MGHB02H3 Chapter Notes - Chapter 6: Profit Sharing, Absenteeism, Motivation
ProfessorJulie Mc Carthy
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Questions and Exercises prepared by Alan Saks.
I. Money as a Motivator
The money that employees receive in exchange for organizational membership is usually a package
made up of pay and various other fringe benefits that have dollar values, such as insurance plans, sick
leave, and vacation time. We are mainly concerned with the motivational characteristics of pay.
Employees and managers, however, seriously underestimate the importance of pay as a motivator.
Motivation theories suggest that money can be a motivator to the extent that it satisfies a variety of
needs, is highly valent, and it is clearly tied to performance. Research has found that financial incentives
and pay-for-performance plans increase performance and lower turnover. In general, the ability to earn
money for outstanding performance is a competitive advantage for attracting, motivating, and retaining
A. Linking Pay to Performance on Production Jobs
The prototype of all schemes to link pay to performance on production jobs is piece-rate. Under a piece-
rate system, workers are paid a certain sum of money for each completed unit of production completed.
Various schemes that link pay to performance on production jobs are called wage incentive plans which
often offer a bonus for production over a minimum quota. These wage incentives have often resulted in
increases in productivity.
B. Potential Problems with Wage Incentives
Despite their theoretical and practical attractiveness, wage incentives have some potential problems
when they are not managed with care.
Lowered Quality. It is sometimes argued that wage incentives can increase productivity at the expense
of quality. While adequate systems can usually be put in place to monitor and maintain quality in
manufacturing operations, wage incentives that increase "through-put" in service contexts are more
difficult to control.
Differential Opportunity . A threat to the establishment of wage incentives exists when workers have
differential opportunities to produce at a high level. Sometimes access to raw materials or the quality of
roduction equipment can give some workers an unfair advantage over others in their opportunity to
Reduced Cooperation. Wage incentives that reward individual productivity might decrease cooperation
among workers who might hoard materials intended for common use or neglect common tasks like
house-keeping that do not contribute directly to production quotas.
Incompatible Job Design. In some cases, the way jobs are designed can make it very difficult to install
wage incentives. It is very difficult to identify individual productivity in such contexts as assembly line
work or where teams are large. As the size of the team increases, the relationship between any
individual’s productivity and his or her pay decreases
Restriction of Productivity. A chief psychological impediment to the use of wage incentives is the
tendency for workers to restrict productivity. Restriction of productivity refers to the artificial
limitation of work output that can occur under wage incentive plans. Workers come to an informal
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agreement about what constitutes a fair day's work and artificially limit their work output.
C. Linking Pay to Performance on White-Collar Jobs
Compared with production jobs, evaluating white-collar performance is more difficult because there are
fewer objective performance criteria to which pay can be tied. Attempts to link pay to performance on
white-collar jobs are often called merit pay plans. Just as straight piece-rate is the prototype for most
wage incentive plans, there is also a prototype for most merit pay plans: Periodically (usually yearly),
managers are required to evaluate the performance of employees on some form of rating scale or by
means of a written description of performance. Using these evaluations, the managers then recommend
that some amount of merit pay be awarded to individuals over and above their basic salaries. This pay is
usually incorporated into the subsequent year’s salary. Most companies employ these plans, although
their implementation is often ineffective since many individuals do not perceive a link between their job
erformance and their pay.
D. Potential Problems with Merit Pay Plans
As with wage incentive plans, merit pay plans have several potential problems if employers do not
manage them carefully.
Low Discrimination. A major flaw with merit pay plans is that managers might be unable or unwilling to
discriminate between good performers and poor performers.
Small Increases. Merit increases are often simply too small to act as effective motivators, especially if
they are spread out over an entire year and combined with other things like cost of living allowances. To
overcome this problem, some companies pay a lump sum bonus which is merit pay that is awarded in a
single payment and not built into base pay.
Pay Secrecy. Since most companies consider salary information confidential, employees that receive
merit pay have no ability to assess the relative value of what they receive which reduces its motivation
otential. Further, research has shown that, in the absence of accurate information, managers tend to
overestimate the salaries of peers and subordinates, while underestimating the salaries of superiors.
E. Using Pay to Motivate Teamwork
Given the highly individual orientation of wage incentives and merit pay, some organizations have
either replaced or supplemented individual incentive pay with plans designed to foster more cooperation
Profit Sharing. Profit sharing is one of the most commonly used group-oriented incentive systems. In
years in which the firm makes a profit, some of this is returned to employees in the form of a cash bonus
or a retirement supplement. However, it is unlikely that these plans are highly motivational. Too many
factors beyond the control of individual employees can intervene in the determination of a company’s
rofit. It is also difficult to see the impact of one's efforts on overall outcomes. They work best in
smaller firms that regularly turn a profit.
Employee Stock Ownership Plans (ESOPs). Employee stock ownership plans (ESOPs) are incentive
lans that allow employees to own a set amount of a company’s shares and provide employees with a
stake in the company’s future earnings and success. Employees are sometimes allowed to purchase
shares at a fixed price and in some cases the or
anization will match emplo
ee contributions. However,
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