Pay

Introduction
 What we are going to discuss
• Talk about pay
• Role of pay as a motivator.
• Extent to which employers / managers can use
pay to motivate-how and in what
circumstances
• Relation between pay and motivation seems
simple-people work to get paid-so more pay
more work? More pay better people?
 Introduction (2)
• But the deeper we look in the relationship
between pay and motivation to work, the more
complex it appears.
• Example of lottery winners
• US Career Builder Survey 2014 - 51% of US
workers said would continue working even if
they won 30% in their present job.
• Difference between what people say and do,
but…
 Introduction (3)
• ABC news 2012 - Florida woman took a day off
work as waitress after winning 1million $
• Cardiff man, 2008, went back to minimum
wage job at McDonalds 18 months after
winning £1.3m-only “so much relaxing you can
do.”
• Oxford Economics 2012 - 3000 lottery winners,
19% kept their jobs, 15% started a business.
 Introduction (4)
• Implications of this for managers -it indicates
that people do not just work for pay, and may
continue to work when they clearly do not
need the pay. If paying a lottery winner an
extra dollar/euro an hour is not likely to make
them work harder, that may be the case with
others.
 Introduction (5).
• This is a viewpoint that has had some widely known
supporters. Frederick Herzberg’s “One More Time….pay
is not a motivator,” for decades the Harvard Business
Review’s most requested article. It argued it was just
necessary to pay enough to stop actual dissatisfaction.
The clear message to managers-don’t waste your
money on pay rises. Tempting.
• Yet against this there are other reasons and evidence
to suggest pay does play an important role in
motivating people.
 Introduction (6)
• Maslow's Hierarchy of Needs-flawed theory
but it is a useful way of discussing what
humans need.
• Proposed five levels we need to satisfy in
order from physiological needs, safety needs,
need to belong, self esteem and actualization.
• Maslow, did not mention money-but-we need
money to satisfy all those needs in a monetary
economy.
 Seven
• Money to buy food, a house, to socialise. It also
serves as a basis for comparison with others-how
well am I doing-the existence of pay secrecy
clauses demonstrates that employers understand
this very well.
• Money may well be necessary to self actualise if
that involves becoming a great yachtsman or
golfer. On the other hand a person might find a
route to self actualization thru their job, becoming
a great teacher/doctor etc.
 Introduction (7).
• So using money as a tool for motivating staff is not
straightforward because money has so many roles and
because people work for a variety of reasons. And pay
clearly not the only motivator.

• In the following sessions we are going to look into this in

more depth, that is: how and when managements can
use pay as a motivator, beginning next time with an
examination of how important a motivator pay actually
is.
• Thank you.
How important is pay as a motivator (1)
• A manager needs to know just how important a
motivator pay is compared to other factors such as
achievement, potential to use one’s skills,
responsibility, autonomy, potential career
advancement, training etc., before deciding how much
effort is justified in designing a pay and reward system.
• Two basic ways of discovering how important pay is in
relation to other motivators: First-Ask employees.
Secondly see how they actually behave. BUT Two
methods produce very different answers!
 How important is pay as motivator
(2)

• If you ask people how pay rates compare to

other motivators it comes out quite low.
Towers Perrin 2003 found that pay did not
even come in the top 10 for motivating
existing employees, behind factors such as:
challenging work, career advancement
opportunities, and a collaborative work
environment.
 How important is pay as a motivator (3)

• But asking people about pay results in socially

desirable responses that may not reflect how they
actually act. Respondents may convince themselves
that they are more concerned with challenging work or
work relationships than something as crude as money.
• Incidentally Frederick Herzberg’s claim that money is
not a motivator, a claim that has been very widely
promoted by management journals, notably the HBR,
was based on research which-simply asked people to
state what motivated them. So his results were
predictable.
How important is pay as a motivator (4)
• The real test of whether pay is a motivator is to see whether
payment by results systems actually do motivate people on
the job.

• The research is not entirely consistent-it never is but there

is a lot of research that demonstrates that pay incentives can
have quite a dramatic impact on performance. For example
Judiesch’s meta-analysis found that that individual pay
incentives increased performance by just under 50%. Guzzo
and his colleagues found that monetary incentives were
four times as effective as making the work more interesting.
 How important is pay
(5)
.Pay by results systems can operate at the individual or group level.

• Individual pay incentive schemes are often very effective and

tend to be popular with good performers but have some
possible downsides in terms of co-operation and team building-
a manager needs to be aware of that,
• An alternative is some form of group or team based bonus
system, which can promote team building-with the reservation
that high performing individuals may resent carrying other
members of the team and that for each member of the team
the relationship between their individual effort and the reward
is not clear cut.
 How important is pay
(6)
• As we will discuss in a later session: certain
types of employees, usually the one most valued
by the employer, those who are well educated,
go getting and have strong self belief, are those
to whom individual PRPs have most attraction.
• In the next session we will be looking more
closely at the necessary conditions for successful
pay for performance schemes.
• Thank you!
 Pay and Performance
(1)
• This session: when can pay be used to
increase performance, what are the
conditions, limitations?
• Suppose you are the manager of an
enterprise, a car dealership or a store, will
offering bonuses or pay for performance
guarantee an increase in performance?
 Pay for Performance
(2)
• The answer to that: not necessarily,
• A useful framework for analysing when and
how performance related pay will and will not
work- Vroom’s famous VIE theory.
• Vrooms theory dates back to the mid 1960s,
so it is not a new kid on the block, and it is not
beyond criticism, but nevertheless it is a useful
analytical tool.
 Pay for Performance
(3)
• Vroom proposed that a person will consider three
basic factors: Valence, Instrumentality and
Expectancy before applying effort.
• Valence-just equals value. It is the question do I
value the reward offered enough.
• Expectancy: Do I expect that if I make an effort I
will achieve the performance that will bring me a
reward?
• Instrumentality: If I reach the desired level of
performance can I be certain I will get the reward?
 Pay for Performance
(4)
Looking at these more closely:
Valence: A manager should not simply assume that a
particular level of financial reward will be valued by
their staff. There will always be the question of ‘how
much’ does it need to be in any situation?
Expectancy: A manager also has to really evaluate
whether staff will believe that they can achieve the
desired performance. Do they need-or think they
need-training, better equipment, better supervision
etc?
 Pay for Performance
(5)
• Instrumentality: If the employees don’t trust
the system, and in particular if they don’t trust
the systems and people who assess their level
of work, then offering pay for performance
may not work.
• Marsden and Richardson's’ classic study of
why a PRP system introduced in the UK Inland
Revenue –the government’s tax authority.
 Pay for Performance
(6)
• Found a clear majority of staff supported the principle of
PRP.
• But actual PRP system failed.
• Staff felt their performance was not fairly and accurately
appraised by management (Instrumentality)
• Staff felt rewards offered simply too small to justify
making greater effort. (Valence)
• Staff felt they were already working at an appropriate
level and could not improve it (Expectancy).
 Pay for performance
(7)
• So if a manager is to successfully introduce
PRP, must consider the issues of Valence,
Instrumentality and Expectancy if it is to
succeed. A badly designed payment for
rewards system will fail

• Thank you. In the next session we will look at

the importance of pay in attracting and
retaining employees.
 Pay: Attraction and Retention
(1)
• In the last session we looked at the necessary conditions for
pay to motivate existing employees, but equally important,
how significant is the role of pay in attracting new, high
performing staff and then to retain them.
• Researching this is –again-surprisingly complex and the
result of academic studies have produced some very
divergent results. But I am going to suggest here that the
conclusion we should draw is simple: pay is very important
in attracting new employees. In fact there is consistent
research (Towers and Perrin, Barber et al) that it is more
important for attracting new staff than motivating existing
staff.
 Pay: Attraction and Retention
(2)
• A classic study by Jurgensen in the late 1970s will
illustrate the problems of researching this issue-and
why we should draw the conclusion that pay is
important for job applicants.
• Jurgensen survey 50,000 job applicants over 10
years:
• Male applicants rated pay 5th most important factor
out of 10 alternatives in determining their job
choice.
• Female applicants rated it just 7th!
 Pay : Attraction and Retention
(3)
• But managers would have been unwise to jump
to the conclusion that pay was unimportant
because Jurgenson went on to ask exactly the
same applicants: “How important do you think
pay is to someone exactly like you?” (same age,
gender, education).
• Both male and female applicants rated pay-first!
Explanation in terms of social desirability-explain.
 Pay: Attraction and Retention
(4)
• However Sarah Rynes and her colleagues
demonstrated, the importance of pay in attracting
staff will vary depending on whether there is wide
variation in pay .
• Rynes: pay explained 65% of applicants evaluations of
job attractiveness when the pay range was great, but
when that pay range was halved that dropped to 40%
• Towers and Perrin the importance of pay and benefits
was not influenced by external economic factors-eg
the collapse internet bubble burst in the early 2000s.
 Pay: Attraction and Retention
(5)
• Managers and employers therefore should
conclude that if they want to attract the best
staff:
• Pay at the high end of the band
• But do not ignore other motivating factors
such as challenging work, career progression
etc.
 Pay: Attraction and Retention
(6)
• Looking specifically at Retention, some good studies
(e.g. Towers and Perrin) suggest that pay is more
salient for attraction than retention, essentially
because the pay rate will be the one factor that will
be certain for the new applicant.
• Advancement, talented co-workers and overall work
environment matter much more in the decision to
stay or go -BUT if pay and benefits drop below the
competition or are perceived to fail to reflect effort-
pay will become a major factor in deciding to leave.
 Pay and Attraction
(7)
• So managers can safely conclude that pay is very important
in attracting new staff and somewhat important in retaining
staff. In the latter case it is critical pay is not below a level
which will leave an employee feeling relatively underpaid.
• That said pay is not the only factor a prospective employee
takes into account or indeed an existing employee
considers in deciding whether to stay. Employees will look
at this holistically and so employers must do the same.
• Thank you and next time we will look at how individual and
situational factors influence the impact of pay.
 Pay: Individual and situational characteristics
(1)
• Last session we touched on the fact that the
importance of pay in attracting applicants
depended on how wide the range of pay being
offered by comparable employers. Examples
of sectors: school teachers versus sales.
• In this session we are going look at what
other factors and characteristics, individual
and situational, influence the impact of pay as
a motivator.
 Pay: Individual and Situational characteristics
(2)
• Understanding these factors will indicate when the
introduction of a Pay for Performance by
management is likely to be effective.
• So lets first look at the characteristics of
employees that will impact on the importance of
Pay to them:
• There is research which indicates the employees
with higher self efficacy-higher, that is high self
belief in their ability to succeed-have higher
preference for pay for performance systems.
 Pay: Individual and Situational Characteristics
(3)
• Performance related pay is also viewed more
positively by high academic achievers than those
with a lower level of education (Trank et al) . This may
in part be related to the previous point about self
efficacy, as academic success can be a consequence
of, and reinforce a sense of self efficacy.
• Clear implications here for managers, in relation to
employees who have demonstrated high
achievement in life, they are likely to respond
particularly well to PRP schemes.
 Pay: Individual and Situational Characteristics
(4)
• Also research evidence that Pay is rated as more important
by extraverts than introverts (e.g. Lucas et al 2000).
Extraverts require external stimulation so a logical finding.
Insofar as extraverts tend to attracted to certain areas of
employment, eg sales, customer relations etc, managers
could take this into account. Relates to ‘Valence’.
• Perhaps more contentiously there has been research
suggesting that pay is less important for women than to
men! (eg Hollenbeck et al). We have to be very careful
about this as social desirability may explain the findings-and
managers would have to be very cautious in drawing any
practical implications!
 Pay: Individual and Situational characteristics
(5)
• Turning to situational characteristics that influence
the significance of pay:-as we have seen the range of
pay in a given sector is very important: but a manager
or employer in a sector with a traditionally narrow
pay range has the potential option to stand out of the
crowd by moving out of the standard range.
• A finding by Sarah Rynes and her colleagues is
related to this point: declining marginal utility to
every increase in pay. There is a diminishing effect on
motivation for each additional pound, euro or dollar.
 Pay: Individual and Situational characteristics
(6)
• How any pay changes are communicated is very
important, and not surprisingly this is particularly
important when pay changes are negative-cuts-
which managers may have to impose in difficult
times. Greenberg found that the impact of a pay
cut, measured in terms of employee thefts, was
three and half times greater when no explanation
was provided by managers. Obvious implications
for managers here.
 Pay: Individual and Situational characteristics
(7)
• Legislative influences-pay related motivation
cannot be used for minimum wages jobs
which provide a ‘floor’. For an organization
which heavily depends on employees on
minimum wage rates and where competitive
pressures make going above this impossible,
the manager or employer must put the
emphasis on other potential motivators such
as training and progression.
• Thank you. In the next and last session we are
going to briefly consider the arguments as to
whether pay can actually demotivate in some
circumstance before summarizing the overall
conclusions to be drawn from the course.
 Pay as a non motivator
(1)
• In this session we are going to consider :-can
money fail to motivate and even demotivate
employees, and if so when and how?
. Articles in popular management journals and
many management courses have made the case
that money either actually demotivates or is at
best not a motivating factor, for some decades
now.
 Pay as a non motivator
(2)
• (Eg :offering to fetch coffee or doughnuts,
taking an interest in co-workers welfare etc).
• Why do we do them?
• Calculation of advantage, or enjoyment?
• If we do them because we derive some sort of
pleasure from the act of doing it, then this is so
called ‘intrinsic motivation’ as opposed to
‘extrinsic motivation’ when we perform an act
to receive a reward.
 Pay as a non motivator
(3)
• So managers should take on board that if the
pay is perceived as unfair that can have
negative consequences for motivation and
effort. Again, we discussed earlier the
importance of communicating with
employees, when for example a pay cut is
imposed, and that is very relevant here.
 Pay as a demotivator
(1)
• Think about the entire range of activities you
do in relation to your work, everything that
takes some time and effort, and that effort can
be physical, intellectual or emotional.
• Question: Amongst that range of activities are
there any you would be less likely to do if you
were paid for doing it?
 Pay as a demotivator
(2)
• The work psychologist Deci, argued that if you
start rewarding someone for an action they
did originally because they were intrinsically
motivated to do it, that will ‘crowd out’ the
intrinsic motivation and overall actually
demotivate. So, following this line or
reasoning, if you paid an employee to warmly
greet their colleagues, they could actually end
up doing it less.
 Pay as a demotivator
(3)
• But a lot of problems with this-does the
concert pianist really cease to gain any
pleasure from playing when he or she can
command high fees? Why does JK Rowling still
write books? Does Mick Jagger still tour into
his 70s ?
 Pay as a demotivator
(4)
• One last approach to think about is Adam’s
famous Equity Theory which simply proposed
that if an employee thinks the rewards
received are not a fair reflection of what the
employee brings to the job in terms of effort,
skill etc., the employee may react by reducing
their effort. In other words unfair pay can
demotivate. This ties in with what we
discussed earlier in terms of retention.
 Summary
• So lets just briefly summarize some of the key lessons for
managers from this course:
• Pay at least the market level if you want to attract, retain
and avoid negative feelings leading to potential
demotivation.
• Communicate the reasons for important pay decisions to
your staff.
• The employees you are likely to value most, the
educated, self driven and confident are those most likely
to respond well to PRP, particularly individual based PRP
 Summary
• Make sure the link between pay and performance is clear
and understood.
• Determine whether to introduce group level or individual
level PRP based on the extent to which performance can
be genuinely attributed to the efforts of individuals.

So thank you for following this course which I hope you have
enjoyed. In the time we have had available here it is only
possible to introduce a topic as complicated as pay and
motivation, but I hope this will inspire you to study this in
more depth. Thank you again.