MGHB02H3 Chapter Notes - Chapter 6: Highscope, Profit Sharing, Problem Solving
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Chapter 6 – Motivation in Practice
Money as a Motivator
Money as a motivator represents an attempt to capitalize on extrinsic motivation.
Pay is motivational to people with strong lower-level needs (pay can be exchanged for
necessities). Pay can also satisfy social (pay can give you prestige among friends and family),
self-esteem (pay can signal your competence as a worker), and self-actualization (pay can
demonstrate that your boss cares about you) needs.
According to the 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 to performance.
Financial incentives and pay-for-performance plans increase performance and decrease
turnover. Pay may be the most important and effective motivator of performance.
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 completed.
Wage Incentive Plans: Various systems that link pay to performance on production jobs.
Usually leads to substantial increases in productivity.
Potential Problems with Wage Incentives
Lowered Quality. Wage incentives can increase productivity at the expense of quality.
Differential Opportunity. Workers may have different opportunities to produce at a high level. If
the supply of raw materials or the quality of production equipment varies from workplace to
workplace, some workers will be at an unfair disadvantage under an incentive system. Workers
will differ in the expectancy that they can produce at a high level (expectancy theory).
Reduced Cooperation. Wage incentives that reward individual productivity might decrease
cooperation among workers.
Incompatible Job Design. The way jobs are designed can make it hard to implement wage
incentives. On an assembly line, it may be impossible to identify and reward individual
contributions to productivity. As the size of the team increases, the relationship between any
individual’s productivity and his or her pay decreases (removes the intended incentive effect)
(e.g., the impact of your productivity in a team of two is greater than the impact of your
productivity in a team of ten).
Restriction of Productivity: The artificial limitation of work output that can occur under wage
o Under normal circumstances (without wage incentives), productivity is distributed in a
o Why it happens: workers may feel that increased productivity due to the incentive will
lead to reductions in the workforce or workers may fear that if they produce at an
especially high level, an employer will reduce the rate of payment to cut labour costs.
o Hypothetical productivity distributions, with and without wage incentives, when
incentives promote restriction:
Linking Pay to Performance on White-Collar Jobs
White-collar jobs frequently offer fewer objective performance criteria to which pay can be tied.
Performance in many such jobs is evaluated by the subjective judgment of the performer’s
Merit Pay Plans: Systems that attempt to link pay to performance on white-collar jobs.
Periodically (usually yearly), managers evaluate the performance of employees. Using these
evaluations, the managers then recommend that some amount of merit pay be awarded to
individuals (usually incorporated into the subsequent year’s salary cheques).
Merit pay plans are used more often than wage incentive plans.
Many pay-for-performance systems are now ineffective in most organizations, seniority, the
number of employees, and job level account for more variations in pay than performance does.
Potential Problems with Merit Pay Plans
Low Discrimination. Managers might be unable or unwilling to discriminate between good
performers and poor performers. Subjective evaluations of performance may be difficult to
make and may be distorted by perceptual errors. Therefore, manager might feel that the only
fair response is to rate most employees as equal performers (equalization strategy). If there are
true performance differences among employees, equalization over-rewards poorer performers
and under-rewards better performers.
Small Increases. Occurs when merit increases are too small to be effective motivators.
Sometimes a reasonable amount of merit pay is provided, but its motivational impact is reduced
because it is spread out over a year or because the organization fails to communicate how much
of a raise is for merit and how much is for cost of living.
o Lump Sum Bonus: Merit pay that is awarded in a single payment and not built into base
pay. Used to overcome the small increases problem.
o When merit pay makes up a substantial portion of the compensation package,
management has to take extreme care to ensure that it ties the merit pay to
performance criteria that benefit the organization. Otherwise, employees could be
motivated to earn their yearly bonus at the expense of long-term organizational goals.
Pay Secrecy. Even if merit pay is administered fairly, is contingent on performance, and is
generous, employees have no way of comparing their own merit treatment with that of others.
As a result, pay secrecy might damage the motivational impact of a well-designed merit plan.
o Without better information, employees are inclined to “invent” salaries for other
organizational members (reduces job satisfaction and motivation). These tendencies will
reduce satisfaction with pay, damage perceptions of the linkage between performance
and rewards, and reduce the valence of promotion to a higher level of management.
o If performance evaluation systems are inadequate and poorly implemented, a more
open pay policy will simply expose the inadequacy of the merit system and lead
managers to evaluate performance in a manner that reduces conflict.
o A manager’s estimates of pay earned by boss, peers, and subordinates:
Using Pay to Motivate Teamwork
The highly individual orientations of wage incentives and merit pay plans may cause people to
pursue their own agendas (and pay) at the expense of the goals of their work group,
department, or organization.
Teamwork Pay Plans:
Profit Sharing: The return of some company profit to employees in the form of a cash bonus or
a retirement supplement.
o Problems (it may not be motivational): (1) too many factors beyond the control of the
workforce (e.g., the economy) can affect profits no matter how well people perform
their jobs and (2) in a large firm, it may be difficult to see the impact of one’s own
actions of profits (it works best in smaller firms that regularly return a large profit).
Employee Stock Ownership Plans (ESOPs): Incentive plans 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.
o Purposes: ESOPs create a sense of ownership; attract and retain talent; motivate
employee performance; focus employee attention on organizational performance;
creates a culture of ownership; educates employees about the business; and conserves
cash by substituting options for cash.
o Benefits: (1) ESOPs increase employees’ loyalty and motivation because they align
employees’ goals and interests with those of the organization and create a sense of legal
and psychological ownership and (2) ESOPs improve employee retention and