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.
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.
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.
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