MGHB02H3 Chapter Notes - Chapter 6: Merit Pay, Motivate (Company), Telecommuting
19 Jul 2010
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MONEY AS A MOTIVATOR
• Employees and managers seriously underestimate the importance of pay as a motivator
• Pay should be motivating to those people who have strong lower-level needs, according
to Maslow and Alderfer
• According to Expectancy theory, if pay can satisfy a variety of needs, it should be highly
valent, and it should be a good motivator to the extent that it is clearly tied with
performance
• According to Need hierarchy, pay can also function to satisfy social, self-esteem, and
self-actualization needs
• Financial incentives and pay-for-performance plans have been found to increase
performance and lower turnover
Linking Pay to Performance on Production Jobs
• Piece rate is a pay system in which individual workers are paid a certain sum of money
for each unit of production completed
o Group incentives are employed when difficult to measure individual productivity
• Wage incentive plans are various system that link pay to performance on production
jobs
o Leads to substantial increases in productivity
Potential Problems with Wage Incentives
Lowered Quality
• Increases productivity at expense of quality
• Quality issue can be a problem when employers use incentives to motivate faster
• Quality control is difficult
Differential Opportunity
• A threat to the establishment of wage incentives exists when workers have
different(better) opportunities to produce at a high level
Reduced Cooperation
• Wage incentives that reward individual productivity might decrease cooperation among
workers
Incompatible Job Design
• The way jobs are designed can make it very difficult to implement wage incentives
o Example: on an assembly line, it is almost impossible to identify and reward
individual contributions to productivity
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• As size of team increases, the relationship between any individuals productivity and their
pay decreases
Restriction of Productivity
• A chief psychological impediment to the use of wage incentives is the tendency for
workers to restrict productivity
• When wage incentives are introduced, workers sometimes come to an informal
agreement about what constitutes a fair day’s work and artificially limit their output
accordingly
• Restriction of Productivity is the artificial limitation of work output that can occur
under wage incentive plans
Link Pay to Performance on White-Collar Jobs
• White-collar jobs offer few objective performance criteria to which pay can be tied
• Performance in many jobs is evaluated by the subjective judgement of the performer’s
manager
• Merit pay Plans are systems that attempt to link pay to performance on white-collar jobs
o Using evaluations, managers recommend that some amount of merit pay be
awarded to individuals over and above their basic salaries
o Merit pay can provide an especially intangible signal that the organization
considers an employee’s performance “on track”
o Employed more frequently than wage incentive plans
o Many of these systems now in use are ineffective
! Research suggests pay is not related to performance under some merit
plans
Potential problems with Merit Pay Plans
Low Discrimination
• Managers might be unable or unwilling to discriminate between good performers and low
performers
• Good rating systems are rarely employed
• If there are true performance differences among employees, equalization overrewards
poorer performances and underrewards better performers
Small Increases
• Merit increases are simple too small to be effective motivators
• Sometimes a reasonable amount of merit is provided, but its motivational impact is
reduced because it is spread out over a year
• Lump sum bonus is a merit pay that is awarded in a single payment and not built into
base pay
o A way to overcome the visibility problem of small increases of merit pay
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Pay Secrecy
• The extreme secrecy that surrounds salaries in most organizations is a threat to the
effectiveness of merit pay
• Even if merit pay is administered fairly, is contingent on performance, and is generous,
employees might remain ignorant of these facts because they have no way of comparing
their own merit treatment with that of others
o Secrecy can severely damage the motivational aspect of well-designed merit plan
• Managers have that tendency to overestimate the pay of their employees and their peers
and to underestimate the pay of their superiors
o This leads to reduced satisfaction with pay, damage perceptions of the linkage
between performance and rewards, and reduce the valance of promotion to a
higher level of management
Using Pay to Motivate Teamwork
• People sometimes end up pursuing their own agendas at the expense of the goals of their
work group, department, or organization
Profit Sharing
• Profit sharing is one of the most commonly used group-orientated incentive systems
o In years which the firm makes a profit, some of this is returned to employees in
the form of a bonus, sometimes in cash and sometimes in a deferred retirement
fund
• Unlikely profit sharing is highly motivational
o Difficult to see individual impact on the profits
• Works best in smaller firms that regularly turn handsome profit
Employee Stock Ownership Plans (ESOPs)
• Employee stock ownership plans are incentive plans that allow employees to won a set
of a company’s shares and provide employees with a stake in the company’s future
earnings and success
• Attracts and retains talent, motivates employee performance, focuses employee attention
on organizational performance, creates a culture of ownership, educates employee about
the business, and conserves cash
• Believed to increase employee’s loyalty and motivation because they align employee’s
goals and interests with the organizations
• Work best in smaller firms that regularly make profits
• Lose their motivational potential in a weak economy when a company’s share price goes
down
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