Motivation: Reward system and the role of compensation


“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
    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         |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
    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

    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
book, 1990