Motivation: Reward system and the role of compensation

The design and management of reward systems				answer or objective solution to what or how
present the general manager with one of the most				someone should be paid. What people will accept, be
difficult HRM tasks. This HRM policy area contains the				motivated by, or perceive as fair is highly subjective.
greatest contradictions between the promise of				Pay is a matter of perceptions and values that often
theory and the reality of implementation.				generate conflict.
Consequently, organizations sometimes go through				Management’s influence on attitudes toward
cycles of innovation and hope as reward systems are				money
developed, followed by disillusionment as these				Many organizations are caught up in a vicious cycle
reward systems fail to deliver.				that they partly create. Firms often emphasize
Rewards and employee satisfaction				compensation levels and a belief in individual pay for
Gaining an employee’s satisfaction with the				performance in their recruitment and internal
rewards given is not a simple matter. Rather, it is a				communications. This is likely to attract people with
function of several factors that organizations must				high needs for money as well as to heighten that
learn to manage:				need in those already employed. Thus, the meaning
1. The individual’s satisfaction with rewards is, in				employees attach to money is partly shaped by
part, related to what is expected and how much is				management’s views. If merit increases,
received. Feelings of satisfaction or dissatisfaction				bonuses, stock options, and perquisites are held out
arise when individuals compare their input - job skills,				as valued symbols of recognition and success,
education, effort, and performance - to output - the				employees will come to see them in this light even
mix of extrinsic and intrinsic rewards they receive.				more than they might have perceived them at first.
2. Employee satisfaction is also affected by				Having heightened money’s importance as a
comparisons with other people in similar jobs and				reward, management must then respond to
organizations. In effect, employees compare their				employees who may demand more money or better
own input/output ratio with that of others. People				pay-for-performance systems.
vary considerably in how they weigh various inputs in				Firms must establish a philosophy about rewards and
that comparison. They tend to weigh their strong				the role of pay in the mix of rewards. Without such
points more heavily, such as certain skills or a recent				a philosophy, the compensation practices that happen
incident of effective performance. Individuals also				to be in place, for the reasons already stated, will
tend to overrate their own performance compared				continue to shape employees’ satisfactions, and
with the rating they receive from their supervisors.				those expectations will sustain the existing practices.
The problem of unrealistic self-rating exists partly				If money has been emphasized as an important
because supervisors in most organizations do not				symbol of success, that emphasis will continue even
communicate a candid evaluation of their				though a compensation system with a slightly
subordinates’ performance to them. Such candid				different emphasis might have equal motivational
communication to subordinates, unless done skillfully,				value with fewer administrative problems and
seriously risks damaging their self-esteem. The bigger				perhaps even lower cost. Money is important, but its
dilemma, however, is that failure by managers to				degree of importance is influenced by the type of
communicate a candid appraisal of performance				compensation system and philosophy that
makes it difficult for employees to develop a realistic				management adopts.
view of their own performance, thus increasing the				Pay for performance
possibility of dissatisfaction with the pay they are				Some reasons why organizations pay their
receiving.				employees for performance are as follows:under the
3. Employees often misperceive the rewards of				right conditions, a pay-for-performance system can
others; their misperception can cause the employees				motivate desired behavior.a pay-for-performance
to become dissatisfied. Evidence shows that				system can help attract and keep
individuals tend to overestimate the pay of fellow				achievement-oriented individuals.a
workers doing similar jobs and to underestimate their				pay-for-performance system can help to retain good
performance (a defense of self-esteem-building				performers while discouraging the poor performers.
mechanism). Misperceptions of the performance and				In the US, at least, many employees, both managers
rewards of others also occur because organizations				and workers, prefer a pay-for-performance system,
do not generally make available accurate information				although white-collar workers are significantly more
about the salary or performance of others.				supportive of the notion than blue-collar workers.
4. Finally, overall satisfaction results from a mix of				But there is a gap, and the evidence indicates a wide
rewards rather than from any single reward. The				gap, between the desire to devise a
evidence suggests that intrinsic rewards and extrinsic				pay-for-performance system and the ability to make
rewards are both important and that they cannot be				such a system work.
directly substituted for each other. Employees who				The most important distinction among various
are paid well for repetitious, boring work will be				pay-for-performance systems is the level of
dissatisfied with the lack of intrinsic rewards, just as				aggregation at which performance is defined -
employees paid poorly for interesting, challenging				individual, group, and organizationwide. Several
work may be dissatisfied with extrinsic rewards.				pay-for-performance systems are summarized in the
				exhibit that follows.
				Historically, pay for performance has meant pay for
Rewards and motivation				individual performance. Piece-rate incentive systems
From the organization’s point of view, rewards				for production employees and merit salary increases
are intended to motivate certain behaviors. But under				or bonus plans for salaried employees have been the
what conditions will rewards actually motivate				dominant means of paying for performance. In the
employees? To be useful, rewards must be seen as				last decade, piece-rate incentive systems have
timely and tied to effective performance.				dramatically declined because managers have
One theory suggests that the following conditions are				discovered that such systems result in dysfunctional
necessary for employee motivation.				behavior, such as low cooperation, artificial limits on
1. Employees must believe effective performance (or				production and resistance to changing standards.
certain specified behavior) will lead to certain rewards.				Similarly, more questions are being asked about
For example, attaining certain results will lead to a				individual bonus plans for executives as top managers
bonus or approval from others.				discovered their negative effects.
2. Employees must feel that the rewards offered are				Meanwhile, organizationwide incentive systems are
attractive. Some employees may desire promotions				becoming more popular, particularly because
because they seek power, but others may want a				managers are finding that they foster cooperation,
fringe benefit, such as a pension, because they are				which leads to productivity and innovation. To
older and want retirement security.				succeed, however, these plans require certain
3. Employees must believe a certain level of individual				conditions. A review of the key considerations for
effort will lead to achieving the corporation’s				designing a pay-for-performance plan and a discussion
standards of performance.				of the problems that arise when these considerations
As indicated, motivation to exert effort is triggered				are not observed follow.
by the prospect of desired rewards: money,				Individual pay for performance. The design of an
recognition, promotion, and so forth. If effort leads				individual pay-for performance system requires an
to performance and performance leads to desired				analysis of the task. Does the individual have control
rewards, the employee is satisfied and motivated to				over the performance (result) that is to be
perform again.				measured? Is there a significant
As mentioned above, rewards fall into two				effort-to-performance relationship? For motivational
categories: extrinsic and intrinsic. Extrinsic rewards				reasons already discussed such a relationship must
come from the organization as money, perquisites, or				exist. Unfortunately, many individual bonus,
promotions or from supervisors and coworkers as				commission, or piece-rate incentive plans fall short in
recognition. Intrinsic rewards accrue from performing				meeting this requirement. An individual may not have
the task itself, and may include the satisfaction of				control over a performance result, such as sales or
accomplishment or a sense of influence. The process				profit, because that result is affected by economic
of work and the individual’s response to it				cycles or competitive forces beyond his or her
provide the intrinsic rewards. But the organization				control. Indeed, there are few outcomes in complex
seeking to increase intrinsic rewards must provide a				organizations that are not dependent on other
work environment that allows these satisfactions to				functions or individuals, fewer still that are not
occur; therefore, more organizations are redesigning				subject to external factors.
work and delegating responsibility to enhance				Choosing an appropriate measure of performance on
employee involvement.				which to base pay is a related problem incurred by
Equity and participation				individual bonus plans. For reasons discussed earlier,
The ability of a reward system both to motivate and				effectiveness on a job can include many facets not
to satisfy depends on who influences and/or controls				captured by cost, units produced, or sales revenues.
the system’s design and implementation. Even				Failure to include all activities that are important for
though considerable evidence suggests that				effectiveness can lead to negative consequences. For
participation in decision making can lead to greater				example, sales personnel who receive a bonus for
acceptance of decisions, participation in the design				sales volume may push unneeded products, thus
and administration of reward systems is rare. Such				damaging long-term customer relations, or they may
participation is time-consuming.				push an unprofitable mix of products just to increase
Perhaps, a greater roadblock is that pay has been of				volume. These same salespeople may also take
the last strongholds of managerial prerogatives.				orders and make commitments that cannot be met
Concerned about employee self-interest and				by manufacturing. Instead, why not hold salespeople
compensation costs, corporations do not typically				responsible for profits, a more inclusive measure of
allow employees to participate in pay-system design				performance? The obvious problem with this
or decisions. Thus, it is not possible to test thoroughly				measure is that sales personnel do not have control
the effects of widespread participation on				over profits.
acceptance of and trust in reward system.				These dilemmas constantly encountered and have led
Compensation systems: the dilemmas of practice				to the use of more subjective but inclusive behavioral
A body of experience, research and theory has been				measures of performance. Why not observe if the
developed about how money satisfies and motivates				salesperson or executive is performing all aspects of
employees. Virtually every study on the importance				the job well? More merit salary increases are based
of pay compared with other potential rewards has				on subjective judgments and so are some individual
shown that pay is important. It consistently ranks				bonus plans. Subjective evaluation systems though
among the top five rewards. The importance of pay				they can be all-inclusive if based on a thorough
and other rewards, however, is affected by many				analysis of the job, require deep trust in
factors. Money, for example, is likely to be viewed				management, good manager-subordinate relations,
differently at various points in one’s career,				and effective interpersonal skills. Unfortunately, these
because the need for money versus other rewards				conditions are not fully met in many situations, though
(status, growth, security, and so forth) changes at				they can be developed if judged to be sufficiently
each stage. National culture is another important				important.
factor. American managers and employees apparently				Group and organizationwide pay plans. Organizational
emphasize pay for individual performance more than				effectiveness depends on employee cooperation in
do their European or Japanese counterparts.				most instances. An organization may elect to tie pay,
European and Japanese companies, however, rely				or at least some portion of pay, indirectly to individual
more on slow promotions and seniority as well as				performance. Seeking to foster team-work, a
some degree of employment security. Even within a				company may tie an incentive to some measure of
single culture, shifting national forces may alter				group performance, or it may offer some type of
people’s needs for money versus other rewards.				profits or productivity-sharing plan for the whole plant
Companies have developed various compensation				or company.
systems and practices to achieve pay satisfaction				Gains-sharing plans have been used for years in many
and motivation. In manufacturing firms, payroll costs				varieties. The real power of a gains-sharing plan
can run as high as 40% of sales revenues, whereas				comes when it is supported by a climate of
in service organizations payroll costs can top 70%.				participation. Various structures, systems, and
General managers, therefore, take an understandable				processes involve employees in decisions that
interest in payroll costs and how this money is spent.				improve the organization’s performance and
The traditional view of managers and compensation				result in a bonus throughout the organization.
specialists is that if the right system can be				Bibliography
developed, it will solve most problems. This is not a				Searle, John G.
plausible assumption, because, there is no one right

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Motivation: Reward system and the role of compensation