Using incentives to support new behaviors

Organizations expend a huge amount of resources on pay. How successful are monetary incentives in shaping and altering employee behaviors?

A. Pay for performance.

1. Pay for performance—pay that is tied to the performance in the form of either a merit raise to base pay or an incentive bonus that does not increase base pay.

2. Many different options are available. Organizations need to look for a mix of rewards to ensure alignment between employee behaviors and strategic goals.

3. Key question deals with level of aggregation: should PP incentive be targeted at individuals, teams, or the organization?

a. Pay for individual performance is the most popular form in the U.S. – see exhibit 6-6, p. 153.

i. Piece rate—employee earns all or part of a wage based on number of units produced.

ii. Commission—sales person earns all or part of a wage based on number of units sold.

iii. Merit pay—employee earns raise to base wage based on performance evaluation.

iv. Bonus—employee earns extra payment based on performance evaluation.

b. Pay for individual performance plans have many potential pitfalls.

i. Individuals do not always have control over the outcomes that are being measured and rewarded.

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall 74 ii. Incentive systems do not always target appropriate

measures of performance.

iii. The pay increments for outstanding performance must be perceived as significant in order to be motivating.

iv. To be effective, raises should be accompanied by public recognition and praise, but this is often hampered by secrecy and concern over confidentiality.

v. Pay for performance must be based on valid judgment, not subjective assessment.

In addition, exhibit 6-7 on p. 154 shows the following problems:

- Performance appraisals on which raises are often based are inherently subjective, with supervisors evaluating subordinates according to their own preconceived biases.

- Emphasize individual rather than group goals that may lead to dysfunction conflict in the organization.

- Encourage a short-term orientation (the performance period being evaluated) at the expense of long-term goals.

- Merit pay raises become an annuity on which employees continue to draw regardless of future performance.

- The often lengthy time lag between actual performance and reward undermines perceived connection between the two.

- Many of today’s jobs cannot be individually isolated and precisely measured without taking into account complex interdependencies.

- Pay differentials between performance levels tend to be relatively small and therefore of questionable behavioral value.

- Actual payout of program often determined by organizational factors beyond the control of individual

employees and only indirectly related to actual performance.

c. Team-based bonus plans are becoming more popular.

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall 75 1. Teams can share a performance bonus equally or allocate to individual members based on an evaluation of their

contribution.

i. Team-based bonuses enhance team performance, although the effect is relatively weak.

ii. Team-level bonuses can hurt collaboration among and between teams.

d. Because strategic renewal focuses on organizational

performance, organization-level incentives often supplement or replace individual bonuses.

i. Part of Asda’s strategic renewal was to offer an organization-level performance bonus to all employees, encouraging everyone to keep focus on the same measures of overall effectiveness.

ii. Stock options are intended to tie the total compensation package to the overall performance of the firm.

iii. Actual effectiveness of organization-level bonuses is unclear – does the performance bonus result in or from outstanding performance?

Theory into practice:

• Individual incentives will be most effective in shaping behavior when the individual controls the outcomes being measured and rewarded, when the outcomes are tied to improved performance, when the evaluation of an employee’s contribution are perceived as being valid, and when the difference between rewards for high and low performance are significant.

• Organizations call upon team-based performance bonuses to enhance the effectiveness of teams, but the bonus may undermine collaboration between teams.

• Bonuses based on the overall performance of the organization make a symbolic statement recognizing the shared purpose and responsibility of all employees and organizational units.

B. Pay and motivation.

1. Distinguish between intrinsic and extrinsic rewards.

a. Extrinsic rewards are rewards (pay, promotion, praise, etc.) provided by the organization to employees.

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall 76 b. Intrinsic rewards are rewards (feelings of pride, satisfaction, and self-esteem) that accrue to the individual based on the performance of a task.

c. Organizations need to use a combination of intrinsic and extrinsic rewards. Overreliance on extrinsic rewards may dampen internal motivation.

d. Providing employees with development opportunities, autonomy and performance feedback are good strategies.

e. Unless rewards are perceived to be equitable, employees will not be motivated to support the goals of organizational change.

f. Pay equity is a perception by employees that their pay is fair and equitable in relationship to others—peers inside the organization and out, as well as subordinates and superiors in the hierarchy.

Theory into Practice:

• By relying heavily on extrinsic rewards to shape employee behavior,

organizations risk driving out the intrinsic rewards that might be associated with the work; as a result, curiosity, creativity, and problem-solving

behaviors may be lessened.

• Organizations will not be able to call on intrinsic motivation unless employees feel that they are being paid equitably.

C. Sequencing the introduction of incentives.

1. Change leaders make choices about incentive design based in part on what behaviors they wish to impact.

a. At what level of performance will incentives be set?

b. How large will potential incentive earnings be in relationship to base salary?

c. To what extent will the incentives emphasize short-term or long-term performance or some blend of the two?

d. How far up and down the hierarchy will incentives be offered?

2. Change leaders also have to decide when in the implementation process to introduce redesigned incentives.

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall 77 Theory into Practice:

• Introducing new incentives early in a change implementation process risks several negative consequences: over focus on pay rather than on new strategies, compliance rather than commitment, and unintended

consequences.