The Effectiveness of Monetary Incentives on Job Performance

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Nowadays, business environments have become increasingly dynamic and competitive. Due to globalisation and technological change, many companies today are trying to identify innovative compensation strategies that are directly linked to improving organizational performance as well as to make the companies become more flexible and adaptive. According to Appelbaum and Mackenzie (1996), the fundamentals of incentive pay and how it associates with known organizational behaviour theories can be correlated with the achievement of company goals through the use of reward system.

Basically, employees work because of money and they desire to receive fair wages and salaries for their contributions. Whereas employers want their workers to feel that is what they are getting and at the same time wish to maximize firm value. Hence, it is rational that employees and employers perceive money as the basic incentive for satisfactory job performance. Campling, Poole, Wiesner and Schermerhorn (2006) suggest that the use of monetary incentives in the classic ‘work performance paradigm’ is based mainly on the ‘Reinforcement Theory.’ Under this theory, managers must concentrate on the relationship between target behaviour (job performance) and its consequences (pay), as well as emphasized on the principles and techniques of organizational behaviour modification. Campling et al. (2006, p.398) define organizational behaviour modification as ‘the application of operant conditioning to influence human behaviour at work.’

According to Ballentine, McKenzie, Wysocki and Kepner (2003), monetary incentives include salary increases, profit sharing plans, stock options, warrants, individual and small-group rewards, merit pay, project bonuses, and additional paid vacation time. The purpose of such incentives is to reward employees for outstanding job performance through money. However, the effectiveness of monetary incentives on job performance has become critical issues in organizations today. Financial incentives, their use and misuse, have long been the focus of numerous researchers (Gibbons 1998; Gupta, Jenkins, Mitra and Shaw, 1998; Katz, 2000; Vecchio, 2003; Govindarajulu and Daily, 2004; McCausland, Pouliakas and Theodossiou, 2005; Fielding, 2007) dedicated to maximizing human and job performance. In the next section, a review of the literature on the impact of monetary incentives on job performance will be presented, followed by several motivational theories that can be associated with financial incentives and work performance, and also an examination of monetary rewards that focus on individual and group performance as well as productivity. Subsequently, the effectiveness of profit sharing plans on job performance will be examined too. Finally, conclusions are offered.

Literature Review

Monetary Incentives in the Workplace

According to Govindarajulu and Daily (2004), monetary incentives may be one of the strongest motivators for encouraging employees to perform better. Research shows that monetary rewards significantly influence job satisfaction and work motivation. Gupta et al. (1998) agree and suggest that monetary incentives motivate employees whether their jobs are exciting or boring, in labs and real-world settings alike.

Moreover, some investigators indicate that financial incentives show a positive impact on job performance of high-paid employees only. This is because higher-paid employees derive a utility advantage from what they perceive as supportive reward systems (McCausland et al., 2005). Whereas for lower-paid workers, performance pay is perceived to be controlling (Cummings and Worley, 2005), and hence, monetary incentives prove to be counter-productive for certain low-paid employment in the long run. Similarly, research team also finds that money...
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