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Chapter 6 Notes

Management (MGH)
Course Code
Ted Mock

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Lecture Notes ∙ Chapter Six ∙ Motivation in Practice
Money as a Motivator
Pay can provide for lower order needs such as food and shelter. It can also help to satisfy higher order needs
such as esteem and prestige. Can pay be linked to self-actualization?
Pay is potentially a good motivator to the extent it is clearly tied to performance.
Research indicates that financial incentives and pay for performance plans can increase performance and lower
The text suggests that pay may be the most important and effective motivator of performance. Do you agree?
Pay for performance
Piece rate – workers are paid a certain sum of money for each unit produced – often combined with a basic
hourly rate. Often tied to quotas ie. piecework rate is paid for production over a certain standard quota.
Wage incentive plans is the general term for these types of plans.
Potential Problems with Wage Incentive Plans
Lowered quality – plans may increase productivity at the expense of quality and it may be more costly to
correct mistakes than to do it right the first time
Differential opportunity – workers may be disadvantaged (not able to produce at a high level in comparison
with other workers) due to conditions beyond the workers’ control eg. Production equipment; raw material;
production rate of workers up the line; unfair distribution of work
Reduced cooperation – plans that reward individual productivity may decrease cooperation among workers
(that might slow them down and reduce their income)
Incompatible job design – job design may make it difficult to implement wage incentives. The worker must
have control over the process in order to reasonably tie wage incentives to individual productivity
Restriction of productivity – workers come to an informal agreement among themselves as to what constitutes
a fair day’s work. Reasons:
Workers fear that an increase in productivity will lead to staff reductions
Workers fear that an increase in productivity will lead to lowering the rate of payment under the
incentive plan – see next point -
Note: the types of incentive plans discussed here are found in factory production environments.
Standard levels of productivity are established through “time and motion” studies that are carried out by
“Industrial Engineers”. Piece rate incentives are tied to the established standards. If the standards are
increased, the workers must achieve higher levels of productivity to earn the same incentives.
Pay for Performance on White Collar Jobs
Merit pay – linking annual salary increase percentage to annual performance rating
Merit bonus – linking annual bonus to annual performance rating. Also called lump sum bonus
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Most salaried employees believe that there should be a link between pay and performance yet most employees
do not believe that their company’s plan effectively makes the connection
Potential problems with merit pay
Low discrimination – are performance appraisals able to clearly discriminate between good and poor
performers or do other issues and perceptual problems get in the way? Managers often feel that the only fair
response is to rate most employees as equals (restriction of range error). This equalization over-rewards poor
performers and under-rewards excellent performers
Small increases – the size of the merit increases or, more significantly, the difference in size of increase
between great and poor performance is too small to be an effective motivator
Pay secrecy – management frequently implores employees not to discuss their merit increases with other
workers. Since employees do not have a basis for comparison, they may not receive the potential motivational
impact of the merit pay plan.
Using Pay to Motivate Teamwork
Due to the dysfunctional aspects of many for performance systems, some firms have replaced or supplemented
individual incentive plans with broader based plans designed to foster cooperation and teamwork.
Organizations must be careful to choose plans that will encourage employee behaviors that are important to that
firm – this is referred to as “strategic compensation”.
Profit sharing - return of some company profit to employees in the form of cash bonus or may be diverted to a
retirement plan. In some firms, the cash from profit sharing is used to purchase company stock for the
employees. The amount of profit sharing payout is driven by a combination of factors that may include annual
profits, employee’s level in firm, employee’s salary, and sometimes is also tied to seniority or performance.
Profit sharing plans are “company plans” and the company is free to make up the rules as best fit its strategic
objectives. Two big problems with profit sharing are “line of sight” and entitlement mentality. In big firms, it
is impossible for many employees to see how their efforts impact the company bottom lines (line of sight
problem) and also in larger firms, employees may come to “expect” the annual profit sharing payout and the
only motivational impact of the payout is that employees will be disgruntled if the payout is smaller than usual
(negative impact of entitlement mentality).
ESOP – Employee Stock Ownership Plan – plans to put company stock into the hands of employees –
employees become owners of the company (think WestJet commercials – “Why do WestJet employees care so
much? We’re owners too!”) There are a variety of ways to get stock into the hands of employees – see text –
we will discuss in class. Owning stock increases employee loyalty and motivation because employees align
themselves with company goals and interests. It creates a sense of psychological ownership.
Gainsharing – is a group pay incentive plan based on productivity or performance improvements over which
the workforce has some control. The savings and improvements occur because of suggestions from workers.
Such plans often include reductions in the cost of labour, material or supplies. In the presence of a union,
Gainsharing plan rules are negotiated between union and management so the rules are transparent. In a typical
Gainsharing plan, a percentage of the savings is returned to employees – sometimes as high as 75% of the
savings. Gainsharing requires workers to learn more about the business and requires increased cooperation
Skill based pay – people are paid according to the number of job skills they have acquired. Also called Pay for
Knowledge System (PKS). Companies use PKS to have a more flexible workforce to allow flexibility in task
assignments. This can allow the firm to have leaner staff levels. Potential upsides of PKS include increases in
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