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Motivation: Reward system and the role of compensation

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