Links between Incentives and Performance - Research Proposal Example

LINKS BETWEEN INCENTIVES AND PERFORMANCE A RESEARCH PROPOSAL TABLE OF CONTENTS Page Aims & Objectives 3 2 Hypothesis 3 3 Literature 3 4 The Human Relations Theories 4 5 Motivation 5 6 Tools 6 7 Methodologies 7 8 Effective Management 8 9 Conclusions 12 10 Bibliography 13 1 Aims & Objectives It has always been thought that every performance has an incentive behind it. Indeed in everyday life it is observed that every activity has a result and that every result has a reward or benefit attached to it. This common belief however does not stand the test when an activity is based on self denial. It also does not hold good when the reward or result is not acceptable to the activist. This also fails to explain why the result of same activities by different people in same environment differs from each other. This research will therefore aim to find out the extent of the validity in this common belief. It will also attempt to find if there is a link between incentives and performance. 2 Hypothesis Economic forces are bringing continuous pressure on organizations for higher yield with same or even fewer resources. The aim and objective of this discourse is to find the link between incentive and performance but this research which will be limited to cover the field of business environment particularly corporate management. The exact research question has been framed as - “Is there a link between performance related pay and incentive schemes to highlight effective management?” 3 Literature The most valuable assets of any business are its people. This is one fact that is singularly recognised as a winner. Through effective utilization of a person’s talent the firm will achieve concrete results and build up a highly productive labour force (Harrington 2003). There are three assumptions to all HR theories. Organizations serve human needs, as they are associations formed to offer multi-faceted gains and benefits to a variety of stakeholders. People and organization need each other for this service, to harness talent and develop on opportunities. It is critical that people and the organization are in complete harmony to fulfil this purpose, otherwise there will be either exploitation or victimization. On the above basis various HR theories have attempted to explain why employees perform their duties the way they do. 4 The Human Relation Theories Abraham Maslow (1954) described this in a hierarchy, starting with human psychology, safety and security, belongingness, self esteem and finally self-actualization. According to Maslow, employees have a basic human need and a right to strive for self-actualisation, just as much as the corporate directors and owners do and, by this fulfilment, the organisation becomes stronger, more competitive and profitable. Frederick Herzberg (1959) propounds that there are indeed only two factors that motivate a person to work and they are hygiene and motivators like self actualization. Hygiene does not motivate but its absence will reduce motivation and a good hygienic environment enhances motivating factors like achievements, responsibility and advancement. Negative or positive attitudes of the management are explained by McGregor (1960) in his theory X and theory Y. According to McGregor a negative attitude of the management, theory X, presupposes that workers are lazy, passive, without ambition, willing to be led and resist change. Hence, management occurs through control, coercion, threats and punishment. This results in low productivity, antagonism, unionism and subtle sabotage. In contrast, positive management, theory Y, reflects the view that people are motivated, active and interested, ambitious, prefer to lead and are interested in change. Hence, management occurs through open systems, communications, self-managing teams and peer-controlled pay systems. The result is high productivity, bonhomie and care for the organization. 5 Motivation However the level of performance of employees is not just a result of their skills but also the result of motivation each person exhibits. There are two sources of motivation, intrinsic and extrinsic. Since it is not always possible to have external rewards all the time for all activities the management has to promote intrinsic motivation that is the outcome of internal factors like self satisfaction or the pleasure of satisfactory performance (Hagedoorn and Van Yperen 2003). The intrinsic motivation is also preferable as in this environment the employee develops affinity with the organisation and considers the welfare of the organisation to be his wellbeing. This improves his productivity and performance since it will go along with his personal satisfaction. Such employees are also loyal to the company’s cause. In contrast the employee who looks for extrinsic motivation becomes greedy in anticipation and looks for alternatives to promote his own wellbeing. When there is an external reward like money or bonus attached to performance the motivation is extrinsic. The importance of extrinsic incentives cannot be ruled out as apart from intrinsic incentive the emoluments are required to fulfil material needs. The question that needs answering is how much bonus, reward or incentive is required to produce a high level of performance. 6 Tools Tools are needed for such an assessment. It has been stated that goal setting is a useful tool (Mento et al 1987; Tubbs, 1986) and that it leads to higher performance when there are monetary awards attached to it (Guzzo et al, 1985; Locke et al, 1980). But when a goal is set is it possible to evaluate performance against it? When a goal is set, how is the reward calculated? How to ascertain whether it was enough to improve performance? Was there still some underperformance due to the reward being low? Locke (1968) said that goals reconcile the relationship between incentives and performance and that there are three possible ways in which this could happen. Either the incentive could help the individual to set his goal or target; or motivate him to achieve his goal; or change his perception of the goal itself. But Locke et al (1981) failed to find practical evidence to support any of these hypotheses. What they did find was that there was some relationship between the incentive and performance due to a commitment level that developed when goal was set. A conditional pay system work was examined by Reidel et al (1988) under which incentives was termed as sharing rates. It was determined that higher goal commitment was made in these conditions compared to a situation where there was no incentive. Wright (1989) also made a comparison of piece-rate, goal attainment bonus, and hourly rate incentive systems and observed that the different incentive systems brought about different results. In each case the incentive affected commitment in relation to the goal. Maximum commitment was found to be in the case of goal attainment objective followed by piece rate and hourly-rates. But with increase in complexity of work or setting more difficult goals changed the commitment level. With more difficult targets the goal attainment incentive reduced the commitment level and in this case the piece rate workers fared batter. People working under goal attainment incentive system also articulated higher commitment relative to hourly rate subjects (Reidel et al. 1988). This is also reflected in the two factor theory of Herzberg (1993) which says that the worst motivator is the across the board salary increase. Since it could not be finally proved as to what extent the commitment to goal reconciles the relation ship between monetary incentive and performance it can be said that the original finding of Lock et al, 1981) may be correct that there is some relationship between incentives and performance through commitment but that is unquantifiable. Thus commitment will only partially reconcile between incentive and performance (James & Brett, 1984). 7 Methodologies The literature provides little by way of methodologies of achieving this end therefore some methodologies need to be adopted to find out the answer to the original research question. While the theories show that there is a direct relationship between incentives and performance through setting of goals, the quantification of the performance remains an open question and the answer lies in research and some methodologies are suggested for carrying out such research. Believing commitment to be the gauge for linking incentive and performance then it must be tested for its veracity. The quest is the measurement of the commitment to determine the link between performance related pay and incentive schemes to highlight effective management. Setting of goals is an important tool that links incentive to performance. Hence it becomes important to explore the way in which goals act as a go-between monetary incentives and performance. How they raise the commitment level to prove that there is a link between the two. There are two theories that can test the genuineness of commitment on incentive and performance. One is the expectancy theory and the other is the NPI theory. In an expectancy theory framework, the challenge is what determines the level of commitment and is seen through influencing either expectancies or valence of goal attainment. It specifically hypothesizes that monetary incentives influenced goal commitment through affecting the prospect of goal attainment. The second theory is based on Naylor, Pritchard, and Ilgen (NPI) of 1980 which scrutinizes how different types of incentives systems interact with goals to determine goal commitment and performance. This was also applied by Wright !1991) to find the cognitive, or reason based, choice behaviour which is the essential difference between the Expectancy and NPI theories. Subjects have to be chosen and given various choices under given circumstances for quantitative as well as qualitative measurement of their reactions under these theories to determine the research question. 8 Effective Management It is the goal of management to get the most out of least resources. Competitive advantage is often built on using the human resources to their optimum level. This has been done by through reduction, retraining and offering incentives. But effective management is built on recognising that the human resource is the most volatile yet the most productive resource that they have. Extrinsic rewards are what move the employee to achieve high levels of performance. Intrinsic rewards play their emotional role in the same direction. A blend of both is required and effective management is one that will be able to use both these tools in different conditions for maximum effect. There are two types of organisations today. One, which is oriented towards Total Quality Management (TQM) and follows either Lean Manufacturing Just-in-Time Technologies or the Six Sigma method for continuously improving production and another, which produces only what is in demand and any change in standard is not acceptable. In TQM environments there is need for continuous improvements in quality by eliminating wastes, and the strong incentives for operators is to increase their earnings by increase in output. Elimination of wastages or of wasted efforts on rework produces better quality as well as results in higher production. Incentives work wonderfully well and ensure better performance against higher incentives. But in these cases group effort is rewarded and individual effort is ignored. This is a strange conflict but pays in the TQM environment. McGregor (1960) points out introduction of pay against incentive in such places would destroy the concept of collaborative effort and bring about antagonism between workers against high performers. The incentive would indeed become a disincentive for high performers. It will also create ill feelings against the management for creating conflicts through unfair means. In contrast in companies that have loose standards, the trade off with incentives pays highly. The motivation is greater and incentives bring about high performances. But here too there is a conflict. In an hourly wage environment, the worker does not have a motive as his salary is fixed irrespective of quality and output, unless it is far below normally accepted standards. His individual reward cannot be offered as there are no standards. His increments are usually periodic mostly on basis of time served. This creates no motivation. But in case of piece rate workers or those who get a bonus against higher performance against set standards there is definitely an incentive in performing better. The effort is therefore missing in the case of constant wages and is evident in the other two cases. There is another aspect to efforts. In case of loose standards, the workers have greater control over their leisure and income tradeoffs. In case of unionisation the unions resist improvements and ask for rewards in shape of raises without improvements in performance. But in non-unionised organisation the labour has to prove itself with better performance to demand rewards in shape of raises. Yet another variation can be seen where there is no change in product description, like in an assembly environment, the improvements come through two means. Either the company provides training and also sets goals and rewards the group, or the workers raise their own skills and earn the rewards. But the greater external environment comes into play here. The culture of the company becomes a factor. In Japanese companies it is incumbent on the company to provide both training and give directives to workers and they decide on the cash awards. Alterations in duties, techniques, principles, or task all generate the need for learning but training lowers the potential incentive. The company feels that their effort and expense should profit them not the workers. At least the offer of rewards is lower than if the skills were acquired by the workers themselves. There is potential conflict here too. The TQM philosophy is reliant on continuous improvements and is based in the active participation of workers. This means that the ownership of worker ideas is transferred to the company for implementation. While this is accepted in the East, this issue of ownership of shop floor improvements is a major obstacle raised by western workers for the same manufacturers attempting to implement TQM practices in the West. This is unthinkable in US companies where the unions will negotiate these rewards and will be reluctant to share their skills with others. Unions have wage contracts that are negotiated periodically. It is imminent that apart from periodic revision the ground for reward or revision is also raised due to skills of the workers during the period of the contract. The ownership of this skill that has developed out of practice and innovation by the workers becomes a matter of denial by the company but is hotly debated as owned by the workers. This leads to narrower classification of tasks and jobs which in turn curbs to restrict the earning capacity of the worker. There is also the Taylor’s so called scientific management tradition that has created a strongly held belief among Western workers that since they were not being paid to think, there was no good reason for the company to receiving the benefits of their ideas. These ideas then made it possible for workers to ask for and obtain more favorable work-effort and income-leisure trades offs, and were therefore conscientiously held back from the company. Narrow job classifications are an expected outcome of an incentive system environment. They protect incentive earnings by limiting a workers exposure to less familiar tasks and preventing others from encroaching on the workers familiar tasks. Taylor’s scientific management tradition created a strongly held belief among Western workers that since they were not being paid to think, there was no justification for the company receiving the benefits of their ideas. These ideas made it possible for workers to achieve more favorable work-effort and income-leisure trades offs, and hence were jealously guarded, especially in incentive shops. 9 Conclusions With such enormous variations, incentive for performance becomes a difficult test of effective management. The best equilibrium is impossible to achieve as there will always be a doubt on the quantum of incentive vis-à-vis the performance. But the proof will lie in the output and improving outputs can always be taken as the road to success. Further primary research is required to test the reality of incentives being cause of better performance by actually quantifying the performance level. The secondary research however leads one to believe that in fact it does but does not entirely satisfy the question whether it relates to effective management or not. 10 Bibliography Guzzo, R. A., Jette, R. D., & Katzell, R. A. 1985. The effects of psychologically based intervention programs on worker productivity: A meta-analysis. Personnel Psychology, 38: 275-291 Hagedoom, M. & Van Yperen, N. (2003). Do high job demands increase intrinsic motivation or fatigue or both? The role of job control and job social support. Academy of Management Journal, 46(3), 339-349. Harrington, Jill. (2003). Training adds up. incentive, 177(6),22. Herzberg, F., Mausner, B., & Snyderman, B. B. (1959/1993). The motivation to work. New Brunswick, NJ: Transaction Publishers James, L., & Brett, J. 1984. Mediators, moderators, and tests for mediation. Journal of Applied Psychology, 69: 307-321. Locke, E. A. 1968. Toward a theory of task motivation and incentives. Organizational Behavior and Human Performance, 3: 157-189.. Locke, E. A., Feren, D. B., McCaleb, V. M. Shaw, K. N., & Denny, A. T. 1980. The relative effectiveness of four methods of motivating employee performance. In K. Duncan, M. Gruneberg, & D. Wallis, (Eds.), Changes in working life: 363-388. New York: Wiley. Locke, E. A., Shaw, K. N., Saari, L. M., & Latham, G. P. 1981. Goal setting and task performance: 1969-1980. Psychological Bulletin, 90: 125-152. Maslow, A. (1954). Motivation and Personality. (2nd ed., 1970). McGregor, D., The Human Side of Enterprise, McGraw Hill, New York, 1960, pg 93. Mento, A. J., Steel, R. P., & Karren, R. J. 1987. A meta-analytic study of the effects of goal setting on task performance: 1966-1984. Organizational Behavior and Human Decision Processes, 39: 52-83. Naylor, J. C., Pritchard, R. D., & Ilgen, D. R. 1980. A theory of behavior in organizations. Academic Press. Reidel, J. A., Nebeker, D. M. & Cooper, B. L. 1988. The influence of monetary incentives on goal choice, goal commitment, and task performance. Organizational Behavior and Human Decision Processes, 42: 155-180. Tubbs, M. 1986. Goal setting: A meta-analytic examination of the empirical evidence. Journal of Applied Psychology, 71: 474-483. Wright, P. M. 1989. A test of the mediating role of goals in the incentive-performance relationship. Journal of Applied Psychology, 74: 699-705. Wright, P. M. 1991. Goals as mediators of the relationship between monetary incentives and performance: A review and NPI theory analysis. Human Resource Management Review, 1: 1-22. Read More