Реферат: Motivation: Reward system and the role of compensation


“Motivation: Reward system and the role of compensation”

Student:Anton Skobelev, IBS-855

Teacher:Kartashova L.

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The design andmanagement of reward systems present the general manager with one of the mostdifficult HRM tasks. This HRM policy area contains the greatest contradictionsbetween the promise of theory and the reality of implementation. Consequently,organizations sometimes go through cycles of innovation and hope as rewardsystems are developed, followed by disillusionment as these reward systems failto deliver.

Rewards and employee satisfaction

Gaining an employee’s satisfaction with the rewards given is not asimple matter. Rather, it is a function of several factors that organizationsmust learn to manage:

1. The individual’s satisfaction with rewards is, inpart, related to what is expected and how much is received. Feelings ofsatisfaction or dissatisfaction arise when individuals compare their input — job skills, education, effort, and performance — to output — the mix ofextrinsic and intrinsic rewards they receive.

2. Employee satisfaction is also affected bycomparisons with other people in similar jobs and organizations. In effect,employees compare their own input/output ratio with that of others. People varyconsiderably in how they weigh various inputs in that comparison. They tend toweigh their strong points more heavily, such as certain skills or a recentincident of effective performance. Individuals also tend to overrate their ownperformance compared with the rating they receive from their supervisors. Theproblem of unrealistic self-rating exists partly because supervisors in mostorganizations do not communicate a candid evaluation of their subordinates’performance to them. Such candid communication to subordinates, unless doneskillfully, seriously risks damaging their self-esteem. The bigger dilemma,however, is that failure by managers to communicate a candid appraisal ofperformance makes it difficult for employees to develop a realistic view oftheir own performance, thus increasing the possibility of dissatisfaction withthe pay they are receiving.

3. Employees often misperceive the rewards of others;their misperception can cause the employees to become dissatisfied. Evidenceshows that individuals tend to overestimate the pay of fellow workers doingsimilar jobs and to underestimate their performance (a defense of self-esteem-buildingmechanism). Misperceptions of the performance and rewards of others also occurbecause organizations do not generally make available accurate informationabout the salary or performance of others.

4. Finally, overall satisfaction results from a mix ofrewards rather than from any single reward. The evidence suggests thatintrinsic rewards and extrinsic rewards are both important and that they cannotbe directly substituted for each other. Employees who are paid well forrepetitious, boring work will be dissatisfied with the lack of intrinsicrewards, just as employees paid poorly for interesting, challenging work may bedissatisfied with extrinsic rewards.

Rewardsand motivation

From the organization’s point of view, rewards are intended to motivatecertain behaviors. But under what conditions will rewards actually motivateemployees? To be useful, rewards must be seen as timely and tied to effectiveperformance.

One theory suggests that the following conditions are necessary foremployee motivation.

1. Employees must believe effective performance (orcertain specified behavior) will lead to certain rewards. For example,attaining certain results will lead to a bonus or approval from others.

2. Employees must feel that the rewards offered areattractive. Some employees may desire promotions because they seek power, butothers may want a fringe benefit, such as a pension, because they are older andwant retirement security.

3. Employees must believe a certain level ofindividual effort will lead to achieving the corporation’s standards ofperformance.

As indicated, motivation to exert effort is triggered by the prospect ofdesired rewards: money, recognition, promotion, and so forth. If effort leadsto performance and performance leads to desired rewards, the employee issatisfied and motivated to perform again.

As mentioned above, rewards fall into two categories: extrinsic andintrinsic. Extrinsic rewards comefrom the organization as money, perquisites, or promotions or from supervisorsand coworkers as recognition. Intrinsic rewards accrue from performing the taskitself, and may include the satisfaction of accomplishment or a sense ofinfluence. The process of work and the individual’s response to it provide theintrinsic rewards. But the organization seeking to increase intrinsic rewardsmust provide a work environment that allows these satisfactions to occur;therefore, more organizations are redesigning work and delegatingresponsibility to enhance employee involvement.

Equityand participation

 The ability of a reward systemboth to motivate and to satisfy depends on who influences and/or controls thesystem’s design and implementation. Even though considerable evidence suggeststhat participation in decision making can lead to greater acceptance ofdecisions, participation in the design and administration of reward systems israre. Such participation is time-consuming.

Perhaps, a greater roadblock is that pay has been of the laststrongholds of managerial prerogatives. Concerned about employee self-interestand compensation costs, corporations do not typically allow employees toparticipate in pay-system design or decisions. Thus, it is not possible to testthoroughly the effects of widespread participation on acceptance of and trustin reward system.

Compensationsystems: the dilemmas of practice

A body of experience, research and theory has been developed about howmoney satisfies and motivates employees. Virtually every study on theimportance of pay compared with other potential rewards has shown that pay isimportant. It consistently ranks among the top five rewards. The importance ofpay and other rewards, however, is affected by many factors. Money, forexample, is likely to be viewed differently at various points in one’s career,because the need for money versus other rewards (status, growth, security, andso forth) changes at each stage. National culture is another important factor.American managers and employees apparently emphasize pay for individualperformance more than do their European or Japanese counterparts. European andJapanese companies, however, rely more on slow promotions and seniority as wellas some degree of employment security. Even within a single culture, shiftingnational forces may alter people’s needs for money versus other rewards.

Companies have developed various compensation systems and practices toachieve pay satisfaction and motivation. In manufacturing firms, payroll costscan run as high as 40% of sales revenues, whereas in service organizationspayroll costs can top 70%. General managers, therefore, take an understandableinterest in payroll costs and how this money is spent.

The traditional view of managers and compensation specialists is that ifthe right system can be developed, it will solve most problems. This is not aplausible assumption, because, there is no one right answer or objectivesolution to what or how someone should be paid. What people will accept, bemotivated by, or perceive as fair is highly subjective. Pay is a matter of perceptionsand values that often generate conflict.

Management’s influence on attitudes toward money

Many organizations are caught up in a vicious cycle that they partlycreate. Firms often emphasize compensation levels and a belief in individualpay for performance in their recruitment and internal communications. This islikely to attract people with high needs for money as well as to heighten thatneed in those already employed. Thus, the meaning employees attach to money ispartly shaped by management’s views. If merit increases, bonuses, stockoptions, and perquisites are held out as valued symbols of recognition andsuccess, employees will come to see them in this light even more than theymight have perceived them at first. Having heightened money’s importance as areward, management must then respond to employees who may demand more money orbetter pay-for-performance systems.

Firms must establish a philosophy about rewards and the role of pay inthe mix of rewards. Without such a philosophy, the compensation practices thathappen to be in place, for the reasons already stated, will continue to shapeemployees’ satisfactions, and those expectations will sustain the existingpractices. If money has been emphasized as an important symbol of success, thatemphasis will continue even though a compensation system with a slightlydifferent emphasis might have equal motivational value with feweradministrative problems and perhaps even lower cost. Money is important, butits degree of importance is influenced by the type of compensation system andphilosophy that management adopts.

Payfor performance

Some reasons why organizations pay their employees for performance areas follows:

under the right conditions, a pay-for-performance system can motivatedesired behavior.

a pay-for-performance system can help attract and keepachievement-oriented individuals.

a pay-for-performance system can help to retain good performers whilediscouraging the poor performers.

In the US, at least, many employees, both managers and workers, prefer apay-for-performance system, although white-collar workers are significantlymore supportive of the notion than blue-collar workers.

But there is a gap, and the evidence indicates a wide gap, between thedesire to devise a pay-for-performance system and the ability to make such asystem work.

The most important distinction among various pay-for-performance systemsis the level of aggregation at which performance is defined — individual,group, and organizationwide. Several pay-for-performance systems are summarizedin the exhibit that follows.

Individual performance



Organizationwide performance

Merit system

Piece rate

Executive bonus

Productivity incentive

Cost effectiveness

Profit sharing


Historically, pay for performance has meant pay for individualperformance. Piece-rate incentive systems for production employees and meritsalary increases or bonus plans for salaried employees have been the dominantmeans of paying for performance. In the last decade, piece-rate incentivesystems have dramatically declined because managers have discovered that suchsystems result in dysfunctional behavior, such as low cooperation, artificiallimits on production and resistance to changing standards. Similarly, morequestions are being asked about individual bonus plans for executives as topmanagers discovered their negative effects.

Meanwhile, organizationwide incentive systems are becoming more popular,particularly because managers are finding that they foster cooperation, whichleads to productivity and innovation. To succeed, however, these plans requirecertain conditions. A review of the key considerations for designing apay-for-performance plan and a discussion of the problems that arise when theseconsiderations are not observed follow.

Individual pay for performance. Thedesign of an individual pay-for performance system requires an analysis of thetask. Does the individual have control over the performance (result) that is tobe measured? Is there a significant effort-to-performance relationship? Formotivational reasons already discussed such a relationship must exist.Unfortunately, many individual bonus, commission, or piece-rate incentive plansfall short in meeting this requirement. An individual may not have control overa performance result, such as sales or profit, because that result is affectedby economic cycles or competitive forces beyond his or her control. Indeed,there are few outcomes in complex organizations that are not dependent on otherfunctions or individuals, fewer still that are not subject to external factors.

Choosing an appropriate measure of performance on which to base pay is arelated problem incurred by individual bonus plans. For reasons discussedearlier, effectiveness on a job can include many facets not captured by cost,units produced, or sales revenues. Failure to include all activities that areimportant for effectiveness can lead to negative consequences. For example,sales personnel who receive a bonus for sales volume may push unneededproducts, thus damaging long-term customer relations, or they may push anunprofitable mix of products just to increase volume. These same salespeoplemay also take orders and make commitments that cannot be met by manufacturing.Instead, why not hold salespeople responsible for profits, a more inclusivemeasure of performance? The obvious problem with this measure is that salespersonnel do not have control over profits.

These dilemmas constantly encountered and have led to the use of moresubjective but inclusive behavioral measures of performance. Why not observe ifthe salesperson or executive is performing all aspects of the job well? Moremerit salary increases are based on subjective judgments and so are someindividual bonus plans. Subjective evaluation systems though they can beall-inclusive if based on a thorough analysis of the job, require deep trust inmanagement, good manager-subordinate relations, and effective interpersonalskills. Unfortunately, these conditions are not fully met in many situations,though they can be developed if judged to be sufficiently important.

Group and organizationwide pay plans.Organizational effectiveness depends on employee cooperation in most instances.An organization may elect to tie pay, or at least some portion of pay,indirectly to individual performance. Seeking to foster team-work, a companymay tie an incentive to some measure of group performance, or it may offer sometype of profits or productivity-sharing plan for the whole plant or company.

Gains-sharing plans have been used for years in many varieties. The realpower of a gains-sharing plan comes when it is supported by a climate ofparticipation. Various structures, systems, and processes involve employees indecisions that improve the organization’s performance and result in a bonusthroughout the organization.

Russian management’s approach to motivation.

Nowadays, top managers at Russian companies don’t pay much attention tothe employee motivation. Not only is it the result of the long communistbackground of the country, but it also is somewhat affected by the nationaltraditions, customs and mentality.

Many of the recently “commercialized” enterprises believe that employeesare to be satisfied with their salary only, and a pay-for-performance systemis, therefore, of no need. However, the failure to observe the differentmotivation factors, such as money, respect, promotion and others, can lead to aworsening performance and, as a result, to a lower efficiency organizationwide.

On the other hand, money is not considered to be the most influencingmotivation factor by the employees themselves. Though it may be a more vitalneed of most Russian workers in comparison with their Western colleagues, atthe same time they put more value on the cooperative atmosphere in theorganization, rather than on the money side. And, thus, it is reasonable forthe management to base the performance incentive system on some other factors,such as work security, pension etc. It’s hard to predict the situation in thelong-run, however one can expect that the value put on money as a performancemotivation factor will rise.

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Searle, John G., Manage People, Not Personnel, AHarvard Business review book, 1990

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