: Motivation: Reward system and the role of compensation
HUMAN RESOURCE MANAGEMENT
“Motivation: Reward system and the role of compensation”
Student: Anton Skobelev, IBS-855
Teacher: Kartashova L.
The design and management of reward systems present the general manager with
one of the most difficult HRM tasks. This HRM policy area contains the
greatest contradictions between the promise of theory and the reality of
implementation. Consequently, organizations sometimes go through cycles of
innovation and hope as reward systems are developed, followed by
disillusionment as these reward systems fail to deliver.
Rewards and employee satisfaction
Gaining an employee’s satisfaction with the rewards given is not a simple
matter. Rather, it is a function of several factors that organizations must
learn to manage:
1. The individual’s satisfaction with rewards is, in part, related to what is
expected and how much is received. Feelings of satisfaction or
dissatisfaction arise when individuals compare their input - job skills,
education, effort, and performance - to output - the mix of extrinsic and
intrinsic rewards they receive.
2. Employee satisfaction is also affected by comparisons with other people in
similar jobs and organizations. In effect, employees compare their own
input/output ratio with that of others. People vary considerably in how they
weigh various inputs in that comparison. They tend to weigh their strong
points more heavily, such as certain skills or a recent incident of effective
performance. Individuals also tend to overrate their own performance compared
with the rating they receive from their supervisors. The problem of
unrealistic self-rating exists partly because supervisors in most
organizations do not communicate a candid evaluation of their subordinates’
performance to them. Such candid communication to subordinates, unless done
skillfully, seriously risks damaging their self-esteem. The bigger dilemma,
however, is that failure by managers to communicate a candid appraisal of
performance makes it difficult for employees to develop a realistic view of
their own performance, thus increasing the possibility of dissatisfaction
with the pay they are receiving.
3. Employees often misperceive the rewards of others; their misperception can
cause the employees to become dissatisfied. Evidence shows that individuals
tend to overestimate the pay of fellow workers doing similar jobs and to
underestimate their performance (a defense of self-esteem-building
mechanism). Misperceptions of the performance and rewards of others also
occur because organizations do not generally make available accurate
information about the salary or performance of others.
4. Finally, overall satisfaction results from a mix of rewards rather than
from any single reward. The evidence suggests that intrinsic rewards and
extrinsic rewards are both important and that they cannot be directly
substituted for each other. Employees who are paid well for repetitious,
boring work will be dissatisfied with the lack of intrinsic rewards, just as
employees paid poorly for interesting, challenging work may be dissatisfied
with extrinsic rewards.
Rewards and motivation
From the organization’s point of view, rewards are intended to motivate
certain behaviors. But under what conditions will rewards actually motivate
employees? To be useful, rewards must be seen as timely and tied to effective
One theory suggests that the following conditions are necessary for employee
1. Employees must believe effective performance (or certain specified
behavior) will lead to certain rewards. For example, attaining certain
results will lead to a bonus or approval from others.
2. Employees must feel that the rewards offered are attractive. Some
employees may desire promotions because they seek power, but others may want
a fringe benefit, such as a pension, because they are older and want
3. Employees must believe a certain level of individual effort will lead to
achieving the corporation’s standards of performance.
As indicated, motivation to exert effort is triggered by the prospect of
desired rewards: money, recognition, promotion, and so forth. If effort leads
to performance and performance leads to desired rewards, the employee is
satisfied and motivated to perform again.
As mentioned above, rewards fall into two categories: extrinsic and intrinsic.
Extrinsic rewards come from the organization as money, perquisites, or
promotions or from supervisors and coworkers as recognition. Intrinsic rewards
accrue from performing the task itself, and may include the satisfaction of
accomplishment or a sense of influence. The process of work and the
individual’s response to it provide the intrinsic rewards. But the organization
seeking to increase intrinsic rewards must provide a work environment that
allows these satisfactions to occur; therefore, more organizations are
redesigning work and delegating responsibility to enhance employee involvement.
Equity and participation
The ability of a reward system both to motivate and to satisfy depends on who
influences and/or controls the system’s design and implementation. Even
though considerable evidence suggests that participation in decision making
can lead to greater acceptance of decisions, participation in the design and
administration of reward systems is rare. Such participation is time-
Perhaps, a greater roadblock is that pay has been of the last strongholds of
managerial prerogatives. Concerned about employee self-interest and
compensation costs, corporations do not typically allow employees to
participate in pay-system design or decisions. Thus, it is not possible to
test thoroughly the effects of widespread participation on acceptance of and
trust in reward system.
Compensation systems: the dilemmas of practice
A body of experience, research and theory has been developed about how money
satisfies and motivates employees. Virtually every study on the importance of
pay compared with other potential rewards has shown that pay is important. It
consistently ranks among the top five rewards. The importance of pay and
other rewards, however, is affected by many factors. Money, for example, is
likely to be viewed differently at various points in one’s career, because
the need for money versus other rewards (status, growth, security, and so
forth) changes at each stage. National culture is another important factor.
American managers and employees apparently emphasize pay for individual
performance more than do their European or Japanese counterparts. European
and Japanese companies, however, rely more on slow promotions and seniority
as well as some degree of employment security. Even within a single culture,
shifting national forces may alter people’s needs for money versus other
Companies have developed various compensation systems and practices to
achieve pay satisfaction and motivation. In manufacturing firms, payroll
costs can run as high as 40% of sales revenues, whereas in service
organizations payroll costs can top 70%. General managers, therefore, take an
understandable interest in payroll costs and how this money is spent.
The traditional view of managers and compensation specialists is that if the
right system can be developed, it will solve most problems. This is not a
plausible assumption, because, there is no one right answer or objective
solution to what or how someone should be paid. What people will accept, be
motivated by, or perceive as fair is highly subjective. Pay is a matter of
perceptions and values that often generate conflict.
Management’s influence on attitudes toward money
Many organizations are caught up in a vicious cycle that they partly create.
Firms often emphasize compensation levels and a belief in individual pay for
performance in their recruitment and internal communications. This is likely
to attract people with high needs for money as well as to heighten that need
in those already employed. Thus, the meaning employees attach to money is
partly shaped by management’s views. If merit increases, bonuses, stock
options, and perquisites are held out as valued symbols of recognition and
success, employees will come to see them in this light even more than they
might have perceived them at first. Having heightened money’s importance as a
reward, management must then respond to employees who may demand more money
or better pay-for-performance systems.
Firms must establish a philosophy about rewards and the role of pay in the
mix of rewards. Without such a philosophy, the compensation practices that
happen to be in place, for the reasons already stated, will continue to shape
employees’ satisfactions, and those expectations will sustain the existing
practices. If money has been emphasized as an important symbol of success,
that emphasis will continue even though a compensation system with a slightly
different emphasis might have equal motivational value with fewer
administrative problems and perhaps even lower cost. Money is important, but
its degree of importance is influenced by the type of compensation system and
philosophy that management adopts.
Pay for performance
Some reasons why organizations pay their employees for performance are as
under the right conditions, a pay-for-performance system can motivate desired
a pay-for-performance system can help attract and keep achievement-oriented
a pay-for-performance system can help to retain good performers while
discouraging the poor performers.
In the US, at least, many employees, both managers and workers, prefer a pay-
for-performance system, although white-collar workers are significantly more
supportive of the notion than blue-collar workers.
But there is a gap, and the evidence indicates a wide gap, between the desire
to devise a pay-for-performance system and the ability to make such a system
The most important distinction among various pay-for-performance systems is
the level of aggregation at which performance is defined - individual, group,
and organizationwide. Several pay-for-performance systems are summarized in
the exhibit that follows.
Historically, pay for performance has meant pay for individual performance.
Piece-rate incentive systems for production employees and merit salary
increases or bonus plans for salaried employees have been the dominant means
of paying for performance. In the last decade, piece-rate incentive systems
have dramatically declined because managers have discovered that such systems
result in dysfunctional behavior, such as low cooperation, artificial limits
on production and resistance to changing standards. Similarly, more questions
are being asked about individual bonus plans for executives as top managers
discovered their negative effects.
Meanwhile, organizationwide incentive systems are becoming more popular,
particularly because managers are finding that they foster cooperation, which
leads to productivity and innovation. To succeed, however, these plans
require certain conditions. A review of the key considerations for designing
a pay-for-performance plan and a discussion of the problems that arise when
these considerations are not observed follow.
Individual pay for performance. The design of an individual pay-for
performance system requires an analysis of the task. Does the individual have
control over the performance (result) that is to be measured? Is there a
significant effort-to-performance relationship? For motivational reasons
already discussed such a relationship must exist. Unfortunately, many
individual bonus, commission, or piece-rate incentive plans fall short in
meeting this requirement. An individual may not have control over a performance
result, such as sales or profit, because that result is affected by economic
cycles or competitive forces beyond his or her control. Indeed, there are few
outcomes in complex organizations that are not dependent on other functions or
individuals, fewer still that are not subject to external factors.
Choosing an appropriate measure of performance on which to base pay is a
related problem incurred by individual bonus plans. For reasons discussed
earlier, effectiveness on a job can include many facets not captured by cost,
units produced, or sales revenues. Failure to include all activities that are
important for effectiveness can lead to negative consequences. For example,
sales personnel who receive a bonus for sales volume may push unneeded
products, thus damaging long-term customer relations, or they may push an
unprofitable mix of products just to increase volume. These same salespeople
may also take orders and make commitments that cannot be met by
manufacturing. Instead, why not hold salespeople responsible for profits, a
more inclusive measure of performance? The obvious problem with this measure
is that sales personnel do not have control over profits.
These dilemmas constantly encountered and have led to the use of more
subjective but inclusive behavioral measures of performance. Why not observe
if the salesperson or executive is performing all aspects of the job well?
More merit salary increases are based on subjective judgments and so are some
individual bonus plans. Subjective evaluation systems though they can be all-
inclusive if based on a thorough analysis of the job, require deep trust in
management, good manager-subordinate relations, and effective interpersonal
skills. Unfortunately, these conditions are not fully met in many situations,
though they can be developed if judged to be sufficiently important.
Group and organizationwide pay plans. Organizational effectiveness
depends on employee cooperation in most instances. An organization may elect to
tie pay, or at least some portion of pay, indirectly to individual performance.
Seeking to foster team-work, a company may tie an incentive to some measure of
group performance, or it may offer some type of profits or productivity-sharing
plan for the whole plant or company.
Gains-sharing plans have been used for years in many varieties. The real
power of a gains-sharing plan comes when it is supported by a climate of
participation. Various structures, systems, and processes involve employees
in decisions that improve the organization’s performance and result in a
bonus throughout the organization.
Russian management’s approach to motivation.
Nowadays, top managers at Russian companies don’t pay much attention to the
employee motivation. Not only is it the result of the long communist
background of the country, but it also is somewhat affected by the national
traditions, customs and mentality.
Many of the recently “commercialized” enterprises believe that employees are
to be satisfied with their salary only, and a pay-for-performance system is,
therefore, of no need. However, the failure to observe the different
motivation factors, such as money, respect, promotion and others, can lead to
a worsening performance and, as a result, to a lower efficiency
On the other hand, money is not considered to be the most influencing
motivation factor by the employees themselves. Though it may be a more vital
need of most Russian workers in comparison with their Western colleagues, at
the same time they put more value on the cooperative atmosphere in the
organization, rather than on the money side. And, thus, it is reasonable for
the management to base the performance incentive system on some other
factors, such as work security, pension etc. It’s hard to predict the
situation in the long-run, however one can expect that the value put on money
as a performance motivation factor will rise.
Searle, John G., Manage People, Not Personnel, A Harvard Business review