goal: increase group performance and encourage cooperation)

Merit pay and stats around it

Increase in base pay based on individual performance, usually a % (consolidated PRP); often ineffective because raises are too small and don't separate top from average performers

Average merit increase (~3% in the US)

Motivational threshold (~7% of base pay; raises below this may have no meaningful effect)

Sorting effect

How PRP affects who joins and who stays

Attraction (people who want pay differentiated by performance are drawn to organizations offering PRP; person-organization fit; Cable & Judge, 1994)

Retention (low performers get lower pay so are more likely to leave, high performers stay; Shaw, 2015)

Incentive effect

How PRP affects motivation: signals that effort is valued and appreciated and gives direction on where to focus effort (Gerhart, Rynes & Fulmer, 2009)

Three characteristics of motivation

Intensity of effort (how hard someone works)

Direction of effort (what the effort is aimed at; extrinsic vs intrinsic)

Persistence of effort (how long effort is sustained)

Bareket-Bojmel, Hochman & Ariely (2017) bonus study

Field experiment: 156 technicians at a high-tech company doing routine tasks; bonuses manipulated over 5 weeks; productivity measured before, right after, and two days after the bonus

Cash bonus (money)

Verbal reward (written thank you from management)

Pizza voucher (family pizza voucher, same value as the cash)

Choice (cash or pizza voucher)

Bonus study results (statistics)

Right after the bonus (all incentives increased productivity: pizza ≈6.7%, verbal ≈6.6%, cash ≈4.9%, choice ≈4.6%)

Verbal reward (same increase as pizza, but cost-free)

After removal (productivity dropped for all types, most for cash: ≈−12% vs. day 1 and ≈−6.5% below baseline)

Effect of short-term incentives on motivation

Increased intensity of effort but did not encourage persistence; may shift direction toward extrinsic motivation and undermine intrinsic motivation

Extrinsic vs intrinsic motivation

Extrinsic (driven by external rewards, e.g., money)

Intrinsic (driven by enjoying the work itself, e.g., "I love my job")

Individual PRP may undermine intrinsic motivation

Benefits & 2 Types

Rewards with financial value given in forms other than cash (Kulik & Perry, 2023)

Statutory benefits (set out by law at national level)

Organizational benefits (specific to each organization; a source of competitive advantage)

2 main goals of benefits

Benefits serve organizational goals mainly through attraction and retention (not motivation)

Attraction (benefits are critical for drawing in employees)

Retention (employees are more committed and attached even if they don't use the benefits; Grover & Crooker, 1995)

The share of cost of benefits in the business

Benefits ≈ 1/3 of an organization's total labor costs (US data; Dulebohn et al., 2009) → a key strategic concern (textbook: 30–33% of total compensation costs)

The 4 Influences on organizational benefits

Strategic goals of benefits (what the organization wants benefits to signal or achieve)

Workforce demographics (generation and life stage)

National characteristics (state provision and tax rules)

External influences (social change, industry mimicry, economic conditions)

National characteristics and benefits

USA (many benefits untaxed + poor state provision, e.g., healthcare, parental leave → organizational benefits are a competitive advantage)

Europe (better state provision, e.g., healthcare → organizational benefits focus on other things)

Nordic countries & France (generous childcare → less prized as a benefit; prefer cash)

China, Japan, Korea (tax only on base pay → bonuses and benefits have greater financial value)

3 Strategic goals of benefits

Signal values (e.g., Netflix unlimited parental leave: family and flexibility matter; compensates for low US national policy)

Link to core business and P-O fit (e.g., Airbnb $2k a year for travel)

Encourage retention (e.g., PwC student loan repayment in instalments; helps younger workers get more value from pay)

Workforce demographics and benefits

Preferences are shaped by generation and life stage (Dulebohn et al., 2009)

Generational differences (e.g., older workers may have historical expectations about career development)

Life stages and life choices (e.g., parents and those planning to be parents prefer work-family and financial benefits)

Gender and benefits (statistics)

% who would heavily weigh a benefit in job choice, men vs women (Jones, 2017, HBR)

Health, dental & vision insurance (47% vs 61%; top for both)

Work-from-home options (40% vs 55%)

Paid maternity/paternity leave (14% vs 24%)

Free day-care (11% vs 23%; about double for women)

External influences on benefits

(Dulebohn et al., 2009)

Shifting roles and same-sex couple rights (e.g., EU/UK parents can switch parental leave, though still mostly taken by women in heterosexual couples)

Mimicry (organizations copy companies in the same industry or region)

Financial crisis or recession (preference for stable financial benefits, e.g., pension, life insurance)

Flexible benefits

Employees choose among a variety of benefits or varying levels of benefits (e.g., sell life insurance, buy extra holiday or dental insurance); typically a core package plus credits to "buy" extras; most valuable for a diverse workforce. Increase satisfaction and awareness of benefits (Barber, Dunham & Formisano, 1992)

Pay secrecy

"A pay communication policy that limits employees' access to pay-related information and discourages discussion among employees about pay issues" (Belogolovsky & Bamberger, 2014, p. 1706); forbidding pay sharing is illegal in many countries but still common in the private sector, and other types of secrecy are legal

Benefits of pay transparency

(Bamberger & Belogolovsky, 2010; Colella et al., 2007)

Removes uncertainty (removes asymmetric information as a basis for perceived unfairness or discrimination)

Trust and fairness (promotes trust and fairness in the organization)

Motivation and performance (promotes both; textbook: also reduces turnover and gender pay gaps)

3 Benefits of pay secrecy

1. Organizational control (avoids conflicts while still allowing pay dispersion)
   
   

2. Privacy (protects employees' privacy)
   
   

3. Decreased labor mobility (productive workers are less likely to be stolen by a different copy, as long as they have pay secrecy)

Factors shaping pay secrecy effects

Type of pay secrecy (what is kept secret)

Preference for disclosure (whether people want pay disclosed)

How pay levels are determined (relative vs absolute, objective vs subjective)

Types of pay secrecy

Distributive pay nondisclosure (organization restricts info it shares about employee pay levels)

Pay communication restriction (employees are stopped from talking about their pay)

Procedural pay nondisclosure (organization restricts info it shares about how pay decisions are made)

What makes an intention positive or negative for pay secrecy

Malevolent (restricting pay communication and info on pay procedures; seen as negative intentions)

Benevolent (openness about procedures for pay decisions; seen as positive intentions)

Preference for pay disclosure

Job satisfaction is highest when an employee's nondisclosure preference matches the organization's nondisclosure policy (high/high or low/low) (Smit & Montag-Smit, 2019)

Pay secrecy and performance

Pay secrecy is generally negatively related to performance, especially when (Belogolovsky & Bamberger, 2014):

Pay is relative (determined relative to others, e.g., forced ranking)

Performance is objective (e.g., based on sales or outputs)

Compensation components and relative AMR

How well each component achieves attract / motivate / retain (Table 8.1)

Base pay (high / low / high)

Short-term incentives (high / high / moderate)

Long-term incentives (moderate / moderate / high)

Benefits (high / low / high)

→ No single component achieves all three; base pay and benefits are tied to membership, not performance, so they barely motivate

Firm-general vs firm-specific jobs (textbook)

Firm-general (skills common across organizations, e.g., executive assistant, nurse → pay set by external market comparison)

Firm-specific (unique to the company → pay set by internal comparison or job evaluation)

Market matching vs market leading (textbook)

Market matching (base pay aligned with the market median; ~85% of companies)

Market leading (pay above market rates; attracts higher-quality, more productive employees who need less supervision)

Job ladders (textbook)

Sequences of jobs––people are hired from outside into the lowest rungs and move into higher salary ranges as they gain firm-specific skills; promotions reward high performance

Wage compression (textbook)

When market-tied pay for new hires crowds the salaries of longer-tenure employees higher on the job ladder → lower morale, lower productivity, higher turnover

Job levelling (job grading) (textbook)

More flexible alternative to point-factor job evaluation

Define which factors are valuable and build a ladder of job ranks, then sort various jobs into the ladder.

Nondiscretionary vs discretionary bonuses (textbook)

Nondiscretionary (planned, criteria set in advance; most likely to cause dysfunctional effects like gaming the system or fraud)

Discretionary (not promised in advance; awarded after the fact for exceptional performance; e.g., spot bonuses, which are unexpected and given right after the behavior)

Gainsharing vs profit-sharing (textbook)

Gainsharing (group bonus sharing the financial gains from improved productivity, e.g., less waste or downtime; outcomes under employees' control → mainly motivation)

Profit-sharing (payment based on company profits, driven by many factors beyond employee effort → mainly retention; reduces turnover)

Pay fairness and perceived underpayment (textbook) (statistics)

Understanding the pay system → perceived pay fairness → performance and intention to stay

57% (of employees paid at market rate believe they're underpaid; Payscale)

42% (of employees paid above market believe they're underpaid)

50% (more likely to seek a new job within 6 months if they feel underpaid)

→ Too much secrecy breeds suspicion that pay and the pay system are unfair

Incentive use and gratitude (textbook) (statistics)

>90% (of organizations use short-term incentives)

50–60% (of organizations use long-term incentives)

80% vs 10% (employees who say gratitude makes them work harder vs those who regularly express it)

More than doubled (anxiety and depression medication use in Danish firms after introducing PRP)