Incentive Programs and Employee Motivation
Abstract
Given the fast-moving pace at which organizations are undergoing structural and technological changes, organisations are facing the pressure of competitiveness in the market, industries have looked for ways to outperform and stand out from the competitors. To compete, business leaders have to continually improve their performance by reducing costs, innovating products and processes, improving quality, productivity and speed to market.
It is evident that employees are increasingly demanding change, choice, flexibility, and variety in their work, suggesting that with the de-layering of organizations and empowerment of individual employees, the future for both the organization and the individual lies in developing the value of the individual as human capital. With this, employees must be motivated for the survival of the organization. Motivated employees are more productive. To be effective, managers need to understand what motivates employees within the context of the roles they perform. Of all the functions a manager performs, motivating employees is arguably the most complex.
This paper discusses the relationship of incentive programs with employee motivation. First, it provides an overview of employee satisfaction, in which motivation plays a significant role. Then, theories of motivation are discussed with a focus on Vroom’s expectancy theory. This is followed by a section on empowerment as a form of motivation. Finally, the importance of incentive and reward programs as motivational tools is discussed.
Employee Satisfaction
Employee satisfaction has always been a central problem for managers and companies as it has various impact on productivity, it affects how willing employees are performing their duties, how many effort they will extend, and how well they perform it. Human motivation to work can be categorised into two distinct types: intrinsic motivation, the intrinsic value of the work of the individual (such as interest value) and extrinsic motivation, the desire to gain some outcome (e.g. rewards) apart from the work itself (Amabile, 1993). Employee satisfaction also covers its intrinsic and extrinsic values that are reflected from the job. Intrinsic values include recognition, increased responsibility, advancement, good interpersonal relationship and extrinsic values include salary and bonuses. Intrinsic motivators can be independent to extrinsic motivators as these persons are satisfied in the way they are rewarded.
It is prevalent that business-driven industries place a strong focus on extrinsic motivators in rewarding their employees, whereas employees in non-profitable industries or those which involves creativity will benefit more in the intrinsic reward in their perspectives. There has been extensive coverage in research and studies that associate employee satisfaction with business performance. However, it is as of same importance that if employee satisfaction covers different aspect of motivators that result to, not come with better performance, the level and aspect of employee satisfaction and its impact on performance should be studied.
Employee satisfaction is a matter every company concerns, based on its significance to the employee well being and prospects for long-term organisational growth. It reveals the staff and work conditions that companies financial reports do not explicitly show. Satisfied employees are likely to be more enthusiastic to work, productive and committed to the company, therefore, a sensible company makes its effort in attracting high calibre of person and to retain them, and continuously reward them for keeping and bringing more business for the company (Becker and Gerhart, 1996). Competitiveness depends on the ability of business to improve productivity, reduce costs, improve quality, and increase overall customer satisfaction with goods and services.
High employee dissatisfaction put the company at risk with high dysfunction turnover, high replacement costs, resources and expertise being lost or poached by the industry within (Hollenbeck and Williams, 1986). Turnover has a natural negative impact on a company’s productivity, provided that employees are not working with their full potential. More importantly, job satisfaction is directly related to customer satisfaction. A contented workforce is a prerequisite for a satisfied customer base, that failure to recognise good performance, or poor support and backup for front line staff can lead to poor morale and momentum at work. Consequently, staff do not see the impact of service on customers and will lose confidence and trust from customers and eventually business.
High employee satisfaction has a wide impact on the company overall productivity and returns. Employees with high job satisfaction care about the quality of their work, more committed to the organisation, and more productive. It is argued that loyalty to employees is an important source of growth, profits, and competitive advantage (Pfeffer, 1982). In particular, loyal employees are valuable to companies as they are more likely to develop higher quality relationships with customers, have greater opportunities to learn, to increase efficiency, to reduce recruiting and training costs, and producing resources that can be reinvested in other parts of the business (Reichheld, 1996).
Thus, it is important for a company to realize that employee satisfaction brings not only quality relationships with customers, but also business performance. With this realization comes the need of employee motivation.
Motivation Theories
Understanding what motivates employees and how they are motivated is the focus of Maslow’s need-hierarchy theory, Herzberg’s two- factor theory, Adams’ equity theory, Skinner’s reinforcement theory, and Vroom’s expectancy theory.
In managing people in an organization, the manager must first satisfy the needs of the employees. Motivational theories dealing with the needs of employees fall under the general rubric of Content Theories of Motivation (Ratzburg, 2001). Content theories state that employees’ behaviors are a function of the workers’ abilities to satisfy their felt needs at the workplace. A basic assumption of all need theories is that, when need deficiencies exist, individuals are motivated into action in order to satisfy them. The best known of the Content Theories of Motivation is Maslow’s Hierarchy of Needs. This is based on the assumption that people are motivated by physiological, safety, social, ego and esteem, and self-actualization needs. These needs are ranked, according to the order in which they influence human behavior, in hierarchical fashion.
According to Maslow, lower level needs has to be satisfied before the next higher level need would motivate employees. Herzberg’s work categorized motivation into motivators (intrinsic factors) and hygienes (extrinsic factors) (Herzberg, Mausner, & Snyderman, 1959). The former, such as achievement and recognition, produce job satisfaction, whereas the latter, such as pay and job security, produce job dissatisfaction.
Adams’ theory states that employees strive for equity between themselves and other workers. Equity is achieved when the ratio of employee outcomes over inputs is equal to other employee outcomes over inputs (Adams, 1965). On the other hand, Skinner’s reinforcement theory states that those employees’ behaviors that lead to positive outcomes will be repeated and behaviors that lead to negative outcomes will not be repeated (Skinner, 1953). Managers should positively reinforce employee behaviors that lead to positive outcomes. Managers should negatively reinforce employee behavior that leads to negative outcomes.
Vroom’s theory is based on the belief that employee effort will lead to performance and performance will lead to rewards (Vroom, 1964). Rewards may be either positive or negative. The more positive the reward the more likely the employee will be highly motivated. Conversely, the more negative the reward the less likely the employee will be motivated. The premise of expectancy theory is that motivation depends on how much an individual wants something in relation to other things, and the perceived effort-reward probability that they will get it (Asnold, 1981). In this motivation theory, the transaction is an economic one and is assumed that individuals have expectations and preferences regarding the rewards they will receive in exchange for their investment of time and resources (Parker and Dyer, 1976). They use these criteria in choosing among an array of possible behaviors.
Moreover, this theory explains why many employees are not motivated on their jobs and merely do the minimum necessary to get by (House, Shapiro, and Wahba, 1974), while others who expect desired rewards for their performance will exert themselves in doing their jobs (Reinharth and Wahba, 1975). According to Muchinsky (1977), the expectancy theory proposes a tailoring of the study of motivation to the individual with the anticipation of differences. It recognizes that there is no universal principle for explaining everyone’s motivations, and the expected outcomes are either positive, negative, or neutral. The applicability of these notions to both public and private sector employees has been well-documented (Gabris and G. Simo, 1995).
In examining what employees want from their jobs and comparing it to what they are getting, Vroom (1964) reveals the need deficiency that instigates goal-directed behavior, which in turn leads to performance and productivity (Gibson, Ivancevich and Donnelly, 1988). In any case, one can presume that if an imbalance exists for an individual, she/he will be motivated to attend to the inequity at the expense of being motivated toward a particular organizational objective (Mowday, 1987). The optimal point exists when an individual perceives the exchange to be a balanced one, when their “wants” and “gets” match.
It is presumed that the focus of individual energies will be toward the organization’s goals, and in turn, this will satisfy personal goals. Similarly, imbalance exists when ratios are unequal (Mowday, 1987). In each instance, it is the individual’s perception of the situation that determines its degree of balance, as opposed to some measure of objective criteria. What is clear from the research is that organizational commitment depends upon the alignment of what employees want from their jobs and what they get from them (Flynn and Tannenbaum, 1993).
To determine if a state of disequilibrium exists, it is necessary to know the value placed upon a set of potentially achievable outcomes by the individual in the workplace. In addition, Sims, Szilagyi and McKemy (1976) find that it is necessary to appraise the relative attractiveness attributed to the perceived rewards that will be granted in exchange for the job done. The greater the collective disparity between an employee’s “wants” and “gets,” the greater the possibility for unwarranted absenteeism, turnover, performance problems, insubordination, and suppressed productivity (Bogg and Cooper, 1995). In addition, the match between employee “wants” and “gets” is a key factor in determining long-term employer success levels as a function of organizational productivity. Collectively, this information provides a picture of the general culture or subculture of an organization (Heimovics and Brown, 1976).
Motivation as Empowerment
Empowerment is a technique for improving employee satisfaction which is being undertaken by many organizations. It involves responsibility and authority for decisions affecting the workplace, downwards through the organization. In an international organization, employees need to be equally empowered. This empowerment results to an increased competence, self-esteem and self-respect, which are very important to one’s well-being. Moreover, creating an environment in the workplace that results in employees feeling better about themselves when they are in it results in love of their work. A work environment that constantly raises an employee’s self-esteem, above that she/he experiences anywhere else in their life, will be where she/he most desires to spend their time and yields very high employee satisfaction with their job and costs next to nothing. People do more of what they enjoy and less of what they do not enjoy. The results also show that people who enjoy working are more productive. Creating such a work environment is the responsibility of all corporate or organizational leadership. There are no schools that teach how to create such an environment and very, very few training programs that result in the behaviors necessary to do so. While a very small number of managers of people have found and refined the skills that produce such a high satisfaction environment, these are skills that anyone can learn and master through conscientious and consistent practice. Empowerment refers to the process of gaining influence over events and outcomes of importance to an individual or group (Fawcett et al. 1994). This definition recognizes the primary purpose for adopting this construct: enhancing people’s control over their lives (Rappaport, 1981). It recognizes that empowerment endeavors should consider those domains important to a particular individual or group and facilitate a process that eventually leads to realized control and influence in those domains (Rapapaport, 1981). Some organizations ignored the person-environment interaction and the critical role that both individual and contextual characteristics play in the empowerment process, which result in risking the implementation of ill-fated empowerment initiatives.
Incentive Programs
An effective incentive bonus program can have a positive impact on an entity’s growth. Of course, an ineffective one can have the opposite effect. Intensified global competition has highlighted the importance of effective incentive compensation programs for U.S. companies. An annual incentive bonus program is a popular and effective form of incentive compensation, and is usually a key element in any company’s executive compensation program.
A bonus program provides suitable rewards to motivate superior performance from the key people who impact profitability of the company. An effective program should maximize current profitability and assist management in attracting and retaining the best managerial talent. Achieving such an ambitious goal is not easy and can involve pitfalls which must be understood and considered in the design of the program and in its’ administration. Providing suitable rewards to motivate superior performance usually requires the expenditure of a significant amount of corporate funds. If the program is properly designed and administered, it should have a major positive impact on earnings and cash flow. An ineffective program may have the reverse effect and severely damage the company.
Locke, Feren, McCaleb, Shaw, and Denny (1980) claim that there is substantial evidence to support the proposition that there can be a positive effect on productivity stemming from individual incentives. Expectancy (Vroom, 1964) and reinforcement theory (Luthans and Kreitner, 1975) for example, are two theoretical models that can be employed to provide insight into a relationship between pay and performance. Moreover, there is empirical evidence demonstrating a pay-performance relationship. However, this relationship does not always reveal itself and at other times it has been both positive and negative in nature. Reviews of the compensation literature (Milkovich and Wigdor, 1991) highlight that the ability to offer firm conclusions as to the motivational and attitudinal effects of merit pay is limited and in need of more detailed investigation.
Assuming that motivation is one of the major determinants of employee performance studies of the performance effects associated with pay-for- performance systems provide indirect insight into the relationship between pay-for-performance and motivation. Theoretically, expectancy theory would posit that to the extent that money is valued and the employee has strong expectancy perceptions, there should be a positive relationship between a pay-for-performance system and employee motivation. Reinforcement theory, on the other hand, provides a similar prediction. There will be a motivational effect if there is an experienced-based line of sight linking the receipt of valued compensation as a consequence of performance behavior.
There does not appear to be a well-articulated theory of merit pay and its relationship to employee attitudes. But, we can draw upon social exchange theory (Blau, 1964) and norms of reciprocity (Gouldner, 1960) to provide insight into the relationship between pay-for-performance and employee attitudes. These theories posit that employee attitudes are contingent upon the pay they receive from the organization. It might be reasoned that there is a greater opportunity to achieve an equitable exchange between employees’ performance and the compensation they receive when there is a performance management system that attempts to objectively measure and reward performance at the individual level, as opposed to indiscriminately paying individuals across-the-board without consideration of their individual performance contributions.
Despite the prevalence of merit pay systems used in organizations throughout the world, research into the effectiveness of merit pay programs in motivating employees has been surprisingly limited (Milkovich and Wigdor, 1991). Some of our insight into the motivational effects of merit pay need to be drawn from studies of merit pay and performance while treating motivation as a linking and hypothetical construct in the research of employee motivation.
Pearce, Stevenson, and Parry (1985) concluded that the “merit pay program had no effect on organizational performance” (p. 261), implying that the program had no motivational effects. Similarly, in a later study by Thierry (1987), it was concluded that in contrast to results for all other pay-for-performance plans, the vast majority of the merit pay studies showed either null or negative findings. Kahn and Sherer’s (1990) investigation provides a different perspective, observing that a pay-for-performance bonus system was associated with subsequent performance. Moreover, those managers who had previously experienced a link between their bonuses and performance had the highest subsequent performance levels. Likewise, Schay (1988) observed a significant pay- performance relationship following the introduction of a merit pay system. The findings imply that the pay-for-performance compensation system had motivational effects that manifested themselves in performance increases.
A key problem for any organization is how to motivate their employees, through an incentive program, to put forth the right level and type of effort. One way an organization can use to accomplish this objective is the use of a lump-sum bonus. Once it decides to offer some type of performance based reward, it faces another choice; it can provide a cash award or some type of non-monetary award. Non-cash incentives may include personal notes from the Boss, plaques, employee of the month awards, as well as those with a substantial market value such as high-end merchandise or vacation travel.
While there has been much debate on whether or not to provide this type of pay for performance (see Beer, 2002; Prendergast, 1999) there has been little research on the type of award to be used once the decision to offer performance based pay has been made. This paper hopes to spark interest in that line of research. Many theories of motivation hold that effort, while a function of many things is positively correlated with the predicted utility of the award earned for that effort.
At a simple level, an organization determines what rewards carry the most utility for their employees. Neo-classical micro-economic theory has a clear prediction about this. Money is always better than any non-monetary incentive of equal market value. A firm providing an incentive can do no better than matching exactly what a person would have chosen for himself or herself. In fact, the firm will generally do worse, since it is difficult if not impossible to know another’s preferences exactly. It is difficult enough to match one employee’s preferences with a non-cash award.
The problem is multiplied exponentially by the fact that a firm must try to pick out an award that would maximize utility for all employees. Even if a firm successfully finds a non-monetary award that is highly valued by one group of employees, this same incentive may have far less value for another group. These problems make cash the most efficient award in a pure economic sense and any non-cash reward would lead to a dead-weight loss (List and Shogren, 1998). This makes intuitive sense since cash has option value. An employee could buy the particular incentive offered by the firm or something else that would provide more utility.
The theories previously discussed propose that under certain conditions and with certain types of incentive awards, the organization must make sure that the incentive program creates longer-term benefits such as organizational commitment (Mowday, Porter, and Steers, 1982) and organizational citizenship behavior (Organ and Ryan, 1995).
Summary
This paper has linked incentive and reward programs with employee motivation. It has traced the main reason for motivation, which is employee satisfaction. This paper has shown that employees must be motivated in order to enhance their skills and productivity which eventually results to the growth of the organization.
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