Performance Management Systems and Their Links - Essay Example

Literature Review: Employee Benefits and Reward Plans: Do they Increase Motivation? The role that monetary and other rewards play in the motivation of the individual is part of one of the biggest debates of all time – extrinsic versus intrinsic motivation. Even among rewards themselves, there is conflict of opinion on the relative importance of salary and other forms of rewards. There are unique views about the role of pay and rewards in the motivation of an individual. Some authors are of the view that pay only needs to be ‘fair and competitive’ (Berger & Berger 2003). However, what is considered ‘fair’ is another debate altogether. That debate has been carried on for centuries and has been reinforced in the equity and tournament theories of motivation. This paper will evaluate the significance of monetary rewards and then go on to discuss the concept of equity in pay. The paper will also discuss the importance of non-monetary rewards as well as performance management as a good creator of motivation. The paper will conclude with discussing the importance of intrinsic motivation. Monetary Rewards Some of the greatest theorists like F. W. Taylor, Abraham Maslow and Herzberg have all emphasized the significance of monetary rewards. Taylor’s view is rather conservative in that he believes that money is the sole motivator of human work. He believed in the idea of the ‘economic man’, and said that people were only motivated by self-interest. Taylor, therefore, gave much importance to the idea of pay-per-piece, because he said that this would enhance the speed of work. This theory meshes in well with the research of Armstrong (2006). Armstrong (2006) conducted an extensive research on the relationship between pay and the performance of the employee. The following table shows the interrelationship between performance ratings and pay ranges. This empirical research conducted by Armstrong (2006) illustrates the positive relationship between the two variables and holds evidence to the fact that pay really does impact performance. Table 1: Percentage pay increase according to performance rating and position in pay range (compa-ratio) Position in pay range Rating 80-90% 91-100% 101-110% 111-120% Excellent 12% 10% 8% 6% Very Effective 10% 8% 6% 4% Effective 6% 4% 3% 0 Developing 4% 3% 0 0 Ineligible 0 0 0 0 (Source: Armstrong 2006) However, pay is not the only source of return for workers, especially nowadays. Other form of non-cash rewards are used commonly by many firms to enhance motivation. Zeidner (2010) reports that gift cards or certificates are the most popular form of non-cash rewards and are used by 38% of the companies today. This is followed by other forms of rewards including merchandise (19%), dinners (19%), special trips (19%), trophies or plaques (18%), top-performer listings (12%), honorary sales clubs (7%) and special parking spots (2%). Beyond Monetary Compensation Maslow’s hierarchy of needs is recognized as one of the classical theories of motivation. Maslow not only recognized the prime factors of motivation but also categorized them on a hierarchical scale. Maslow explained that the needs of man can be shown as a hierarchy. A need only motivated a human being as long as it was unfulfilled. The need stopped acting as a motivator as soon as it was fulfilled; then the next level of needs would act as a motivator. Despite the criticisms of Maslow’s hierarchy that it generalized the needs of human beings and failed to take into account the individual differences, it is a widely recognized model for motivation. The hierarchy is presented in the following figure. Figure 1: Maslow’s Hierarchy of Needs Other theorists have considered money in combination with other factors as a motivator for the human workforce. Mclelland’s needs theory, for instance, has gone beyond the physiological needs identified by Maslow – other theorists have exhibited a greater fondness for the social and achievement needs in the hierarchy. Jelavic & Ogilviw (2009) have explained: ‘Individuals can be born into in-groups or be accepted into in-groups by the nature of their position within the organization or personal connections within the organization… These ties within individualistic societies may need to be actively developed and are based on trust that requires time to foster. Self-esteem and self-actualization needs are inherently important to the individual. How these needs relate to the group may be influenced by societal culture. Certain cultures place the importance of self-sacrifice ahead of self-actualization, which may personally rank higher on their own hierarchy of personal needs. It is indeed possible that self-sacrifice can be even personally interpreted as a form of self-actualization. This seeming conflict then turns the better depiction of a persons motivation to McClellands Need Theory that states that one can be motivated by only higher level needs, and those needs are found within affiliation, power, and achievement. This achievement is fostered through the issues of excellence, competition, challenging goals, persistence, and overcoming difficulties.’ Such factors are the focus of performance management programs, discussed later in this chapter. Dewhurst, Guthridge & Mohr (2010) present the results of a global research conducted by McKinsey in 2009. The table below displays the results. Table 2: McKinsey global survey of 1,047 executives, managers, and employees from a range of sectors Financial Incentives Effectiveness, % of respondents answering extremely or very effective Frequent use, % of respondents answering always or most of the time Performance-based cash bonuses 60 68 Increase in base pay 52 61 Stock or stock options 35 24 Nonfinancial Incentives Praise and commendation from immediate manager 67 63 Attention from leaders 63 41 Opportunities to lead projects or task forces 62 54 (Source: Dewhurst, Guthridge & Mohr 2010) An overall analysis of the above table indicates that, even today, managers globally most frequently rely on the use of financial incentives. Despite the effectiveness of nonfinancial rewards, it is still a growing phenomenon and will take some time before managers realize the true potential of factors besides the stamped notes. Demos (2010) reports an instance of when recognition outperformed the payment of bonuses, new titles, high-priced quarterly giveaways at a Boston-based firm called Globoforce. Eric Mosley, Globoforces founder and CEO, is reported to have said: ‘Even high earners can appreciate a small award if it is unexpected!’ (Demos 2010). Dewhurst, Guthridge & Mohr (2010) also testify to this theory: ‘Meaningful work, specific goals, celebrating success, and heartfelt and personal thank-yous work very effectively. The handwritten personal note is effective — even with younger generations who have never written or received a note — its a total and very positive surprise.’ Mansbach (2009) verifies this idea and goes on to explain the concept of recognition: ‘Performance is the alignment of organizational, team and individual efforts toward the achievement of business goals; recognition acknowledges or gives special attention to employee actions, efforts, behavior or performance. It meets an intrinsic psychological need for appreciation of one’s efforts and supports business strategy by reinforcing certain behaviors that contribute to organizational success.’ Equity in Rewards Equity and fairness of pay has always been an area of major debate. Furthermore, there is a massive debate on what comprises fair and equitable pay. Here, can be considered the conflict between the capitalist and the communist view of fairness. The capitalist view of fairness allots returns to the one who has put in the effort. The communist view of fairness allocates resources equally to all members of the organization, with no regard to their relative contributions or rank in the organization. The expectancy theory of motivation suggests that the amount of effort that a person will put into a job will be determined by his expectation that the effort will result in a specific outcome – or reward in the case of work behavior (House, Shapiro, & Wahba, 2007). However, the research of Summers & Hendrix (1991) slightly contradicts this long-held belief of expectancy. ‘The data suggested that pay equity perceptions have an impact on voluntary turnover but not necessarily on job performance. The impact on turnover, however, was indirect, through its influence on pay satisfaction, job satisfaction, organizational commitment, and intent to leave. The major predictors of job performance were prior job performance and salary level.’ (Summers & Hendrix 1991). However, it is important to differentiate between employees in order to customize reward programs. The key blunder in most classic theories of motivation is that they fail to take into account individual differences. Although it is not possible to customize rewards packages according to each individual’s personal needs, it is still possible to divide the workforce along the lines of some obvious groups. Dutra (2009) talks about distinguishing among your workforce based on whether they are members of Generation X, Generation Y or Net-gens1. ‘Incentives like job-sharing, flexible work hours, and a sense of challenge are powerful lures for the younger generations, while job security, a high base salary, and robust health-care benefits are more critical for Gen X,’ explains Dutra (2009). However, she also elaborates that it is important to be able to ‘appeal to the newbies without giving the impression to their slightly older colleagues that the company is bending over backward for the younger generation’. Performance Management: Beyond Monetary Rewards Performance management system is a systematic process implemented by human resource managers to improve the performance of individuals and teams. Armstrong (2006) defines performance management system as a process of ‘agreement, measurement, feedback, positive reinforcement and dialogue.’ It is the element of positive reinforcement that creates the motivation for individuals but they alone do not bring about the needed work attitude. Armstrong (2006) feels that motivation can be enhanced through the process of performance management and that monetary rewards, if offered without any systematic process of evaluation, would fail to create motivation. He says that ‘recognition through feedback, opportunities to achieve, the scope to develop skills, and guidance on career paths’ are equally important to the monetary rewards offered. Therefore, many authors present the concept of total rewards, which include: Salaries and other forms of secured compensation; Variable pay and the opportunity to share in the success of achievements; A stake in the long-term growth and future of the organization through equity participation, career opportunities, or job security; The investment in one’s development and increasing competencies; The opportunities to have challenging and meaningful work; The appreciation and recognition of one’s contributions to the organization; The involvement in decisions that impact one’s work and career; The ability to make meaningful decisions and exert some degree of control over resources commensurate with one’s role in the organization; The confidence in the leadership, mission, and importance of the organization in one’s community; and The pride that accrues from being part of a winning organization and one that has high integrity and commitment to its mission (Berger & Berger 2003). Jensen, McMullen & Stark (2006) explain why the focus has shifted from mere pay to a total rewards systems. They explain that some dynamics of the labor market are responsible for the change. These dynamics are: The war for talent; Increasing focus on employee engagement; and A more diverse workforce. However, Armstrong (2006) also warns against the overreliance on performance as a predictor of pay. He elaborates that ‘it is undesirable to have a direct link between the performance review and the reward review. The former must aim primarily at improving performance and, possibly, assessing potential. If this is confused with a salary review, everyone becomes over-concerned about the impact of the assessment on the increment. It is better to separate the two.’ Designing Total Compensation Packages Demos (2010) provides some advice on what kind of compensation packages will work. The principles are presented as below: 1. Share the wealth: About 80% to 90% of employees should get some reward every year. A lot of companies worry that this sounds like everyone is a winner thinking. But when youre trying to reinforce certain behaviors, you need to constantly recognize them. 2. Small bucks beat big ones: The average prize should be just $110. Smaller prizes can seem insignificant, but larger ones dont motivate any better. "Even billionaires appreciate a Christmas sweater from their mom," says Mosley, CEO of Globoforce. 3. Weekly, not quarterly: Every week, 5% of employees should get an award. Any less frequent and people will forget about the program. Salary increases, which many employees say they prefer, are one-time events. Theres just pressure for another one. Small awards all the time are a way to constantly touch people." Berger & Berger (2003) also dictate some principles of designing compensation programs. They say that compensation plans, foremostly, need to be ‘tailored to the specific needs and unique characteristics’ of the organization. They elaborate that ‘it’s always important to understand the best practices among your top competitors, but if the organization only mirrors other organizations, it will fail to create a competitive advantage’. Secondly, compensation plans need to be ‘expanded and integrated with programs, tools, and practices that impact the actions of people’. This means that compensation ‘needs to be seen as part of an integrated total rewards system that includes what the organization is willing to offer and the individual perceives as rewarding in exchange for his or her contributions. This is achieved by having a well-stocked and finely tuned toolbox that includes cash compensation and equity participation, employee benefits and services, recognition, responsibilities, and development.’ Thirdly, rewards need to be ‘meaningful to the individual’ and should ‘directly relate to the strategy and key drivers of the organization’s success’. Berger & Berger (2003) recognize the issue with universally applied programs that they might be important to some and irrelevant to others. To make rewards both meaningful and strategic, organizations need to ‘segment their internal market at a macro level, in terms of different talent populations, and at a micro level, in terms of the manager’s understanding of what motivates his or her staff members. This is the rewards version of mass customization.’ It is the individual who determines the value of any reward and compensation package and not the organization – therefore, the individual’s view of the fairness of the package is of utmost importance. Lastly, rewards need to directly support the ‘creation of magnetic cultures’. The term magnetic cultures means ‘an environment that draws people in and gives them many good reasons for staying and contributing in an energized fashion. Magnetic cultures are characterized by employees who are proud of their workplace and their work product, enthusiastically recommending its products and services to others and their organization as one of the best places to work in the community.’ Simply put, compensation and total reward systems that ‘foster such environments must mix both extrinsic and intrinsic rewards effectively to meet the needs of the employees, who in turn take the initiative and apply their best efforts to build a successful organization.’ However, there is no one-size fits all policy and it is not possible to please everyone, especially with the limited resources in the current period. Dutra (2009) presents a more applicable set of advice to motivate employees in the current scenario of the recession. Firstly, it is important to identify the people you cannot afford to lose. Secondly, ‘differentiate between the great and the good’. This whole process of prioritizing your human resources is majorly dependent on the firm’s macro strategic plan. The firm’s long-term objectives will indicate which divisions and people are most important and where the firm should focus its resources. Motivating the ‘greats’ in the areas that are strategically important would be the most sensible human resource strategy. In this context, Mansbach (2009) proposes a series of questions to be asked before designing compensation packages. Intrinsic Motivation Herzberg’s two factor model signifies that although extrinsic motivation is important in removing dissatisfactions of work, intrinsic motivation creates job satisfaction. Bassett-Jones & Lloyd (2005)’s research sides with Herzberg’s theory and indicates that money and recognition are not the primary sources of motivation in ‘stimulating employees to contribute ideas’. Instead, factors associated with intrinsic satisfaction play a greater role in the motivation of individuals. However, no one method is a universally correct mode of motivation. Executives should explore all the options for compensation packages – the extrinsic factors and the intrinsic factors. Furthermore, the guidelines for designing compensation packages should not be ignored. Lastly, it is most important that all compensation policies be congruent with the firm’s overall strategy. Bibliography Aguinis, H., & Pierce, C. A. (2008). Enhancing the relevance of organizational behavior by embracing performance management research. Journal of Organizational Behavior (29), pp. 139–145. Armstrong, M. (2006). Performance Management : Key Strategies and Practical Guidelines. Kogan Page, Limited . Bassett-Jones, N., & Lloyd, G. (2005). Does Herzbergs motivation theory have staying power? Journal of Management Development , 24 (10), pp. 929-943. Berger, L. A., & Berger, D. R. (2003). Talent Management Handbook. McGraw-Hill Trade . Coates, G. (2003, September). Money, Motivation and Management. Business Review , pp. 16-18. Demos, T. (2010, April 12). Motivate Without Spending Millions. Fortune , 161 (5), pp. 37-38. Dewhurst, M., Guthridge, M., & Mohr, E. (2010). Motivating people: Getting beyond money. McKinsey Quarterly (1), pp. 12-15. Dutra, A. (2009, October 14). How to Retain and Motivate Talent Now. BusinessWeek Online , p. 12. House, R. J., Shapiro, H. J., & Wahba, M. A. (2007). EXPECTANCY THEORY AS A PREDICTOR OF WORK BEHAVIOR AND ATTITUDE: A RE-EVALUATION OF EMPIRICAL EVIDENCE. Decision Sciences , 5 (3), pp. 481 - 506. Jelavic, M., & Ogilvie, K. (2009, Winter). Maslow and Management: Universally Applicable or Idiosyncratic? Canadian Manager , 34 (4), pp. 16-17. Jensen, D., McMullen, T., & Stark, M. (2006). Managers Guide to Rewards : What You Need to Know to Get the Best For - and From - Your Employees. AMACOM. Lawler, E. E. (2008). Talent : Making People Your Competitive Advantage. Jossey-Bass. Mansbach, D. (2009, November 16). Rewarding packages for executives should go beyond just cash. Nations Restaurant News , 43 (43), p. 32. Rosen, A. S., & B.Wilson, T. (2003, August 13). Integrating Compensation with Talent Management. Retrieved April 29, 2010, from Wilsongroup: http://www.wilsongroup.com/ecr/articles/IntegratingCompwithTalentMgmt.pdf Summers, T. P., & Hendrix, W. H. (1991, June). Modelling the role of pay equity perceptions: A field study. Journal of Occupational Psychology , 64 (2), pp. 145-157. Zeidner, R. (2009, July). Gird Against a House of Cards. HRMagazine , 54 (7), p. 15. Read More