INCENTIVE SCHEMES AND PRODUCTIVITY

Cheryl Ann T. Limbo IR 205 Wages & the Labor Market UP SOLAIR
MOTIVATIO INCENTIVE
N SCHEMES

The mental force The tools that can

that drives the be used in
actions of organizations to
cognitive beings get people to
behave in a certain
Can be internal or manner
external

Definition of Terms
 any reward or benefit
given to the employee
over and above his
wage or salary with a
view to motivating him
Formal or Individual or
Simple
Informal Group-Based
or
Elaborat
e

Money- Mixture of Non-Money

Based Money & Based
Non-Money
Based
Classification of Incentives
Source: Pattanayak (2005), p. 264
Requirements
of a Sound Incentive Scheme
 Consensus No scope for Assured
Trust & required bias or Sound minimum
confidence favoritism system of wage

Beneficial to evaluation
both workers Simple to
& Redressing
operate
management grievances

Review
Variable Pay Plans
Categories of Variable Pay
Plans
Incentive
Plans
 Incentive Plans
Piece Rate
Piece rate incentive is given to the employees based on the
number of units produced. This plan is practiced in the
sectors dealing with manufacturing of products such as
engineering automobile, telecommunication, FMCG, etc.

Commissions
Commission is a variable component of compensation
package. It is given on the basis of business generated by the
employee. Commission is a pre fixed component say 5% of
the total sales done by the employee. It is practiced in the
retail, FMCG and other sectors in the marketing and sales
segment.
 Incentive Plans
Bonuses
Bonuses are given to employees on a pre
established goal or criteria. The organizations
set policies regarding the bonuses. Usually
bonuses are provided during the festive
season.

Merit Raises
Merit raises are given on the basis of
predetermined policies. The employees are
given raise on the basis of their performance.
The performance standards are set by the
organizations much in advance.
 Incentive Plans
Standard Hour Pay
Standard hour plan provides incentives to employees
based on the time saved by them during the job course.
Employees productivity and quality is evaluated with
respect to the set standards.

Maturity Curves
Maturity curve incentive plan considers the experience
and performance of an employee for giving out the
incentives. It is practiced in all the industries.
Experience is always given a weight-age as
experienced people can produce better quality results.
 Incentive Plans
Gain Sharing
Gain sharing incentive plans undertake those
employees who give outstanding performances
and provide for cost saving measures.
Organizations believe in sharing the profits with
the employees who are responsible for
producing those results.

Profit Sharing
Profit sharing incentive plans are practiced in
retail and FMCG sectors. Other sectors too
implement the plan based on organizational
policies. It refers to giving out the share of
profits the organization earned to all the
employees. Indirectly all the organizations
 Employee Stock Plans
Stock Option Plan
A plan that gives employees the right to
purchase a fixed number of shares of company
stock at a specified price for a limited period of
time.

Employee Stock Ownership Plan

(ESOP)
A plan whereby employees gain significant
stock ownership in the organization for which
they work.
 Organization wide Incentive Plans
Employee Stock Ownership Plan (ESOP)

A firm annually contributes its own stockor cash

(with a limit of 15% of compensation) to be used
to purchase the stockto a trust established for
the employees.

The trust holds the stock in individual employee

accounts and distributes it to employees upon
separation from the firm if the employee has
worked long enough to earn ownership of the 18
stock.
1900-1969
Fundamental Theories
 Scientific Research
Focused with manufacturing jobs
Workers were thought to oppose work and
were only doing it to get paid and would
therefore do as little as possible
Work was broken to small, easily
measurable processes
Worker would be paid according to what he
produces
Gave rise to pay-for-performance approach
(PFP)
 Content Theory
Tries to answer why human needs change
over time and what it is that motivates
people
Under this theory are:
Maslows Hierarchy of Needs
Herzberg & McGregors Theory X and Theory Y
(1960)
 Content Theory
Maslows Hierarchy of Needs
Money is only a useful
motivator when the
Self-Actualization
person being
motivated does not
Esteem Needs
have enough of it.
Love/Belonging

Safety & Security

Physiological
Needs
 Theory X Theory Y
Classic view of a worker New view of a worker
Wanting and needing work
Lazy and inherently opposed to
work Organizations need to
develop the individuals
In need of being controlled and not
commitment to its objectives
wanting to take on responsibility
and then liberate his/her
abilities on

behalf of
Claims that organizations those
should seek Y workers as objective
organizations would
benefit more from them.
Therefore, incentives
should be aimed at Y
workers.

Content Theory - Theory X & Y

Maslows Hierarchy of Needs &
McGregors Theory X & Y
S Theory Y a set of
A assumptions of how to
manage individuals
Esteem motivated by higher order
of needs
Love/Belonging
Theory X a set of
Safety & Security assumptions of how to
manage individuals
motivated by lower
Physiological order of needs
 Expectancy Theory (Vroom, 1964)
Tries to measure the motivational force of
motivators
Claims that human actions are dependent
on the desirability of the outcome and
that the action with the most desirable
outcome will be taken

Source:
PSU.edu
 2-Factor Theory (Herzberg, 1959)

Intrinsic Motivators
Extrinsic Motivators
appeal to people's inner
drives, needs, and related to the job
desires environment not the
Achieve better results job content itself
Related to job content Provides short term
Draws motivation from motivation only
within employees

Money can temporarily alter the behavior of workers but once this is
removed, the behavior goes back to its old form.
 Galbraith, 1967
Money is a good motivator if what is being
rewarded can be easily and objectively
measured
2 Motivators
SUPPORT & RECOGNITION: Must have a
connection between recognition and good
performance and a link between the
supervisors status and the effect that his
recognition has on workers
WORKERS ROLE IN DECISION MAKING:
Workers will make him more interested &
1970-1979
Criticism to Theories
 Levison, 1973
Effective organizations and effective
interpersonal relations require
knowledge and understanding of
individual as beings whose need for self-
esteem is powerful and who perform
most effectively when they are involved
in all aspects of their work. They must
also feel that what they do has a
purpose, and that this purpose is
compatible with the purpose and goals
 Deci, 1976
When combining intrinsic & extrinsic
motivators on the job, one tends to
drown out the other.
When combined, the extrinsic ones will
suffocate the intrinsic ones in most
situations, leaving workers with inferior
motivation.

*On Herzbergs 2-Factor Motivation Theory

 Meyer, 1975
Majority of workers at organizations with cash-bonus
incentive systems were unhappy with money
received as well with the systems themselves
WHY?
Performance rating that superiors give are lower
than how employees perceive themselves
Workers focus shifts from work to the cash bonuses
Competition for bonuses creates an unhealthy work
environment
SUGGESTION: Gradual pay-raises, promotion,
increased responsibilities, growth in company
 London & Oldham, 1977
When organized correctly, group
incentive systems could produce the
same results as individual incentive
systems
Group incentives have the advantage
of uniting workers instead of dividing
them and therefore they can eliminate
the possible workplace hostility.
 Mayes, 1978
A small reward given shortly after a
preferred behaviour was more likely to
encourage the continuation of that
behaviour than a large reward given
after some time had passed.
Along with large, year-end bonuses,
companies should also incorporate
smaller rewards into their incentive
systems to be given out shortly after a
worker displays good performance.
1980-1989
Shift to Management Motivation
 Sarin & Winkler, 1980
Rewards could be tied to a pool of
measurements where each
measurement is weighted according to
its importance
Suggests rewards based on goal-setting
and the achievements of those goals.
That way, people could work towards a
long term goal without too much
influence from factors out of their
control
 Stonich, 1981
Suggested that organizations should
implement incentive systems that reward
long term success and the achievement of
strategic goals
3 different approaches:
Use different measurements depending
on different strategies
Reward long term success by granting
stocks or stock options to managers
Keeping capital expenditure towards
strategic growth out of performance
 Rich & Larson, 1984
Found that organizations tend to use
poor measurements and have poorly
designed systems to measure long term
results, leading them to a performance
that is no better than those that do not
have such systems
recommend using some sort of
economic-value-added (EVA)
measurements when it comes to the
long term
 Healy, 1984
Focused on the human part of goal-
setting
Found out that managers that are
rewarded based on profit are more
likely to change accounting procedures
Larcker, 1987
in order to maximize profit displayed

finds that rewards based on short term

measures cause a drop in executive
spending
 Von Glinow, 1985
Found a link between organizational culture
and incentive systems and that they should
complement each other in order to work
If an organization wants to change its culture it
must also change its incentive system or else it
will find itself wanting one thing while rewarding
another
 Kerr & Slocum, 1987
Divided incentive systems into 2 groups:
HIERARCHY-BASED: rewards workers based
on the subjective evaluation of their
superiors (mature markets)
PERFORMANCE-BASED: rewards workers
based on an objective evaluation of their
performance compared to preset goals
(growing markets)
Gomez-Mejia & Welbourne, 1988
Echoed the results of Kerr & Slocum
2 Divisions of Incentive Systems
MECHANISTIC (Hierarchy-based)
ORGANIC (Performance-based)
 Muczyk, 1988
In the turbulent economy of the eighties,
hierarchy-based organizations did worse than
performance-based organizations
Suggested that incentive systems, of
performance-based organizations were better
equipped to deal with changing markets and
growing competition
 Balkin, 1988
Found that rapidly growing
organizations are more likely to use
short term measurements when
assigning rewards
Recommended to use long term
measurements when trying to keep key
employees, rewarding them with stocks
or stock options
 Kanugo & Mendonca, 1988
Claimed that since managers have increasingly
moved from extrinsic to intrinsic motivators they
have lost sight over whether or not they are
getting their moneys worth
Its not enough to know if something motivates
workers, one has to know how much it motivates
him
Since managers cant measure what they get,
they cant optimize the incentive systems,
causing cash-bonuses to be an unnecessarily
large expense
Suggests Expectancy Theory rather than
 Kim, 1990
organizations that use long term incentives for
their managers show an increase in earnings-
per-share and market return beyond their
competitors
 1946
Managers thought
work to be that employees
appreciated mostly valued good
job security wages, job security
good wages and then
promotions

Managers are out

1981 of touch with the
importance of
Interesting
intrinsic motivators
projects as well as their
 Kovach, 1987
Managers might be rewarding workers in the
same way as they themselves want to be
rewarded
Managers might be avoiding responsibility by
choosing rewards that require the least amount
of contact with workers etc.
Research shows that those who see money as a
motivator are low-paid, low-ranking and young.
The majority saw intrinsic motivators as being
more important, highlighting the importance of
non-monetary rewards
1990-1999
Strategy & Globalization
 Gomez-Mejia & Welbourne, 1991
Made use of Hofstedes research and find that global organizations
have to take culture into account when implementing incentive
systems
 Femininity
Rewarded for displaying masculinity with different sets of
incentives for males and females
/
Refrain from rewarding behaviour linked to genders Masculinity
Incentives should not be left to mgts discretion, but n Avoidance
contracts
Rewards should be based on mgts discretion with a
Uncertainly
large part in the form of bonuses
Use individualized, extrinsic incentives that emphasize
m
individual efforts Individualis
Use intrinsic motivators, emphasizing group efforts
Incentives should underscore an individuals power and Distance
rank
Incentives used should be gain-sharing and group
Power
bonuses
Gomez-Mejia & Welbourne, 1991
 Rajagopalan & Finkelstein,

1992
Derived from a long term research on 50 large
electric utility companies
Shows a clear connection between the
incentive systems in use and their strategy

Defender Strategy Discretionary Strategy

Long term incentives for Short term incentives

managers Measurements based on
Measurements based on outcome, tie a larger
operation efficiency portion of managers
compensation to their
performance, & use larger
cash-bonuses
 Rajagopalan & Finkelstein,

1992
Derived from a long term research on 50 large
electric utility companies
Shows a clear connection between the
incentive systems in use and their strategy

Defender Strategy Discretionary Strategy

Long term incentives for Short term incentives

managers Measurements based on
Measurements based on outcome, tie a larger
operation efficiency portion of managers
compensation to their
performance, & use larger
cash-bonuses
 Rajagopalan, 1997
Follow-up on the previous study with Finkelstein
in 2992

Defender Strategy Prospector Strategy

could benefit from could benefit from

offering managers offering managers risky,
small, relatively riskless marked based
cash bonuses based on incentives
accounting related
measurements
Long term impact of these differences in
incentives is very little and that it mainly serves
the purpose of aligning managers behaviour
 Kim & Killough, 1998
Customer and quality performance was higher
in Total Quality Management and Just in Time
situations where there were customer and
quality related performance goals and
incentives compared to where fixed pay was
used
Ittner, Larcher & Tajan, 1997
Organizations following an innovation-oriented
and/or a quality-oriented strategy are more
likely to use non-financial measurements when
measuring managers performance and
 Drake, Haka & Ravenscroft, 1999
Did an experimental study and found that in team
structures, the interaction between Activity Based
Costing and rewards based on group incentives was
associated with cooperative innovations, lower costs
and higher profits
Frey, 1997
Theory on New Economic Man - since people use
more than money to value their existence they are
motivated by more than just money
extrinsic motivators can overpower the intrinsic ones
in what he calls the crowding out effect which leads to
a decrease in motivation and efficiency
2000-2010
Strategy & Continuation of Herzbergs Theory
 Theory X Theory Y
Classic view of a worker New view of a worker
Wanting and needing work
Lazy and inherently opposed to
work Organizations need to
develop the individuals
In need of being controlled and not
commitment to its objectives
wanting to take on responsibility
and then liberate his/her
abilities on

behalf of
Claims that organizations those
should seek Y workers as objective
organizations would
benefit more from them.
Therefore, incentives
should be aimed at Y
workers.

Content Theory - Theory X & Y

 Boyd & Salamin, 2001
Studied organizations outside of the United
States and find a strong connection between
incentive systems and strategy
Organizations following a growth-strategy make
greater use of incentive systems
Organizations following a growth-strategy used
the highest cash bonuses when it came to their
highest ranking managers
Organizations following a prospector-strategy
used higher cash bonuses than other
 Maiga & Jacops, 2005
Found that quality goals, quality feedback and
quality incentives were antecedents to quality
performance.

Chiang & Birtch, 2007

Cultural reactions to incentive systems are in
no way as predictable as Gomez-Mejia and
Welbourne (1988) had suggested and that
people living in vastly different cultural areas
can have a similar reaction to a set of
incentives
culture is not a predominant factor when it
Bassett-Jones & Lloyd, 2005
Intrinsic motivators are still superior to
extrinsic motivators
One difference from Herzbergs theory
in that recognition by superiors was no
longer an intrinsic motivator
Drake, Wong & Salter, 2007
Motivation had a positive effect on
performance
Connection between empowerment and
performance is not as strong as had been
suspected
 Gneezy, Loewenstein & Mazar, 2009
Shows how large cash bonuses can lead to
inferior results in tasks concerning cognitive
thinking
They point to the Yerkes-Dodson theory in
psychology which claims that there is such a thing
as optimum stimulation, resulting in the best
performance
Several trials were done in India and USA
tasks that required mechanistic work,
participants performed better when they were
offered higher bonuses
when the tasks required cognitive thinking all
Benefits of Incentives
 Does Pay for Performance
Really Work?
The answer is that while pay for performance can work, it's
not the solution for every organization.

A survey by Hewitt Associates LLC found: that

Nearly 8 in 10 companies have some

kind of variable pay system

This is up from fewer than 5 in 10 in 1990

 Does Pay for Performance
Really Work?
The concept of pay for performance isn't new
Ancient Mesopotamians were paid by the basket for picking
olives-form of performance-based pay.
Modern era, the term is used fairly loosely and often
includes:
Commissions and bonuses
Variable pay approach anchored to evaluation &
performance.
Re-earned each year
Not a permanent increase in base salary
 When it works?
1. When it is designed for whole-
company success:
Pay for performance is often criticized for tilting
a company toward one measure and away from
another.

Individual goals can pit workers against each

other.

A plan that focuses only on output will

invariably suffer in the area of quality.
 When it works?
When it is designed for whole-company
success:
Pay for performance is often criticized for tilting a
company toward one measure and away from
another.

Individual goals can pit workers against each

other.

A plan that focuses only on output will invariably

suffer in the area of quality.
 When it works?
There are clear expectations:

Must evaluate people on a regular basis

Clear communication of expectations & performance

Allows for employees to make adjustments

They feel their job is under their control

.There is commitment to training and support:

Requires a commitment to training for it to work

Usually requires more administrative support

Why Variable Pay Plans Fail
Plan incentives are Plan doesnt
not seen as reward doing a
desirable good job

Employees
View of Variable
Plan rewards Pay Plan
teams/groups Plan doesnt
rather than motivate
individuals

Plan is prone to
fraud or
undertargetting
SUMMARY:
Motivation
&
Incentives
Questions? Comments?