HRM200 Lecture Notes - Lecture 11: Frederick Herzberg, Edward L. Deci, Victor Vroom
30 Nov 2016
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Ch 12: PAY-FOR-PERFORMANCE AND FINANCIAL INCENTIVES
MONEY AND MOTIVATION
• The use of financial incentives – financial rewards paid to workers whose production
exceeds some predetermined standard
• Todays efforts to achieve the organizations strategy through motivated employees
include fixed and variable compensation plans
• Fixed Pay: compensation that is independent of the performance level of the individual,
group or organization
o includes base pay and other forms of relatively consistent compensation (for
example: allowances) that satisfy the need for income stability
• Variable Pay: any plan that ties pay to productivity or profitability
o represents any plan that links pay with productivity, profitability or some other
measure of organizational performance
o employers continue to increase their use of variable pay plans while holding
salary increases or fixed compensation at modest levels
o cash bonuses or incentives are the most common form of short-term incentives
used in 87% of organizations that have short-term incentive plans in place
• variable pay facilitates management of total compensation by keeping base pay inflation
controlled
• the fundamental premise of variable pay plans is that top performers must get top pay
to secure their commitment to the organization
o thus, accurate performance appraisal or measurable outcomes is a precondition
of effective-pay-for-performance plans
o aothe ipotat peeuisite fo effetie aiale pa plas is lie of sight
or the extent to which an employee can relate his or her daily work to the
achievement of overall corporate goals
• employees need to understand corporate strategy and how their work as individual
employees is important to the achievement of strategic objectives
• the entire thrust of such programs is to treat workers like partners and get them to
think of the business and its goals as their own
o thus reasonable to pay them more like partners too, by linking their pay more
directly to performance
Motivation and Incentives
• several motivation theories have particular relevance to designing incentive plans
Motivators and Frederick Herzberg
• he said that the best way to motivate someone is to organize the jobs so that doing it
poides the hallege ad eogitio e all eed to hekp satis highe-level needs
for things like accomplishments and recognition
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• these needs are relatively insatiable, so challenging work provides a built –in-motivation
generator
• doig thigs to satisf a okes loe leel eeds fo thigs like ette pa ad
working conditions just keeps the person from becoming dissatisfied
• factors hygienes) that satisfy lower-level needs are different from those (motivators)
that satisfy or partially satisfy higher-level needs
• if hygiene factors (factors outside the job itself), such as working conditions, salary, and
incentive pay) are inadequate, employees become dissatisfied. However,, adding more
of these hgiees like ieties to the jo supplig hat Hezeg alls etiisi
otiatio is a ifeio a to t to otiate soeone, because lower-level needs
ae uikl satisfied. Ieitale the peso sas, i effet, I at aothe aise
• instead of relying on hygienes, Herzberg says managers interested in creating a self-
otiated okfoe should ephasize jo otet o otivator factors. Managers
do this by enriching workers job so that the jobs are more challenging and by providing
feedback and recognition – they make doing the job motivating in other words
• in organizational psychology intrinsic motivation: motivation that derives from the
pleasure someone gets from doing the job or task
o oes fo ithi the peso, athe tha fo eteall, suh as a fiaial
incentive plan
• intrinsic motivation means that just doing the task provides the motivation
• Herzberg makes the point that relying exclusively on financial incentives is risky
• the employer should also provide the recognition and challenging work that most
people desire
Demotivators and Edward Deci
• psychologist Edward decis work highlights another downside to relying too heavily on
extrinsic rewards: they might backfire
• dei foud that etisi eads ould at ties atuall detat fo the peso’s
intrinsic motivation
• the point may be stated thusly: be cautious in devising incentive pay for highly
motivated employees
o lest you inadvertently deamean and detract from the desire they have to do the
job out of a sense of responsibility
Expectancy Theory and Victor Vroom
• in general, people wont pursue rewards they find unattractive, or where the odds of
success are very low
• expectancy motivation theory echoes these commonsense observations
• he says a persons motivation to exert some level of effort depends on three things: the
persons expectancy (in terms of probability) that his/her effort will lead to
performance; instrumentality, or the perceived connection (if any) between successful
performance and actually obtaining the rewards and valence, which represents the
perceived value the person attaches to the reward
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• Expectancy: a persons expectation that his or her effort will lead to performance
• Instrumentality: the perceived relationship between successful performance and
obtaining the reward
• Valence: the perceived value a person attaches to the reward
Motivation = (E X I X V)
Where E represents expectancy, I is instrumentality and V valence. If E or I or V is zero or
inconsequential, there will be no motivation
• Fist, if eploees do’t expect that effort will produce performance, no motivation will
occur. So managers must ensure that their employees have the skills to do the job, and
believe they can do the job. Thus training, job description, and confidence building and
support are important in using incentives
• “eod, Voo’s theo suggest that eploees ust see the instrumentality of their
efforts- they must believe that successful performance will in fact lead to getting the
reward. Managers can accomplish this, for instance, by creating easy to understand
incentive plans
• Third, the reward itself must be of value to the employee. Ideally, the managers should
take into account individual employee preferences
Types of Incentive Plans
• there are several types of incentive plans
• individual incentive program give income over and above salary to individual employees
who meet a specific individual performance standard
• informal incentives may be rewards, generally to individual employees, for
aoplishets that ae ot eadil easued a stadad, suh as to eogize
eepla ustoe seie this eek
• group incentive programs are like individual incentive plans but they provide payments
over an above base salary to all team members when the group or team collectively
meets a specified standard for performance, productivity or other work-related
behaviour
• organization-wide incentive plans provide monetary incentives to all employees of the
organization
o examples: are profit-sharing plans that provide employees with a share of the
organizations profits in a specified period, and gainsharing programs designed to
reward employees for improvements in organizational productivity
o finally, non-monetary recognition programs motivate employees through praise
and expressions of appreciation for their work
• it is important to ensure that whatever incentive is being provided is appealing to the
individual receiving it
o demographic factors can have an impact on what is appealing
• for simplicity, these plans will be discussed as follows:
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Document Summary
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