Lessons Learned from Pay and Rewards

This is my last post in the series about my classes last quarter. It's about my main takeaways from my HR elective class on pay and rewards in organizations. The course surveyed empirical research studies on a variety of topics including executive compensation, pay for performance, start-up compensation, and pension plans. A lot of the points below are taken from the articles or studies that we looked at as well as our professor's notes.

We learned that pay is determined by three main forces: the labor market, business strategy, and employee motivation/culture.

One research model we studied suggested the following tips:

• Avoid fixed performance contracts (as they can be gamed)
• Evaluate and reward relative performance (not fixed/absolute)
• Use a few, simple, transparent measures
  
• Align rewards with strategic goals
  
• Reward team performance (not individual)
  
• Align rewards with interdependent groups
  
• Don’t use rewards to “motivate” people (people motivate themselves; find people who are self-motivated)
  
• Make rewards fair and inclusive
  

We also went over several dangerous "myths" about pay from another article:

• Labor rates and labor costs are the same thing (ignores productivity)
  
• Can lower labor costs by cutting labor rates (ignores productivity)
  
• Labor costs constitute a significant portion of total costs (varies)
  
• Low labor costs are a potential, sustainable competitive advantage (easily replicable)
  
• Individual incentive pay improves performance (undermines teamwork)
  
• People work for money (meaning in work is more salient)
  

We next covered the various research frameworks that can be used to analyze how pay practices can best align with business strategy. We covered several types of rewards that are available.

Extrinsic:

• Money
• Promotion
• Diverse co-workers
• Compatible boss
• Work location and environment

Intrinsic:

• Interesting, challenging work
  
• Job autonomy
  
• Job rotation
• Work-family life balance

We also studied how profit sharing with employees positively affects perceptions of trust in management and organizational commitment and reciprocity.

Delving into employees' intrinsic rewards, we looked at how the practice of "job sculpting," where employees will stay with and be retained by organizations only if their jobs match their "deeply embedded life interests." These do not determine what people are good at; they drive what kinds of activities make them happy. These deeply embedded life interests are mostly the following:

• Application of technology
• Quantitative analysis
• Theory development and conceptual thinking
• Creative production
• Counseling and mentoring
• Managing people and relationships
  
• Enterprise control
  
• Influence through language and ideas

People can sometimes concentrate on one or a combination of these life interests, which ultimately determine which jobs make them happiest.
The seven “HR Best Practices” (or high-performance work system practices)  we studied were the following:

• Employee continuity
• Team-based work
• Decentralized, selective hiring
• High pay contingent on organizational performance
• Business information sharing
• Training and development
• Low status differentials
  

In terms of work-life balance, it turns out that organizations that follow the above practices have employees with higher perception of work-life balance in the organization. Other elements that are positively associated with a sense of balance are an understanding supervisor, child care services, organizational commitment, and several categories of intrinsic rewards. This was based on extensive survey data.

In terms of executive compensation, we learned from the research that the use of long-term contingent compensation results in significant windfalls for CEOs and is not consistent with the idea that such compensation exposes executives to risk; in addition, cash compensation for CEOs is not reduced when contingent compensation is granted (thus the latter is a perk); and in the end, firm performance is lower among firms that heavily use long-term contingent compensation for CEOs. The remedies to this include requiring reduction in CEO pay when options are paid and shifting to more emphasis on annual cash pay adjustments (as well as finding CEOs more motivated by themselves than through compensation).

The class was informative, and I found the discussions about employee culture and motivation (as well as how compensation can be used strategically in start-ups) to be the most interesting.