Научная Петербургская Академия

: Motivation: Reward system and the role of compensation

: Motivation: Reward system and the role of compensation

HUMAN RESOURCE MANAGEMENT

“Motivation: Reward system and the role of compensation”

Student: Anton Skobelev, IBS-855

Teacher: Kartashova L.

The design and management of reward systems present the general manager with

one of the most difficult HRM tasks. This HRM policy area contains the

greatest contradictions between the promise of theory and the reality of

implementation. Consequently, organizations sometimes go through cycles of

innovation and hope as reward systems are developed, followed by

disillusionment as these reward systems fail to deliver.

Rewards and employee satisfaction

Gaining an employee’s satisfaction with the rewards given is not a simple

matter. Rather, it is a function of several factors that organizations must

learn to manage:

1. The individual’s satisfaction with rewards is, in part, related to what is

expected and how much is received. Feelings of satisfaction or

dissatisfaction arise when individuals compare their input - job skills,

education, effort, and performance - to output - the mix of extrinsic and

intrinsic rewards they receive.

2. Employee satisfaction is also affected by comparisons with other people in

similar jobs and organizations. In effect, employees compare their own

input/output ratio with that of others. People vary considerably in how they

weigh various inputs in that comparison. They tend to weigh their strong

points more heavily, such as certain skills or a recent incident of effective

performance. Individuals also tend to overrate their own performance compared

with the rating they receive from their supervisors. The problem of

unrealistic self-rating exists partly because supervisors in most

organizations do not communicate a candid evaluation of their subordinates’

performance to them. Such candid communication to subordinates, unless done

skillfully, seriously risks damaging their self-esteem. The bigger dilemma,

however, is that failure by managers to communicate a candid appraisal of

performance makes it difficult for employees to develop a realistic view of

their own performance, thus increasing the possibility of dissatisfaction

with the pay they are receiving.

3. Employees often misperceive the rewards of others; their misperception can

cause the employees to become dissatisfied. Evidence shows that individuals

tend to overestimate the pay of fellow workers doing similar jobs and to

underestimate their performance (a defense of self-esteem-building

mechanism). Misperceptions of the performance and rewards of others also

occur because organizations do not generally make available accurate

information about the salary or performance of others.

4. Finally, overall satisfaction results from a mix of rewards rather than

from any single reward. The evidence suggests that intrinsic rewards and

extrinsic rewards are both important and that they cannot be directly

substituted for each other. Employees who are paid well for repetitious,

boring work will be dissatisfied with the lack of intrinsic rewards, just as

employees paid poorly for interesting, challenging work may be dissatisfied

with extrinsic rewards.

Rewards and motivation

From the organization’s point of view, rewards are intended to motivate

certain behaviors. But under what conditions will rewards actually motivate

employees? To be useful, rewards must be seen as timely and tied to effective

performance.

One theory suggests that the following conditions are necessary for employee

motivation.

1. Employees must believe effective performance (or certain specified

behavior) will lead to certain rewards. For example, attaining certain

results will lead to a bonus or approval from others.

2. Employees must feel that the rewards offered are attractive. Some

employees may desire promotions because they seek power, but others may want

a fringe benefit, such as a pension, because they are older and want

retirement security.

3. Employees must believe a certain level of individual effort will lead to

achieving the corporation’s standards of performance.

As indicated, motivation to exert effort is triggered by the prospect of

desired rewards: money, recognition, promotion, and so forth. If effort leads

to performance and performance leads to desired rewards, the employee is

satisfied and motivated to perform again.

As mentioned above, rewards fall into two categories: extrinsic and intrinsic.

Extrinsic rewards come from the organization as money, perquisites, or

promotions or from supervisors and coworkers as recognition. Intrinsic rewards

accrue from performing the task itself, and may include the satisfaction of

accomplishment or a sense of influence. The process of work and the

individual’s response to it provide the intrinsic rewards. But the organization

seeking to increase intrinsic rewards must provide a work environment that

allows these satisfactions to occur; therefore, more organizations are

redesigning work and delegating responsibility to enhance employee involvement.

Equity and participation

The ability of a reward system both to motivate and to satisfy depends on who

influences and/or controls the system’s design and implementation. Even

though considerable evidence suggests that participation in decision making

can lead to greater acceptance of decisions, participation in the design and

administration of reward systems is rare. Such participation is time-

consuming.

Perhaps, a greater roadblock is that pay has been of the last strongholds of

managerial prerogatives. Concerned about employee self-interest and

compensation costs, corporations do not typically allow employees to

participate in pay-system design or decisions. Thus, it is not possible to

test thoroughly the effects of widespread participation on acceptance of and

trust in reward system.

Compensation systems: the dilemmas of practice

A body of experience, research and theory has been developed about how money

satisfies and motivates employees. Virtually every study on the importance of

pay compared with other potential rewards has shown that pay is important. It

consistently ranks among the top five rewards. The importance of pay and

other rewards, however, is affected by many factors. Money, for example, is

likely to be viewed differently at various points in one’s career, because

the need for money versus other rewards (status, growth, security, and so

forth) changes at each stage. National culture is another important factor.

American managers and employees apparently emphasize pay for individual

performance more than do their European or Japanese counterparts. European

and Japanese companies, however, rely more on slow promotions and seniority

as well as some degree of employment security. Even within a single culture,

shifting national forces may alter people’s needs for money versus other

rewards.

Companies have developed various compensation systems and practices to

achieve pay satisfaction and motivation. In manufacturing firms, payroll

costs can run as high as 40% of sales revenues, whereas in service

organizations payroll costs can top 70%. General managers, therefore, take an

understandable interest in payroll costs and how this money is spent.

The traditional view of managers and compensation specialists is that if the

right system can be developed, it will solve most problems. This is not a

plausible assumption, because, there is no one right answer or objective

solution to what or how someone should be paid. What people will accept, be

motivated by, or perceive as fair is highly subjective. Pay is a matter of

perceptions and values that often generate conflict.

Management’s influence on attitudes toward money

Many organizations are caught up in a vicious cycle that they partly create.

Firms often emphasize compensation levels and a belief in individual pay for

performance in their recruitment and internal communications. This is likely

to attract people with high needs for money as well as to heighten that need

in those already employed. Thus, the meaning employees attach to money is

partly shaped by management’s views. If merit increases, bonuses, stock

options, and perquisites are held out as valued symbols of recognition and

success, employees will come to see them in this light even more than they

might have perceived them at first. Having heightened money’s importance as a

reward, management must then respond to employees who may demand more money

or better pay-for-performance systems.

Firms must establish a philosophy about rewards and the role of pay in the

mix of rewards. Without such a philosophy, the compensation practices that

happen to be in place, for the reasons already stated, will continue to shape

employees’ satisfactions, and those expectations will sustain the existing

practices. If money has been emphasized as an important symbol of success,

that emphasis will continue even though a compensation system with a slightly

different emphasis might have equal motivational value with fewer

administrative problems and perhaps even lower cost. Money is important, but

its degree of importance is influenced by the type of compensation system and

philosophy that management adopts.

Pay for performance

Some reasons why organizations pay their employees for performance are as

follows:

under the right conditions, a pay-for-performance system can motivate desired

behavior.

a pay-for-performance system can help attract and keep achievement-oriented

individuals.

a pay-for-performance system can help to retain good performers while

discouraging the poor performers.

In the US, at least, many employees, both managers and workers, prefer a pay-

for-performance system, although white-collar workers are significantly more

supportive of the notion than blue-collar workers.

But there is a gap, and the evidence indicates a wide gap, between the desire

to devise a pay-for-performance system and the ability to make such a system

work.

The most important distinction among various pay-for-performance systems is

the level of aggregation at which performance is defined - individual, group,

and organizationwide. Several pay-for-performance systems are summarized in

the exhibit that follows.

Individual performance

Group

performance

Organizationwide performance

Merit system

Piece rate

Executive bonus

Productivity incentive

Cost effectiveness

Profit sharing

Productivity-sharing

Historically, pay for performance has meant pay for individual performance.

Piece-rate incentive systems for production employees and merit salary

increases or bonus plans for salaried employees have been the dominant means

of paying for performance. In the last decade, piece-rate incentive systems

have dramatically declined because managers have discovered that such systems

result in dysfunctional behavior, such as low cooperation, artificial limits

on production and resistance to changing standards. Similarly, more questions

are being asked about individual bonus plans for executives as top managers

discovered their negative effects.

Meanwhile, organizationwide incentive systems are becoming more popular,

particularly because managers are finding that they foster cooperation, which

leads to productivity and innovation. To succeed, however, these plans

require certain conditions. A review of the key considerations for designing

a pay-for-performance plan and a discussion of the problems that arise when

these considerations are not observed follow.

Individual pay for performance. The design of an individual pay-for

performance system requires an analysis of the task. Does the individual have

control over the performance (result) that is to be measured? Is there a

significant effort-to-performance relationship? For motivational reasons

already discussed such a relationship must exist. Unfortunately, many

individual bonus, commission, or piece-rate incentive plans fall short in

meeting this requirement. An individual may not have control over a performance

result, such as sales or profit, because that result is affected by economic

cycles or competitive forces beyond his or her control. Indeed, there are few

outcomes in complex organizations that are not dependent on other functions or

individuals, fewer still that are not subject to external factors.

Choosing an appropriate measure of performance on which to base pay is a

related problem incurred by individual bonus plans. For reasons discussed

earlier, effectiveness on a job can include many facets not captured by cost,

units produced, or sales revenues. Failure to include all activities that are

important for effectiveness can lead to negative consequences. For example,

sales personnel who receive a bonus for sales volume may push unneeded

products, thus damaging long-term customer relations, or they may push an

unprofitable mix of products just to increase volume. These same salespeople

may also take orders and make commitments that cannot be met by

manufacturing. Instead, why not hold salespeople responsible for profits, a

more inclusive measure of performance? The obvious problem with this measure

is that sales personnel do not have control over profits.

These dilemmas constantly encountered and have led to the use of more

subjective but inclusive behavioral measures of performance. Why not observe

if the salesperson or executive is performing all aspects of the job well?

More merit salary increases are based on subjective judgments and so are some

individual bonus plans. Subjective evaluation systems though they can be all-

inclusive if based on a thorough analysis of the job, require deep trust in

management, good manager-subordinate relations, and effective interpersonal

skills. Unfortunately, these conditions are not fully met in many situations,

though they can be developed if judged to be sufficiently important.

Group and organizationwide pay plans. Organizational effectiveness

depends on employee cooperation in most instances. An organization may elect to

tie pay, or at least some portion of pay, indirectly to individual performance.

Seeking to foster team-work, a company may tie an incentive to some measure of

group performance, or it may offer some type of profits or productivity-sharing

plan for the whole plant or company.

Gains-sharing plans have been used for years in many varieties. The real

power of a gains-sharing plan comes when it is supported by a climate of

participation. Various structures, systems, and processes involve employees

in decisions that improve the organization’s performance and result in a

bonus throughout the organization.

Russian management’s approach to motivation.

Nowadays, top managers at Russian companies don’t pay much attention to the

employee motivation. Not only is it the result of the long communist

background of the country, but it also is somewhat affected by the national

traditions, customs and mentality.

Many of the recently “commercialized” enterprises believe that employees are

to be satisfied with their salary only, and a pay-for-performance system is,

therefore, of no need. However, the failure to observe the different

motivation factors, such as money, respect, promotion and others, can lead to

a worsening performance and, as a result, to a lower efficiency

organizationwide.

On the other hand, money is not considered to be the most influencing

motivation factor by the employees themselves. Though it may be a more vital

need of most Russian workers in comparison with their Western colleagues, at

the same time they put more value on the cooperative atmosphere in the

organization, rather than on the money side. And, thus, it is reasonable for

the management to base the performance incentive system on some other

factors, such as work security, pension etc. It’s hard to predict the

situation in the long-run, however one can expect that the value put on money

as a performance motivation factor will rise.

Bibliography

Searle, John G., Manage People, Not Personnel, A Harvard Business review

book, 1990



(C) 2009