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
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
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
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
Pay for performance
Some reasons why organizations pay their employees for performance are
under the right conditions, a pay-for-performance system can motivate
a pay-for-performance system can help attract and keep achievement-
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 |Group |Organizationwide |
|performance |performance |performance |
| | | |
|Merit system |Productivity |Profit sharing |
|Piece rate |incentive |Productivity-sharin|
|Executive bonus |Cost effectiveness |g |
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
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
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
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
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.
Searle, John G., Manage People, Not Personnel, A Harvard Business review