Work Motivation for an Organisation: Employee Reward Schemes - Term Paper Example

THE ONE BEST WAY TO INCREASE WORK MOTIVATION FOR AN ORGANISATION IS THROUGH EMPLOYEE REWARD SCHEMES INTRODUCTION Economic theory, psychological theory and organisational behaviour have predicted that distributing rewards, both material and non-material, based on performance will motivate self-interested workers to enhanced levels of effort and performance. The hypothesized stimulants of additional motivation are both psychological and economic. Empirical evidence examining the relationship linking incentives to enhanced performance has, however, been mixed (Bonner et al, 2000). Bonner and Sprinkle (2002), for example, report that the structure of incentive schemes, individual ability, and other organisational and environmental circumstances impact the effectiveness of performance-based incentive compensation schemes. Regardless of their ultimate effectiveness, organisations implementing incentive schemes often anticipate improved recruitment and retention of employees by generously rewarding individuals who perform at high levels. The question of how to properly motivate high performing employees while not alienating other important workers is, however, becoming a more important part of many motivational programs (Stuart, 2005). In fact, establishing appropriate employee reward schemes and limiting undesirable reactions for those who fail to achieve imposed goals may be as much of a managerial difficulty as rewarding top performers. Ultimately, challenges presented to firm owners and managers who seek to motivate valuable workers while not imposing harsh penalties for failure are substantial. From the critical perspective, various employee reward schemes and their derivatives represent possibly the best way to increase work motivation within organisations. UNDERSTANDING MOTIVATION AND GOAL SETTING A general assumption of much of prior economics-based research is that encouraging enhanced performance from employees is beneficial because it leads to increased profitability to organisation’s owners by aligning the interests of owners and employees (Sprinkle, 2003). Economic agency theory, primarily the principal-agent model, and psychologically based goal-setting theory explain the hypothesised causal relationships between incentives, motivation, effort, and performance (Bonner & Sprinkle, 2002; Locke, 2001). From an economic perspective, the benefits of using performance information as a motivational tool stem from the assumption that self-interested employees are interested in maximising personal wealth either through personal compensation or the consumption of firm prerequisites and engaging in leisure or not working. Research on goal setting suggests that specific, challenging goals lead to enhanced effort on a task while relatively easy or no goals do not have the same effect (Hirst & Yetton, 1999). Goals in and of themselves may work to direct the attention of individuals toward successful task completion, apart from any additional extrinsic motivation such as monetary rewards. A primary theme of goal setting is that goals have the effect of increasing individual arousal, focusing attention, and acting as a psychological reward (Gollwitzer & Schall, 2001). In addition, social cognitive theory posits that individuals associate goal achievement with psychological rewards such as positive self-evaluations and greater levels of self-satisfaction (Cameron and Pierce, 2002). Thus, achieving goals provides significant psychological reward in addition to any economic reward provided. Whereas goal-setting theory posits that establishing goals and providing performance-related information may provide sufficient motivation leading to increased levels of effort, economic theory contends that it is not sufficient to simply propose goals as performance targets (Cameron and Pierce, 2002). Instead, coupling goals to financial rewards must also be contracted in order to motivate increased levels of performance in self-interested employees (Locke, 2001). Interestingly, in the first research examining differences in extrinsic and intrinsic motivation, Deci found that rewarding individuals for engaging in an otherwise enjoyable task actually reduced their desire to engage in the task in the future (Martocchio, 2001). Deci specifically found that the controlling nature of an economic reward reduced individuals intrinsic motivation to engage in the task (Martocchio, 2001). Both theories of extrinsic motivation and goal setting propose that internalised goals or those in which individuals “buy in” to the goal are a primary determinant of individual effort (Martocchio, 2001). For any performance-based incentive compensation scheme to be effective, individuals must first internalise or “buy in” to achieving a performance target (Gollwitzer & Schall, 2001; Locke, 2001). Personal commitment to a goal, especially a goal that is imposed externally, is necessary in order to observe performance improvement. Lack of personal commitment on the part of the worker negates the positive motivational impact of performance targets, and the incentive scheme has little effect (Locke, 2001). In general, it appears that the mere presence of goals may have a positive impact on motivation by providing an opportunity for individuals to experience positive emotion, increased feelings of self-worth, and increased satisfaction associated with achievement. These constructs, in addition to economic considerations, may help provide a more complete understanding of individual self-interest. In fact, psychological theory may also help explain the cognitive mechanism whereby “the motivation created by monetary incentives leads to changes in effort” (Bonner & Sprinkle, 2002, p. 308). Although the mechanism by which employee reward schemes influence the impact of specific, challenging goals on enhanced effort is not completely clear, three models have been proposed. First, employee reward schemes may lead individuals to set goals when they otherwise would not. Second, employee reward schemes may lead individuals to establish more challenging goals than they would otherwise set. Third, employee reward schemes may lead to greater levels of goal commitment than otherwise would be observed. Various employee reward schemes, in addition to other positive effects of goals, may work to enhance motivation, increase effort, and, in many cases, improve task performance. In sum, it appears that a combination of economic and psychological factors best explain the behaviour of self-interested individuals. MOTIVATION AND PERFORMANCE BASED REWARD SCHEMES From the critical perspective, the level at which performance is measured is an important issue to consider when designing employee reward schemes (Martocchio, 2001). Individual level plans are often used when organisations want to encourage entrepreneurial, risk-taking behaviour (Martocchio, 2001). For example, individual pay plans are frequently used for motivational purposes in sales positions (Banker et al, 2000) and banking jobs (Dernovsek, 2005), where employees interact with customers and performance is largely under the control of the individual. When employees are rewarded for individual-level performance, the measures used to evaluate performance may include quantity or quality of work output, sales, work safety, and attendance records (Martocchio, 2001). For example, a sales employee may have a target bonus amount equal to 20% of salary. If the employee meets his or her sales goals, she would receive 100% of the target bonus. If the employee exceeded sales goals, the employee could receive 120%, 150%, or even 200% of that bonus target. These individual-level rewards systems may reward employees on a quarterly basis, as is often the case with sales, or after employees receive performance evaluations. Team-level plans are preferred when cooperation and information-sharing are required (Kerr & Slocum, 2006). Thus, team-level plans are often used to motivate and reward small project groups or small manufacturing teams (Beer & Cannon, 2004), where performance depends upon the interdependent efforts of the groups members. At this level, groups are often rewarded based upon measures such as labour, materials, and services cost savings (Martocchio, 2001). Finally, at the organisational level, gain-sharing, profit-sharing and employee stock ownership plans are used to motivate and reward employees for organisation-level outcomes (Zingheim & Schuster, 2000). Stock ownership rewards are often reserved for executives and other high-status employees (Kerr & Slocum, 2006). These mechanisms provide compensation for quarterly or yearly profits, sales revenue, and market share (Martocchio, 2001). Gain-sharing and profit-sharing systems are often used with line employees, especially in manufacturing. These systems typically reward employees for cost containment and company profits (Martocchio, 2001). For example, under gain-sharing, each employee in a manufacturing plant may receive a predetermined bonus amount when levels of scrap and absenteeism are kept to a specified minimum. CRITIQUE OF EMPLOYEE REWARD SCHEMES Empirical research has found that performance-based incentive compensation schemes are generally effective in aligning the interests of owners and employees by additional employee effort and thereby reducing the moral hazard problem (Sprinkle, 2003). A review of this line of research suggests that the mechanisms by which compensation is tied to performance have a significant impact on the actions of employees and the pay-performance relationship. The operationalisation of theories of motivation at its most basic level is frequently examined by a comparison of how alternative incentive scheme structures impact individual motivation, effort, work, and performance (Bonner & Sprinkle, 2002). Incentive schemes may be classified into five general categories: (a) flat rate, (b) piece rate, (c) quota, (d) variable ratio, and (e) tournament. Because, variable ratio and tournament incentive schemes deal with the relationship between an individual’s performance and that of the organisation as a whole or among other workers within the organisation, their discussion do not fit the purposes of the paper and can be omitted. Flat-rate incentive schemes are characterised as those that do not link compensation to task performance. Flat-rate schemes are similar to salaries; that is, a fixed amount of compensation is provided for time spent engaged in work-related activities and not for some performance metric. Flat-wage schemes transfer no performance risk from the employer to the employee and, therefore, typically offer the lowest amount of compensation to the agent that meets his or her reservation wage for time but not effort (Prendergast, 2002). At least in a single-period world, the economically rational, self-interested employee would accept the flat-wage contract and provide no effort input into the employment relationship unless noneconomic factors also play into a decision on how much effort to expend. In this case, potential psychological benefits such as increases in positive emotion, enhanced perceptions of self-worth, and improved satisfaction associated with achievement may help explain why otherwise economically rational individuals may exert effort beyond what may be explained in simple economic terms. In fact, when offered a flat-wage contract, only potential psychological benefits associated with achievement could explain any expended work-related effort. From the critical perspective, while this type of contract may be optimal for an employee whose effort or action is not able to be observed, the contract is often not optimal for the employer because it does not align his or her interests with the actions of the employee. Piece-rate incentive schemes may be characterised as those that offer a predetermined fixed amount of compensation for each individual unit of output. This type of incentive scheme exhibits a linear relationship between employee’s performance and compensation, which provides a fixed incremental benefit for each additional unit of output. For example, an employee may be paid a dollar for each electronic component made (Bonner et al., 2000, p. 26). Piece-rate incentive schemes act to transfer compensation risk from the employer to the employee; that is, employees are only compensated for output they achieve during the term of the employment contract (Prendergast, 2002). Piece-rate contracts necessarily impose higher expected wage costs on the employer because of performance risk assumed by the employee. According to Bonner et al (2000), “under quota schemes, individuals typically receive a flat rate irrespective of performance until a certain targeted level of performance is attained. Once individuals reach this quota, they receive a bonus” (p. 26). Quota, in this sense, could be used interchangeably with other terms such as standard, goal, bonus level, or performance target. Quota schemes link pay to performance on a more global level because they do not tie pay to performance per individual unit produced. Due to their nonlinear or “kinked” linkage with performance, quota schemes do not provide incremental benefit to individuals on a per unit basis. Instead, individuals are motivated to reach a target performance level before any compensation above and beyond a base wage is received. In addition, quota schemes are different from both fiat-wage and piece-rate schemes; that is, they, by design, have a specific target performance level at which individuals may receive the incentive or bonus portion of their overall compensation. Other incentive schemes may or may not explicitly state specific performance targets such as that expressed or implied in quota systems. This difference between schemes may or may not be salient to individual employees. Depending on the performance level required to obtain the bonus compensation, quota schemes impose the greatest amount of risk on the employee (Prendergast, 2002). Quota schemes require that a potentially greater wage cost be imposed on the employer for the employee agreeing to work under the contract (Prendergast, 2002). Quota schemes are, therefore, typically the most costly for employers and the most beneficial to the employee but only when the target level of performance is met. In fact, the expected value of a quota contract may be less than that of both flat-wage and piece-rate contracts due to the employer’s desire to, albeit substantially, reward only top performers in the firm. When the target level of performance is not achieved, quota schemes may actually be the least costly in terms of employee pay to the employer. Research has found that quota schemes typically produce the greatest positive incentive-performance effect (Bonner & Sprinkle, 2002). Based on the postulation that goal or bonus levels are set at challenging yet not impossible target levels, quota schemes closely follow goal-setting research, which finds that such goals are more motivating than no or “do-your-best” goals.” After an exhaustive review of literature from various business fields and industries, Bonner et al. (2000) found that, whereas performance-based incentive compensation does not always lead to higher levels of task performance and output, in general, “quota schemes engender the highest likelihood of yielding positive incentive effects, followed by piece-rate schemes . . . and flat-rate schemes” (p. 28). It appears that many incentive schemes in practice are also based on this type of reward structure. Overall the trade-off between risk and reward is salient in employment contracts. Risk- and effort-averse employees may be selected and rewarded (Bonner et al., 2000) based on their willingness to both engage in work-related activities and assume compensation risk for that effort. Simultaneously, the ability to contract on both aspects of employment relationships allows employers to more closely align their interests with those of the employee but also requires that additional wage costs potentially be incurred to do so. REFERENCES Banker, R. D., Lee, S. 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