Intrinsic and Extrinsic Motivation - Assignment Example

The grass really is greener on the other side Executive pay raises seem to be based on realities that do not exist! As the recent recession is slowing starting to become an image in the economic rearview mirror, the realities of corporate performance begin to take centre stage. A key area is what this means to the average employee. According to forecasts prepared by Mercer Consulting wages across the European Union are projected to increase by 2.7%, and for the UK the estimate is 3%1. In a comparison of independent economic forecasts by the HM Treasury,2 it found the forecast calls for a moderate growth rate of around 1.8% for 2013. The mild recession improvements have a dark side. In 2011 compensation for directors in the FTSE 100 companies averaged 50%3. Even more startling for chief executives among this group the pay increase average was approximately 43 percent4.   In the face of the recent recession, this leaves one to ask how is the above possible?   This is exactly the question posed by UK Business Secretary Vince Cable who voiced the government’s concern that plans are needed to sort out executive pay rises5. The current approach proposes a three-year freeze on executive and director pay raises subject to 51 percent shareholder ratification to take effect6. The above coincides with the ire raised by shareholders over executive pay increases. At advertising giant WPP, 60 percent of the shareholders voted against CEO Sir Martin Sorrell’s bid to secure a 30% increase in 20127.   Looking at the performance of FTSE 100 companies as a reference point, shareholder opposition to executive and director pay increases is well founded. The FTSE 100 percentage gain in 2012 was just 5.8 percent8.   FTSE 10 Year Performance Total Return (GBP)9 However, one needs to remember this came on the heels of a recession recovery as opposed to a normal economic period. This means as the economy corrected it dragged up corporate returns. In effect, CEO’s rode the recovery as opposed to doing anything noteworthy in terms of corporate performance. For CEO’s and directors to vote themselves pay raises in the face of the above indicates compensation rewards versus performance is out of control. The above leads to looking at ways to approach reward system challenges and how to construct foundations that are based on sound principles. This constitutes a look at theoretical and practical approaches.   Executive compensation falls in the area of reward management that is a corporate Human Resource (HR) and strategy function10. It is concerned with controlling and analysing the manner remuneration is devised, along with with executive and director pay policies11.   Two important facets of reward management are intrinsic and extrinsic motivation12. The first is motivated internally entailing by the interest or enjoyment of what one does, including recognition, trust, and empowerment13. Extrinsic motivation is the opposite, entailing monetary rewards, promotions, and competition14. It falls under Frederick Herzberg’s motivation-hygiene theory15.   Theories play a part in constructing compensation methods as they use an analysis of human behavioural and motivation factors. Under Vroom’s valence and expectancy theory, he asserts individuals can be motivated to act in certain ways based on the culture instilled in the organisation under the team concept16. Its three core elements consist of efforts and performance, performance and reward along with rewards for goal achievement17. These are aspects companies need to instill in their HR and company cultures where rewards are tied to results achieved.   Another theory that helps to explain a basis for changing the reward culture is Adams’ equity theory18. It is based on the fact individuals are motivated to act based on their belief of the fairness or unfairness of a company’s reward structure19. If the foundation for compensation is put into terms that are directly connected to performance, then it is clear higher rewards are the outcome of better input and outcomes on their part20. Adams’ equity theory fits with Skinner’s reinforcement theory as they both call for designing an environment supporting new thinking and an atmosphere for change. This is in keeping with the view of shareholders and the government.   Interestingly, Edwin Locke’s goal setting theory can be found in the above as it calls for setting clear objectives and ground rules21. By having clearly defined parameters concerning what is expected and acceptable regarding executive compensation, the ethical and moral temper of the country and boardrooms is forced to change in keeping with the mode of the land. Adams’ equity theory22 helps to explain the need for a shift in the thinking of the country where internal (or intrinsic) rewards are the foundation as opposed to external (extrinsic) considerations. This fits into the cognitive evaluation theory where the removal of external stimulus shifts the emphasis to internal stimulus motivated by performance, and results23.   In terms of practical approaches there are varied suggestions and recommendations. One consists of utilising bonuses as an incentive. A bonus/performance compensation plan is now used by over 90% of FTSE companies to reduce exposure to shareholder objection over executive and director pay increases24. Many firms use a calculation where bonus payments are tied to performance that is compared to the company’s competitors (BBC News, 2012a)25. However, in some instances, it is based on the increase in the share price26. The latter turned out to be something of a windfall for some executives as their base salary packages in place before the recession allowed them to benefit from the rebound of the market back to pre recession levels27. The fallacy is this basically did not require them to do anything noteworthy. The last illustration indicates that whilst changes were made to appease shareholders, the moves were more icing than substance.   Back in 2009 executive and director was the subject of a study by Glenn et al28. The survey included 173 UK organisations employing approximately 2 million people29. In terms of significant results, three of the most influential and important recommendations indicated a performance-based approach benefited the company and shareholders30. It found reward strategy objectives should be assessed based on business metrics tied to sales, performance-based customer service, and overall financial results31.   In terms of corporate responsibility, the way executive and director compensation is approached provides an understanding of how responsibilities are viewed32. In an analysis by PricewaterhouseCoopers33 they stated rewards are a tool used to attract, motivate and retain key personnel that brings important talent to the business. In terms of a balanced approach, the above needs to be meshed with company performance set against operational periods that consider revenue generation, share value and competitive performance34.   In a report by Lenzner,35 he stated a fair compensation system should be competitive with external approaches. He added it should be equitable from an internal organisation perspective and communicated in such a manner employees and shareholders understand the basis for its use and components36.   In an announcement by the Association of British Insurers (ABI) supporting shareholder views, they suggested measures other than financial performance should be used to reward executives and directors37. The ABI stated compensation should be based on the financial resources of the company, competitive financial resources, future fiscal needs, cushions against economic shocks, capital and investment needs and shareholder returns38. The idea shareholders should have a binding vote on executive pay was put forth by British Prime Minister David Cameron at a meeting held in Davos39. His approach represented a measure to forestall pay increases rewarding poor or non-existence performance gains that basically rob shareholders and the company of important operational funds (KMPG, 2012)40.   In an examination of the design of an effective reward system, Van de Stede41 suggests there are three important components. He states incentive strength, type and horizon are pragmatic approaches underpinning the process. If one looks closely, it is aligned with the suggestions of the ABI42, Lenzner43 as well as PriceWaterhouseCoopers44. Whilst the terminology differs the underlying concepts are based on tying compensation to measurable foundations.   In looking at constructive recommendations a 2012 BBC article45 reported shareholder revolts over executive and director pay has ushered in the beginning of a new era. In referring to a study conducted by KPMG the article stated the backlash over pay increases was the most serious ever recorded46. Media attention was key as shareholders objected to pay increases that were not justified based on the economy and companies just emerging from a global recession47. Shareholders were put off as they did not see the rise in shareholder prices as being attributed to any stellar moves on the part of management, but rather the market returning to pre-recession levels under the recovery48.   To understand the disparity of executive pay increases, a look at the pay for FSTE 100 chief executives compared against the FSTE Index offers a telling story:   Executive pay has risen steadily since 1998 whilst share prices have fluctuated by wide margins. What is more interesting it that after the dips in share prices, the examples of Davis, Becht, Spencer, Leary, and Albanese49 in the executive pay chart at the beginning of this story shows them getting rewards when a company returns to operational levels after a dip in economic downturns. Returning to normal is not a cause for a raise, it represents the basis to gauge future gains from.   The above points to a failure on the part of company audit committees whose job is to oversee the connection between pay and performance are correlated50. Their job, in looking after the interests of the company and shareholders, is to link compensation plans to performance and the achievement of strategic goals51. Thite52 stated underneath this is the talent and capabilities of people that are increasingly becoming more difficult to find and retain. Despite this reality, excessive executive compensation does not represent the means to solve this issue. The example of the former Steve Jobs $1 per year compensation is an example as he took stock options based on performance53.   The legendary Warrant Buffet is a proponent of compensation tied to incentives based on performance54. Buffett’s base compensation started 25 years ago at $100,000 that due to the cost of living and other aspects presently stands at slightly over $520,000 today55. His billion dollar net worth has been amassed through performance bonuses achieved through his tenure56. The areas covered in this look at executive and director compensation leads to the conclusion that in crafting executive compensation models, the prevailing thoughts being put forth by shareholder groups and the government is along lines based on a more practical basis than theoretical57. The more pragmatic foundations of tax and accounting along with tighter corporate governance signals a shift to measurable foundations58.     Between the years 1999 and 2010 average employee earnings rose by 4.7 percent per annum59 compared against the 13.6 percent increase in FTSE – 100 CEO compensation during that same period60 the disparity becomes illuminating. But, the issue is not the difference in CEO compensation compared against employees. It is CEO compensation using results as the barometer. For the period, indicated the FTSE Index rose just 1.7 percent61, meaning in terms of performance, CEO’s have been rewarded for mediocre results.   The shift in compensation to a more practical basis harkens back to the question of what is the purpose of a company. In a statement made by David Packard of Hewlett Packard, he said companies “… exist to make technical contributions for the advancement and welfare of humanity” 62. To this, he added it is their core ideology that represents if the legacy of a company becomes long-lasting and endures.   The above represents the direction recent events seem to be pointing. Back to the roots and core of the business and its fit in the human community as opposed to a grab for profits. The Sarbanes-Oxley Act in the United States was enacted to stem corporate fraud and protect shareholder interests. This signaled a move back to companies existing for the good of society and not the other way around. This is also the case for the development and increased understanding of Corporate Social responsibility where self-regulation marks a return to ethical operations63.           References 1 Mercer Consulting European 2012 employee salary increase forecasts 2011 (accessed 9 January 2013) 2 HM Treasury Forecasts for the UK economy: A comparison of independent forecasts. 2012 (accessed 9 January 2013) 3 BBC News. Directors' pay rose 50% in past year, says IDS report. 2011 (accessed 9 January 2013) 4 Ibid 5 Robert Peston, Vince Cable forces binding executive pay votes. 2012 (accessed 10 January 2013) 6 Ibid 7 Rupart Neale. Revolts over top pay see fewer bosses get rises. The Guardian. 21 September 2012. p. 3 8 Financial Radio. FTSE 100 gains in 2012. 2012 (accessed on 10 January 2013) 9 FTSE. FTSE Factsheet. 2012. (accessed 10 January 2013) 10 Flora Chiang. A critical examination of Hofstede's thesis and its application to international reward management. The International Journal of Human Resource. Vol. 16, Issue 9. 2005. pp. 1545-1563 11 Duncan Brown, John Purcell. Reward Management: On the Line. Compensation Benefits Review. Vol. 39, Issue 3. 2007. pp. 28-34 12 Roland Benabou, Jean Tirole. Intrinsic and Extrinsic Motivation. Review of Economic Studies. Vol. 79, Issue 3. 2003. pp. 489-520 13 Ibid 14 Ibid 15 Daniel Sachau. Resurrecting the Motivation-Hygiene Theory: Herzberg and the Positive Psychology Movement. Human Resource Development Review. Vol. 6, Issue 4. 2007. pp. 377-393 16 Edwin Locke, Gary Latham. Building a practically useful theory of goal setting and task motivation: A 35-year odyssey. American Psychologist. Vol. 57, Issue 9. 2002. pp. 705-717 17 Ibid 18 Arnold Bakker, William Schaufeli, Evangelia Demerouti, et al. Using Equity Theory to Examine the Difference between Burnout and Depression. Anxiety, Stress & Coping: An International Journal. Vol. 13, Issue 3. 2000. pp. 247-268 19 Ibid 20 Richard Steers, Richard Mowday, Debra Shapiro. Introduction to Special Topic Forum: The Future of Work Motivation Theory. The Academy of Management Review. Vol. 29, Issue 3. 2004. pp. 379-387 21 Donald Schwab, Larry Cummings. Theories of Performance and Satisfaction: A Review. Industrial Relations: A Journal of Economy and Society. Vol. 9, Issue 4. 2008. pp. 408-430 22 Arnold Bakker, William Schaufeli, Evangelia Demerouti, et al. Using Equity Theory to Examine the Difference between Burnout and Depression. Anxiety, Stress & Coping: An International Journal. Vol. 13, Issue 3. 2000. pp. 247-268 23 Kathryn Bartol, Abhishek Srivastava. Encouraging Knowledge Sharing: The Role of Organizational Reward Systems. Journal of Leadership & Organizational Studies. Vol. 9, Issue 1. 2002. pp. 64-76 24 BBC News. Share incentive schemes boost top executive’s earnings. 2012a (accessed 9 January 2013) 25 Ibid 26 Ibid 27 Ibid 28 Steve Glenn, Michael Armstrong, Paul Thompson. Evaluating Reward Effectiveness. 2010 (accessed 10 January 2013) 29 Ibid 30 Ibid 31 Ibid 32 PriceWaterhouseCoppers. Executive benefits and compensation. 2011. (accessed 10 January 2013) 33 Ibid 34 Ibid 35 Lenzner, Mike. The keys to an effective compensation system. 2011. (accessed 11 January 2013) 36 Ibid 37 Treanor, Jill. Curb excessive executive pay rises, insurers tell top companies. The Guardian. 26 November 2012. P. 3 38 Ibid 39 KMPG. Leading the Davos debate on executive compensation. 2012. (accessed 10 January 2013) 40 Ibid 41 William Van de Stede. Designing effective reward systems. Finance & Management. Vol. 170, Issue 10. 2009. pp. 55-68 42 Treanor, Jill. Curb excessive executive pay rises, insurers tell top companies. The Guardian. 26 November 2012. P. 3 43 Lenzner, Mike. The keys to an effective compensation system. 2011. (accessed 11 January 2013) 44 PriceWaterhouseCoppers. Executive benefits and compensation. 2011. (accessed 10 January 2013) 45 BBC. Executive pay battles to get stronger, says report. 2012b (accessed 10 January 2013) 46 Ibid 47 Ibid 48 Ibid 49 BBC News. Directors' pay rose 50% in past year, says IDS report. 2011 (accessed 9 January 2013) 50 April Klein. Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics. Vol. 33, Issue 3. 2002. pp. 375–400 51 Ibid 52 Mohan Thite. Strategic positioning of HRM in knowledge-based organizations, Learning Organization. Vol. 11, Issue 1 ,2004. pp. 28 – 44 53 Katherine Guthrie, Jan Sokolowsky, Kam-Mong Wan. CEO Compensation and Board Structure Revisited. The Journal of Finance. Vol. 7, Issue 3. 2012. pp. 1149–1168 54 Ibid 55 Ibid 56 Michael Jensen, Kevin Murphy. CEO Incentives—It's Not How Much You Pay, But How. Journal of Applied Corporate Finance. Vol. 22, Issue 1. 2010. pp. 64-76 57 Sandy Pepper. Senior Executive Reward: Key Models and Practices. London: PriceWaterhouseCoppers. 2006. p. 2 58 Ibid 59 Alistair Osborne. CEOs and their salaries: because they’re worth it...? 9 January 2012. The Telegraph.. p. 3 60 Ibid 61 Ibid 62 Sandy Pepper. Senior Executive Reward: Key Models and Practices. London: PriceWaterhouseCoppers. 2006. p. 2 63 Nathan Hurst. Corporate Ethics, Governance and Social Responsibility: Comparing European Business Practices to those in the United States. 2004 (accessed 10 January 2013)         Reflective Statement In approaching the research, executive compensation, share price performance and revenues the first stage entailed what I will term as riding the elevator to the top floor. By this it is meant the landscape for the issue is the economy as corporations and their performance fit inside this arena. By understanding the feel of the larger arena, I was able to grasp the significance of where and how the context of this study fit.   Having the broad view permitted more insight regarding views and impacts of executive compensation using economic performance, FTSE 100 share returns and projected employee pay raise forecasts. The problems encountered in the construct of this assignment was understanding and using the most salient points in the article. It was reasoned this would be best served by a brief historical look back to position the context concerning executive compensation in terms of the economy. In this analysis, a look into theoretical and practical approaches afforded the opportunity to examine potential approaches leading to possible solutions.   The above used an approach that needed to build a framework concerning identifying what was important and what was extraneous. The guidelines set the tone with respect to the main elements. By first building the background and context, the focus settled in on introducing the areas and points that would be further elaborated in ensuing sections. As the format represented an article as opposed to essay, topic headings could not be used, thus the writing had to create points to guide the reader into different segments in a clear yet entertaining manner.   This was a difficult task as the opening section needed to personalize the approach to cause the reader to want to continue. This resulted in the headline “The grass really is greener on the other side: Executive pay raises seem to be based on realities that do not exist!” By offering a basis to engage readers, the stage was set for the background that had to quickly deliver on the promise.   The challenges of ways to deal with rewards for executive compensation also needed to be personalized in order to engage the reader. This proved difficult as establishing the significance as a building block was essential. The drier part of the assignment, from a reader perspective, entailed delving into the theoretical and practical areas. Finding ways to introduce extrinsic, extrinsic, and related aspects into the discussion had to be formulated to bring forth their importance.   The length restrictions of the article compounded the above areas as each segment needed to be developed, taking into account the areas being discussed were not common fields of knowledge for the general public. As an informative article, this meant striking a balance between providing new concepts by aligning them to areas the reader might have encountered through general newspaper reading. The use of graphs and charts along with insights on executive pay and shareholder reactions were used to show how the subject related to the reader. By concluding corporations have a responsibility to serve the public, the conclusion sought to indicate government has looked act in their best interests, however the public has to act in their own best interest as well by being proactive.   Read More