Pay for performance

Topics: Motivation, Incentive, Maslow's hierarchy of needs Pages: 7 (1346 words) Published: April 14, 2014

Chap 12

Pay for Performance and
Financial Incentives

Motivation, Performance, and Pay

Financial rewards paid to workers whose production exceeds a predetermined standard. Individual Differences

Law of individual differences
The fact that people differ in personality, abilities, values, and needs. Different people react to different incentives in different ways. Managers should be aware of employee needs and fine-tune the incentives offered to meets their needs. Money is not the only motivator.

Employee Preferences for Noncash Incentives

Needs and Motivation

Abraham Maslow’s Hierarchy of Needs
Five increasingly higher-level needs:
physiological (food, water, sex)
security (a safe environment)
social (relationships with others)
self-esteem (a sense of personal worth)
self-actualization (becoming the desired self)
Lower level needs must be satisfied before higher level needs can be addressed or become of interest to the individual.

Herzberg’s Hygiene–Motivator theory
Hygienes (extrinsic job factors)
Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction. Motivators (intrinsic job factors)
Job enrichment (challenging job, feedback and recognition) addresses higher-level (achievement, self-actualization) needs. The best way to motivate someone is to organize the job so that doing it helps satisfy the person’s higher-level needs.

Edward Deci
Intrinsically motivated behaviors are motivated by the underlying need for competence and self-determination. Offering an extrinsic reward for an intrinsically-motivated act can conflict with the acting individual’s internal sense of responsibility. Some behaviors are best motivated by job challenge and recognition, others by financial rewards.

Instrumentality and Rewards

Vroom’s Expectancy Theory
A person’s motivation to exert some level of effort is a function of three things: Expectancy: that effort will lead to performance.
Have to have the skills to do the job
Instrumentality: the connection between performance and the appropriate reward. Goal must be attainable
Valence: the value the person places on the reward.
Motivation = E x I x V
If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward. Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation.

Types of Incentive Plans

Pay-for-performance plans
Variable pay (organizational focus)
A team or group incentive plan that ties pay to some measure of the firm’s overall profitability. Variable pay (individual focus)
Any plan that ties pay to individual productivity or profitability, usually as one-time lump payments.

Pay-for-performance plans
Individual incentive/recognition programs
Sales compensation programs
Team/group-based variable pay programs
Organizationwide incentive programs
Executive incentive compensation programs

Individual Incentive Plans

Piecework Plans
The worker is paid a sum (called a piece rate) for each unit he or she produces. Straight piecework: A fixed sum is paid for each unit the worker produces under an established piece rate standard. An incentive may be paid for exceeding the piece rate standard. Standard hour plan: The worker gets a premium equal to the percent by which his or her work performance exceeds the established standard.

Pro and cons of piecework
Easily understandable, equitable, and powerful incentives
Employee resistance to changes in standards or work processes affecting output Quality problems caused by an overriding output focus
Employee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output

Merit pay
A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance. Merit pay options
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