COMM 151 Lecture Notes - Merit Pay, Profit Sharing, Motivation
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Chapter 6 – Motivation in Practice
Money as a Motivator
- According to Maslow and Alderfer, pay is especially important for people with strong lower level needs.
- Also when you receive increase in pay, it might give you Prestige among friends and family, signal competence
(abilities) as a worker and demonstrates that boss cares about you.
- Using the hierarchy of needs, pay can also function to fulfill the needs of social, self esteem, and self
actualization. (the above is the example)
- Financial incentive is consistent with the predictions of need theory and expectancy theory.
Linking Pay to Performance on Production Jobs
- Piece rate: a pay system in which individual workers are paid a certain sum of money for each unit of production
- Wage incentive plans are various systems that link pay to performance on production jobs. E.g. worker gets paid
a hourly basic rate but also gets monthly bonus on the products produced
- An review report showed that productivity increased by 30% with installation of piece rate.
Potential Problems with Wage Incentives
- Lower Quality: Workers try to produce more sacrificing the quality.
- Differential Opportunity: Occurs when there is difference in the opportunities to produce at high levels. E.g.
Worker A might have better machine and have no raw material shortage whereas Worker B has shitter
equipment and have raw material shortages.
- Reduced Cooperation: Workers might hoard raw materials and hide new ideas that increase productivity. Also
they might not engage in peripheral tasks like clean shop or unloading the materials.
- Incompatible Job Design: some jobs are difficult to implement wage incentive. Such thing as assembly line, it is
almost impossible to reward each individual. To reward team productivity, as the number of members in a team
increases, the relationship between individual productivity and their pay decreases.
- Restriction of Productivity: DEF: The artificial limitation of work output that can occur under wage incentive
plan. (LOOK AT Exhibit 6.1) The reason that productivity with wage incentive to stop is that workers are scared
that if they produce too much it will lead in reduction of workforce. Also if they are able to produce at very high
level, they are afraid that they will cut the piece rate.
Linking Pay to Performance on White- Collar Jobs
- It is hard to measure the performance of white collar jobs (except some like sales or CEO and the profitability of
- The link between White collar job and Pay performance is called merit pay.
- Periodically (usually yearly) the manager evaluates the performance of the employees and then awards merit
pay on top of the basic salary.
- Since the indicator of employee’s performance is done by the manager, this is highly subjective and unclear. It is
supported by managers saying the one year employee works very efficiently and deserves merit pay and next
year they do not. We know that human performance is always consistence so it seems that organization are not
truly paying merit pay based on performance.
- Merit pay plans are one of the most common forms of motivation in Canadian Organization.
Potential Problems with Merit Pay Plans.
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- Low Discrimination: Managers sometimes feel that equal performance among the employers is the most fair.
Effective rating systems are rarely employed. Even if the managers see the difference, they are reluctant to give
fair reports. Equalization leads to over rewarding poor performers and under rewarding better performers.
- Small Increases: Merit pay plans are often included in the basic salary and received over the year. The difference
is so small sometimes it is not realized. Also when companies encounter economic difficulties and high inflation,
merit pay is removed. To overcome the small increases in base pay, Lump sum bonuses are given out which is a
merit pay that is awarded in a single payment and not built into base pay.
- Pay Secrecy: There are extreme secrecy that surround salaries. Salaries are confidential information and
managers implores employees who receive merit pay to not to discuss with the co-workers. Also organizations
fail to inform the employee’s about average raise received by those doing similar work. This leads for employees
to invent salaries for other members. (see Exhibit 6.2)
Using Pay to Motivate Teamwork
- Profit Sharing: profit sharing is one of most commonly used group- oriented incentive system. It is the return of
some company profit to employees in form of cash bonus or retirement supplement. It is unlikely that profit
sharing is motivational. Some of factors are beyond the control of the workforce. (economy) Profit sharing
seems to work best in smaller firms that consistently turns profit.
- Employee Stock Ownership Plans (ESOP’s): ESOP have become popular group-oriented incentive system.
Employees are often allowed to buy shares at fixed price. ESOP allows the employees with the stake in the
company’s future earnings and success to help create sense of ownership. They also serve number of other
purposes: including attracting and retaining talent; motivating employee performance; focusing employee
attention on organizational performance; creating culture of ownership; educating employees about the
business; and conserving cash by substituting options for cash. Like profit sharing ESOP works best for smaller
firms that turn regular profit.
- Gain sharing: Is a group pay incentive plan based on productivity or performance improvements over which the
workforce has some control. Such plans often include reductions in the cost of labour, materials, or supplies.
When the measured costs decrease, the company using a formula shares the “gain” between employees and the
firm. Gain sharing usually has been installed using committees that include extensive workforce participation.
This includes all members of the work unit, including production, manager and support staff, and builds trust
and commitment to the formula they use to convert gains into bonuses.
- Skill Based pay (AKA: Pay for Knowledge): A system in which people are paid according to the number of job
skills they have acquired. The more skills they acquire the more is their pay. The companies use this to
encourage employee flexibility in task assignment and to give them broader picture of work process. It is also
very useful on self managed teams (chapter 7) Training costs can be high with skill- based pay system.
- LOOK AT EXHIBIT 6.3 for summary of this
Job Design as a Motivator
Traditional Views of Job Design
- From the Industrial Revolution until 1960 the prevailing philosophy was job simplification. The division of labour
in society has helped us to recognize that specialization was key to efficient productivity. If production of an
object was to be broken down into basic, simple steps, even untrained worker could master this step.
Job Scope and Motivation
- Job Scope is the breadth and depth of a job. Breadth refers to the number of different activities performed on
the job whereas depth refers to the degree of discretion or control the worker ahs over how these tasks are
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