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Chapter 6

Textbook Notes - Chapter 6

Management (MGH)
Course Code
Joanna Heathcote

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MGTB27 / 01 Week 5
- WestJet motivates their employees by employing: a profit-sharing plan, an employee stock
ownership plan, jobs that are designed to provide employees with freedom and autonomy, and
alternative working schedules
- Discussed in this chapter will be four motivational techniques: money, job design, Management
by Objectives, and alternative working schedules
Money as a Motivator
- Employees and managers seriously underestimate the importance of pay as a motivator
- According to Maslow and Alderfer, pay is especially motivating in order for people to achieve
strong lower-level needs (e.g. money for food, shelter, other necessities in life)
- Pay can also make you look prestigious among your friends (social need) as well as make you
feel competent (self-esteem need)
- Financial incentives and pay-for-performance plans have been found to increase performance
and lower turnover
- The ability to earn money for outstanding performance is a competitive advantage for attracting,
motivating, and retaining employees
Linking Pay to Performance on Production Jobs
- Linking pay to performance on production jobs uses pure piece-rate which is a pay system in
which individual workers are paid a certain sum of money for each unit of production completed
(e.g. for a sewing machine operator, they are paid $2/dress sewed)
- Wage incentive plans are various systems that link pay to performance on production jobs:
o Paying workers a basic hourly wage and a piece-rate on top of this hourly wage (e.g. a
sewing machine operator is paid $8/hr plus $2/dress sewn)
o Group incentives are sometimes employed if it is difficult to measure the productivity of
an individual because of the nature of the production process
(e.g. workers in a steel mill are paid an hourly wage as well as a monthly bonus for each
ton of steel produced over some minimum quota)
- Compared with straight hourly pay, wage incentives usually leads to substantial increases in
productivity (median productivity increased 30% through piece-rate pay, goal setting or job
enrichment could not match this increase) and greater productivity than those without such wage
incentive plans (43 ± 64% greater productivity)
Potential Problems with Wage Incentives
- Wage incentives have some potential problems when they are not managed with care
- Lowered Quality
o It can be argued that wage incentives can increase productivity at the expense of quality
(when you make things faster, it may not be as high quality)
- Differential Opportunity
o When workers have different opportunities to produce at a high level (e.g. supply of raw
materials or the quality of production may vary from different workplaces)
- Reduced Cooperation
o Wage incentives that reward individual productivity might decrease cooperation among
workers (e.g. may be so focused on individual tasks, you may refuse to me engaged in
unimportant tasks such as unloading supplies or cleaning up)
- Incompatible Job Design
Chapter 6 ± Motivation in Practice (pg. 178 ± 207)

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MGTB27 / 02 Week 5
o Some jobs designed make it difficult to implement wage incentives (e.g. assembly line
where it is impossible to identify and reward individual contributions to productivity)
o When rewarding team productivity, as the size of the team increases, the relationship
productivity in teams of 2 has a greater impact than in teams of 10)
- Restriction of Productivity
o Restriction of productivity is the artificial limitation of work output that can occur
under wage incentive plans
o Restriction often occur because employees fear that if they produce at an especially high
level, an employer will reduce the rate of payment to cut labour costs (e.g. when
productivity increases dramatically, they may change the rate where it requires more
output for a given amount of pay)
Linking Pay to Performance on White-Collar Jobs
- Performance on many white-collar jobs (professional and managerial) is evaluated by the
data), may tie annual bonuses to the profitability of the firm]
- Merit pay plans are systems that attempt to link pay to performance on white-collar jobs
- There is also a prototype for the merit pay plan: managers are required to evaluate the
performance of employees periodically (usually yearly) on some form of rating scale or by
means of a written description of performance. Using these evaluations, managers then
recommend that some amount of merit pay be awarded to individuals over their basic salaries
- Since the distribution of merit pay are from unclear or highly subjective reviews on performance,
an employee is able to see a strong link between rewards and performance
- Merit pay plans are used more frequently than wage incentive plans and have become one of the
most common forms of motivation in Canadian organizations
- There are some studies that show the ineffectiveness of merit systems:
o 83% of organizations with pay-for-performance system said it was only somewhat
successful or not working at all
o Some organizations, seniority, number of employees and job level account for more
variation in pay than performance does
Potential Problems with Merit Pay Plans
- There are also potential problems in merit plans if employers do not manage them carefully
- Low Discrimination
o Merit plans may fail to achieve their intended effect if managers are unable or unwilling
to discriminate between good performers and poor performers
o In the absence of performance rating systems, subjective evaluations of performance can
be difficult so managers may think that it would be fair to rate most employees as equal
performers (perceptual error)
o If there are true performance differences among employees, equalization over-rewards
poor performers and under-rewards better performers (performers may feel unfairness)
- Small Increases
o A threat to the effectiveness of merit pay plans is when the merit increases are simply too
small to be effective motivators even if rewards are carefully tied to performance and
managers do a good job of discriminating between more/less effective performers
o A lump sum bonus is a merit pay that is awarded in a single payment and not built into
base pay (can motivate and retain employees since it gets their attention)

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MGTB27 / 03 Week 5
- Pay Secrecy
may reduce both satisfaction and motivation (e.g. may overestimate co-ZRUNHVSD\
o The action of keeping an employees pay secret from other members of the organizations
tend to reduce satisfaction with pay, damage perceptions of the linkage between
performance and rewards, and reduce the valence of promotion to a higher level of
o A study that was conducted concluded that when pay disclosure was implemented, there
was significant increase in performance and satisfaction with pay
Using Pay to Motivate Teamwork
- Firms have either replaced or supplemented individual incentive pay with plans designed to
foster more cooperation and teamwork in order to prevent people pursuing their own agendas at
the expense of the goals of their work group, department, or organization
- Organizations have to choose pay plans that support their strategic needs (motivational focus)
- Profit Sharing
o Profit sharing is the return of some company profit to employees in the form of a cash
bonus or a retirement supplement (most commonly used group-oriented incentive
systems; e.g. WestJet uses this method, up to 20% of profits is profit sharing)
o Profit sharing may not be highly motivational because there are too many factors beyond
the control of the workers that can affect profit (e.g. economy) and it is difficult to see the
o Profit sharing works best in smaller firms that regularly turns a handsome profit
- Employee Stock Ownership Plans (ESOPs)
o Employee stock ownership plans (ESOPs) is an incentive plan that allow employees to
o Serve as attracting and retaining talent, motivating employee performance, focusing
employee attention on organizational performance, creating a culture of ownership,
educating employees about the business, and conserving cash by distributing shares
o Many companies in Canada offer stock options to their employees (e.g. at PCL
Constructors in Edmonton, only employees are permitted to own company stocks, the
company has realized a profit every year since 1977)
of legal and psychological ownership
o Similar to profit sharing, works best in small organizations that regularly turn a profit
price goes down
- Gainsharing
o Gainsharing is a group pay incentive plan based on productivity or performance
improvements over which the workforce has some control
o Plans include reduction in the cost of labour, material, or supplies (when costs for these
reduce, the company is able to pay monthly bonuses on the savings)
o Gainsharing plans include all members of the work unit (production people, managers
and support staff)
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