Pay is not only an important extrinsic reward; it is an especially complex one. When pay functions well it can help an organization attract and retain highly capable work- ers. It can also help satisfy and motivate these workers to work hard to achieve high performance. But when something goes wrong with pay, the results may well be negative effects on motivation performance. Pay dissatisfaction is often refl ected in bad attitudes, increased absenteeism, intentions to leave and actual turnover, poor organizational citizenship, and even adverse impacts on employees’ physical and mental health.
The research of scholar and consultant Edward Lawler generally concludes that pay only serves as a motivator when high levels of job performance are viewed as the paths through which high pay can be achieved.2 This is the essence of performance-contingent pay or pay for performance. It basically means that you earn more when you produce more and earn less when you produce less.
Merit Pay It is most common to talk about pay for performance in respect to merit pay, a compensation system that directly ties an individual’s salary or wage increase to measures of performance accomplishments during a specifi ed time period.
• The essence of performance-contingent pay is that you earn more when you produce more and earn less when you produce less.
• Merit pay links an individual’s salary or wage increase directly to measures of performance accomplishment.
OB IN POPULAR CULTURE
INTRINSIC/EXTRINSIC REWARDS AND NEW BALANCE
Intrinsic rewards are received directly from task performance. For example, the satisfaction that comes from completing a challenging task would be an intrinsic reward. Extrinsic rewards, on the other hand, are derived from factors external to the job. The most common extrinsic reward is pay. While both types have positive value, extrinsic rewards typically are not as motivating because they leave the worker feeling compelled to complete a task rather than desiring to do it for sheer enjoyment.
In a popular New Balance shoe commercial, groups of high school athletes remind professional athletes about the “little things” in sports, such as fl oor burn, bunting, and training at dawn. The commercial ends with a statement and two questions for the professional athletes. “There are two motivations in sports. Which is yours? For love or money?”
The difference implied in this commercial is that professional athletes play sports because of the extrinsic rewards, and thus are not as motivated to do the little things, while high school athletes are motivated by intrinsic rewards. It is an important distinction for those who believe money is an effective motivator.
Get to Know Yourself Better Take a look at Experiential Exercise 16, Motivation by Job Enrichment, in your OB Skills Workbook. Review the list of jobs. What would motivate you to do each of them? In all likelihood, your fi rst job will not be your dream job. Now consider this. Which would you rather have—a job that is not exciting but pays really well or one that you thoroughly enjoy doing but may not provide a lavish lifestyle?
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Although the concept of merit pay is compelling, a survey by the Hudson Institute demonstrates that it is more easily said than done. When asked if employ- ees who do perform better really get paid more, only 48 percent of managers and 31 percent of nonmanagers responded with agreement. And when asked if their last pay raise had been based on performance, 46 percent of managers and just 29 percent of nonmanagers said yes.3 In fact, surveys over the past 30 or so years have found that as many as 80 percent of respondents felt that they were not rewarded for a job well done.4
To work well, a merit pay plan should create a belief among employees that the way to achieve high pay is to perform at high levels. This means that the merit system should be based on realistic and accurate measures of work performance. It means that the merit system should clearly discriminate between high and low performers in the amount of pay increases awarded. And it also means that any “merit” aspects of a pay increase are not confused with across-the-board “cost-of-living” adjustments.
Although well supported in theory, merit pay is also subject to criticisms. For example, merit pay plans may cause problems when they emphasize individual achievements and fail to recognize the high degree of task interdependence that is common in many organizations today. Also, if they are to be effective, merit pay systems must be consistent with overall organization strategies and environmen- tal challenges. For example, a fi rm facing a tight labor market with a limited sup- ply of highly skilled individuals might benefi t more from a pay system that emphasizes employee retention rather than strict performance results.5
ETHICS IN OB
DRIVE TOWARD PRESENTEEISM AFFECTS BUSINESS You wake up and you’re feeling even worse than the day before.
Sniffl ing, sneezing, coughing, you make your way to work, hoping to get through the day as best as you can. Fine, but what about everyone whom you’ll come into contact with that day, and what about the impact your presenteeism—basically meaning that you go to work sick—can have on offi ce productivity and your co- workers’ and customers’ lives in general?
Brett Gorovsky of CCH, a business information resource, says that when people come to work sick it “can take a very real hit on the bottom line.” His fi rm reports that 56 percent of executives in one poll considered this a problem; that fi gure is up some 17 percent in a two-year period. Estimates are that the cost of lost productivity is as much as $180 billion annually. Just think of the costs of swine fl u season.
WebMD reports a study claiming that the cost of lost productivity could be higher than what might be paid out in authorized sick days. But the fact remains: Many of us work sick because we have to if we want to be paid.
You Tell Us What are the ethics of coming to work sick and sharing our illnesses with others? And from the management side of things, what are the ethics of not providing benefi ts suffi cient to allow employees to stay home from work when they aren’t feeling well?
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126 6 Motivation and Performance
Bonuses Some employers award cash bonuses as extra pay for performance that meets certain benchmarks or is above expectations. The practice is especially common in senior executive ranks. Top managers in some industries earn annual bonuses of 50 percent or more of their base salaries. One of the motivational trends is to extend such opportunities to workers at all levels, and in both managerial and nonmanagerial jobs. Employees at Applebee’s, for example, may earn “Apple- bucks”—small cash bonuses that are given to reward performance and increase loyalty to the fi rm.6
Gain Sharing and Profi t Sharing Another way to link pay with performance is gain sharing. This gives workers the opportunity to earn more by receiving shares of any productivity gains that they help to create. Gain sharing plans are supposed to create a greater sense of personal responsibility for organizational performance improvements and increase motivation to work hard. They are also supposed to encourage cooperation and teamwork to increase productivity.7
Instead of rewarding employees for specifi c productivity gains, profi t shar- ing rewards them for increased organizational profi ts. The more profi ts made, the more money that is available for distribution to employees through profi t shar- ing.8 Of course when profi ts are lower, individuals earn less due to reduced profi t-sharing returns. And indeed, one criticism of the approach is that profi t increases and decreases are not always a direct result of employees’ efforts. Many other factors, including a bad economy, can come into play. In such cases the question is whether it is right or wrong for workers to earn less because of cir- cumstances beyond their control.
Stock Options and Employee Stock Ownership Another way to link pay and performance is for a company to offer its employees stock options.9 These options give the owner the right to buy shares of stock at a future date at a fi xed or “strike” price. The expectation is that employees with stock options will be highly motivated to do their best so that the fi rm performs well, because they gain fi nancially as the stock price increases. However, as the recent economic down- turn reminded us, the value of the options an employee holds can decline or even zero out when the stock price falls.
In employee stock ownership plans, or ESOPs, companies may give stock to employees or allow stock to be purchased by them at a price below market value. The incentive value of the stock awards or purchases is like the stock options. “Employee owners” should be motivated to work hard so that the orga- nization will perform well, its stock price will rise, and as owners they will ben- efi t from the gains. Of course, the company’s stock prices can fall as well as rise.10 During the economic crisis many people who had invested heavily in their employer’s stock were hurt substantially.
Skill-Based Pay Still another alternative is to pay people according to the skills they possess, develop, and use for job performance. Skill-based pay rewards people for acquiring and developing job-relevant skills. Pay systems of this sort pay people for the mix and depth of skills they have, not for the particular job assignment they hold. Some advantages of skill-based pay are employee cross- training—workers learn to do one another’s jobs; fewer supervisors—workers can provide more of these functions themselves; and more individual control over
• Bonuses are extra pay awards for special performance accomplishments.
• Gain sharing rewards employees in some proportion to productivity gains.
• Profi t sharing rewards employees in some proportion to changes in organizational profi ts.
• Stock options give the right to purchase shares at a fi xed price in the future.
• Employee stock ownership plans give stock to employees or allow them to purchase stock at special prices.
• Skill-based pay rewards people for acquiring and developing job-relevant skills.
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Motivation and Performance Management 127
If you want to get hired by Procter & Gamble and make it to the upper manage- ment levels, you had better be good. Not only is the company highly selective in hiring, it also carefully tracks the performance of every manager in every job they are asked to do. The fi rm always has at least three performance-proven replacements ready to fi ll any vacancy that occurs. And by linking performance to career advancement, motivation to work hard is built into the P&G manage- ment model.12
The effort n performance n reward relationship is evident in the P&G man- agement approach. However, we shouldn’t underestimate the challenge of man- aging any such performance-based reward system. As mentioned earlier, perfor- mance must be measured in ways that are accurate and respected by everyone involved. When the performance measurement fails, the motivational value of any pay or reward systems will fail as well.