Tackling the Climate Change Issue in Malawi
April 15, 2018
Technical Email
April 16, 2018
Show all

The Effectiveness of Monetary Incentives on Job Performance

Introduction Nowadays, business environments have become increasingly dynamic and competitive. Due to globalisation and technological change, many companies today are trying to identify innovative compensation strategies that are directly linked to improving organizational performance as well as to make the companies become more flexible and adaptive. According to Appelbaum and Mackenzie (1996), the fundamentals of incentive pay and how it associates with known organizational behaviour theories can be correlated with the achievement of company goals through the use of reward system.

Basically, employees work because of money and they desire to receive fair wages and salaries for their contributions. Whereas employers want their workers to feel that is what they are getting and at the same time wish to maximize firm value. Hence, it is rational that employees and employers perceive money as the basic incentive for satisfactory job performance. Campling, Poole, Wiesner and Schermerhorn (2006) suggest that the use of monetary incentives in the classic ‘work performance paradigm’ is based mainly on the ‘Reinforcement Theory. Under this theory, managers must concentrate on the relationship between target behaviour (job performance) and its consequences (pay), as well as emphasized on the principles and techniques of organizational behaviour modification. Campling et al. (2006, p. 398) define organizational behaviour modification as ‘the application of operant conditioning to influence human behaviour at work. ’ According to Ballentine, McKenzie, Wysocki and Kepner (2003), monetary incentives include salary increases, profit sharing plans, stock options, warrants, individual and small-group rewards, merit pay, project bonuses, and additional paid vacation time.

The purpose of such incentives is to reward employees for outstanding job performance through money. However, the effectiveness of monetary incentives on job performance has become critical issues in organizations today. Financial incentives, their use and misuse, have long been the focus of numerous researchers (Gibbons 1998; Gupta, Jenkins, Mitra and Shaw, 1998; Katz, 2000; Vecchio, 2003; Govindarajulu and Daily, 2004; McCausland, Pouliakas and Theodossiou, 2005; Fielding, 2007) dedicated to maximizing human and job performance.

In the next section, a review of the literature on the impact of monetary incentives on job performance will be presented, followed by several motivational theories that can be associated with financial incentives and work performance, and also an examination of monetary rewards that focus on individual and group performance as well as productivity. Subsequently, the effectiveness of profit sharing plans on job performance will be examined too. Finally, conclusions are offered. Literature Review Monetary Incentives in the Workplace

According to Govindarajulu and Daily (2004), monetary incentives may be one of the strongest motivators for encouraging employees to perform better. Research shows that monetary rewards significantly influence job satisfaction and work motivation. Gupta et al. (1998) agree and suggest that monetary incentives motivate employees whether their jobs are exciting or boring, in labs and real-world settings alike. Moreover, some investigators indicate that financial incentives show a positive impact on job performance of high-paid employees only.

This is because higher-paid employees derive a utility advantage from what they perceive as supportive reward systems (McCausland et al. , 2005). Whereas for lower-paid workers, performance pay is perceived to be controlling (Cummings and Worley, 2005), and hence, monetary incentives prove to be counter-productive for certain low-paid employment in the long run. Similarly, research team also finds that money is not the only thing that concerns employees because higher salaries will make employees happier, but it will not “buy” better performance.

Therefore, money is not termed as a ‘motivator’, but rather they call it a ‘director’ of behaviour (MAE, n. d. ). Furthermore, Gupta et al. (1998) advise that employers who distribute small merit raises may do more harm than good as small raises can actually be dysfunctional in terms of motivation. Thus, employees become frustrated that their effort yielded so little. Kohn (1993, cited in Ballentine et al. , 2003, p. 2) also argues that ‘monetary incentives encourage compliance rather than risk-taking because most rewards are based only on performance. Consequently, employees are discouraged from being creative in the workplace. Monetary incentives are effective if employees have to complete with simple task By focusing on ‘simple jobs’ where a measure of performance is easily available and observable, Gibbons (1998) finds that employees can perform better and thus, shows a positive effect of monetary incentives on job performance. In contrast, Bohnet and Oberholzer-Gee (2001, cited in Bohnet and Eaton, 2002) have conducted a survey on the effect of performance pay on productivity.

They investigate the impact of monetary incentives on the number and the quality of suggestions for improvement submitted to about 1000 firms over 10 years. They find that when employees are faced with a more complex task than a simple project as well as in charge of multiple tasks, it demonstrates that higher piece rates increase the number but reduce the quality of suggestions produced and have a negative impact on overall performance. Monetary incentives are effective if employees mainly work for money

Basically, the assumptions behind the relationship between monetary incentives and job performance depend on a theory about people that is grounded in what Douglas McGregor called ‘Theory X’, which assumes that employees have little ambition, dislike work and avoid responsibility. McGregor (1960, cited in Bolman and Deal, 2003) argues that in reality, most employees would benefit from ‘Theory Y’, which assumes that employees enjoy work, seek responsibility and can exercise self-direction. On the other hand, Alderfer’s ERG Theory collapses Maslow’s five needs categories into three.

Alderfer argues that the three fundamental human needs coexist at the same time so that pay will help with “existence” needs, but not with social or growth needs. A good management and elegant organizations are required for employees to have successful group experiences (for relatedness) and for continuous growth and development as well as a sense of achievement. Therefore, a performance pay advocate is implicitly putting a great deal of emphasis on the ‘material’ needs of employees and must be cautious of neglecting other needs like social relationships and learning (Wiley, 1997; Bohnet and Eaton, 2002).

According to Katz (2000), intrinsic motivation decrease when extrinsic rewards such as monetary incentives were linked to performance on interesting and appealing tasks. This is because when workers were rewarded for doing work they already enjoyed, they observed themselves accepting a reward and implied that they must be working for the reward rather than for intrinsic enjoyment of the task (Katz, 2000; Fielding, 2007). Therefore, extrinsic rewards reduce intrinsic interest and negatively influenced the overall job performance.

Similarly, Frederick Herzberg (1968, cited in Campling et al. , 2006) describes salary as a ‘hygiene factor. ’ He argues that salary levels will mostly generate negative feedback to an organization, especially when compared to intrinsically motivating factors such as a sense of achievement and the commitment with one’s values. Kohn (1993, cited in Ballentine et al. , 2003, p. 13) shares the same view and suggests that managers should ‘pay people well, pay people fairly, and then do everything possible to get money off their minds. ’

In contrast, studies show that extrinsic rewards can weaken or enhance intrinsic motivation, depending upon how the rewards are constructed. Harackiewicz, Manderlink and Sansone (1985, cited in Katz, 2000) explain that rewards have three aspects which are ‘evaluation, performance feedback and reward value. ’ The evaluation aspect encourages feelings of external control and so diminishes intrinsic motivation. The feedback aspect encourages feelings of internal control and the reward value aspect makes the incentive as a symbolic sign of achievement.

Both aspects therefore improve intrinsic motivation. Wiersma (1992, p. 102) agrees and finds that ‘extrinsic rewards can increase intrinsic motivation if they are perceived as providing information about competence. ’ The effectiveness of monetary incentives on individual performance The perception that linking money to performance is enhanced when rewards are administered on the basis of individual performance.

This is because it forces individuals to perform, encourage risk-taking behaviour, seek responsibility for their own actions (Milkovich and Newman, 1990, cited in Katz, 2000) and tend to rely on objective measures of performance which include productivity and cost effectiveness (Lawler, 1981, cited in Vecchio, 2003). According to Milkovich and Newman (1990, cited in Katz, 2000), individual schemes promote a sense of accomplishment and provide a valuable source of performance feedback when such systems successfully differentiate between high and low performers.

Therefore, Condly, Clark and Stolovitch (2003) find that the best performance-based pay systems are likely to be individual schemes. On the contrary, Vecchio (2003, p. 91) argue that ‘the potential for falsification of performance reports produce the belief that the scheme is unfair. ’ Cummings and Worley (2005) indicate that individual schemes encourage competition among employees, and tend to have insufficient information sharing (Appelbaum and Mackenzie, 1996). Thus, this can hinder good relationships between employees and eventually affect their job performance (Kohn, 1993, cited in Ballentine et al. 2003). The effectiveness of monetary incentives on group performance When monetary incentives are based on group performance, group members tend to encourage each other to make positive contributions (Cummings and Worley, 2005), foster interpersonal relationships (Slavin, 1983, cited in Katz, 2000), and share information among themselves (Campling et al. , 2006). Furthermore, Condly et al. (2003) have demonstrated that the team will cooperate effectively and that each member will put in maximum effort because of the perception that ‘success is mutually beneficial’ (Vecchio, 2003, p. 1). However, group-based rewards do have some drawbacks. High performers may hesitate from exerting themselves and force the low performers to put in more effort. Thus, low performers may face non-cooperative working relationship (McCausland et al. , 2005), the absence of commitment to organizational objectives (Appelbaum and Mackenzie, 1996), and have little incentive to acquire training and increase their contribution (Katz, 2000). The effectiveness of profit sharing plans (monetary incentives) on job performance

Other types of monetary incentives are profit-sharing plans which ‘distribute to some or all employees a proportion of net profits earned by the organisation during a stated performance period’ (Campling et al. , 2006, p. 404). This system provides a strong incentive for workers to be more concerned with the company. It is expected that employees tend to work as a team and accept responsibility for enhancing the company’s profitability. Appelbaum and Mackenzie (1996) and Fielding (2007) have agreed that financial rewards are measurable and objective.

Hence, management would not showing bias, which would cause this motivational strategy to be a failure. In contrast, the issues encountered with profit sharing plans are often related to the possible unwillingness of the employer to sacrifice a share of profits, often seeing it as an interruption into management rights (Lanthier, 1989, cited in Appelbaum and Mackenzie, 1996), and do not ensure whether employees will be concentrated on productivity improvement, or other critical aspects for the company’s success (Campling et al. , 2006; Fielding, 2007). If profit levels are ever too low to be distributed, employees will feel dissatisfied.

Even though this does not happen, employees may raise objections to the lack of recognition for their individual achievements. In any circumstances, a negative situation would cause to diminish employee morale, which eventually weakens employees’ motivation and performance (Wiley, 1997; Cummings and Worley, 2005). Conclusion In conclusion, it is perceived that incentive compensation plans can be a successful motivator on job performance. There is a strong support for the claims that monetary incentives can significantly improve work performance when they are carefully implemented and performance is measured before and uring the incentive plans (Condly et al. , 2003). However, their effectiveness is dependent upon organizational conditions. Given both the pros and cons, it shows that financial incentives are effective if the given tasks are simpler and less interdependent. Alternatively, when knowledge-sharing and cooperation are important to accomplish a complex task, monetary incentives should be group based. In general, the theories mentioned above are a part of the broad field of human motivation study and have direct implications for workplace behaviour.

Aldefer’s ERG theory approach provides an additional means for understanding human needs and their influence on people at work (Campling et al. , 2006). Whereas Herzberg’s Motivation-Hygiene Theory suggests that intrinsic factors are related to job satisfaction and motivation, and extrinsic factors are associated with job dissatisfaction. Herzberg describes salary as a ‘hygiene factor’ and argues that salary levels will mostly cause a negative effect to an organization, especially when compared to intrinsically motivating factors.

Thus, ‘the most successful method of motivating is to build challenge and opportunity for achievement into the job itself’ (Wiley, 1997, p. 277). On the other hand, if employees mainly work for money, they can perform better and studies show that extrinsic reward such as money can enhance, hinder, or have no impact on intrinsic motivation, depending upon which of the three aspects: evaluation, performance feedback and reward value is made most prominent (Harackiewicz et al. , 1985, cited in Katz, 2000).

For profit sharing plans, employees tend to be more involved with the company, cooperating effectively with each other and contributing to the effectiveness of the work as well as increasing the company’s profitability. However, the theory and research developed to date do provide some drawbacks of monetary incentives. It shows that employees may be deterred from being creative in the workplace and when they are confronted with more complex tasks as well as in charge of multiple tasks, financial incentives are ineffective. Moreover, studies reveal that extrinsic rewards diminish ntrinsic motivation when monetary incentives were linked to job performance as workers are now working for the reward rather than for intrinsic enjoyment of the task. For individual incentives, it tends to create competition among employees and lack of information sharing. Whereas for group incentives, low performers may face non-cooperative working relationship. Under profit sharing plans, they focus only on the goal of profitability, the pay for each employee goes up or down together and employers cannot make sure whether their employees will put in maximum effort for achieving company’s goals.

In fact, monetary incentives do provide some positive and negative effects on job performance. Research shows that the effectiveness of monetary incentives on work performance may be temporary, rather than long term. According to Appelbaum and Mackenzie (1996, p. 38), ‘the challenge of aligning an organization’s incentive compensation elements to produce the behaviours that support the business strategy will be the critical success factor in enhancing an organization’s strategic effectiveness. ’ Management needs to have good incentive systems that consistently sustain the strategy.

Furthermore, the ways to motivate employees is critical to every manager’s job. Therefore, additional research should be done to gain a continuous view of what motivates employees to perform their best work and provide a comprehensive framework for managers on the factors that affect employee motivation (Govindarajulu and Daily, 2004). (Word Count: 2160) BIBLIOGRAPHY Appelbaum, S. H. , and Mackenzie, L. 1996, ‘Compensation in the year 2000: pay for performance? ’, Health Manpower Management, vol. 22, no. 3, pp. 31-39; http://0www. emeraldinsight. com. library. u. edu. au/Insight/viewPDF. jsp? Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/0390220307. pdf (13 April 2007). Ballentine, A. , McKenzie, N. , Wysocki, A. , and Kepner, K. 2003, ‘The role of monetary and non-monetary incentives in the workplace as influenced by career stage’, April, pp. 1-3; http://edis. ifas. ufl. edu/pdffiles/HR/HR01600. pdf (16 Apr 2007). Bohnet, I. , and Eaton, S. C. 2002, ‘Does performance pay perform? ’, pp. 1-26; http://www. ksg. harvard. edu/visions/deans_research_seminar/for_the_people_chpt_13. pdf (13 April 2007).

Bolman, L. G. , and Deal, T. E. , 2003, Reframing Organizations: Artistry, Choice, and Leadership, 3rd Edition, Jossey-Bass, San Francisco. Campling, J. , Poole, D. , Wiesner, R. , and Schermerhorn, J. R. 2006, Management, 2nd Asia-Pacific Edition, John Wiley and Sons Australia, Milton. Condly, S. J. , Clark, R. E. , and Stolovitch, H. D. 2003, ‘The effects of incentives on workplace performance: A meta-analytic review of research studies’, Performance Improvement Quarterly, vol. 16, no. 3, pp. 44-63; http://www. ispi. org/pdf/Vol16_03_46condly. df ( 12 April 2007). Cummings, T. G. , and Worley, C. G. 2005, Organization Development and Change, 8th Edition, Thomson, South-Western. Fielding, R. L. 2007, ‘Employee motivation strategies’, Concept Marketing Group, Inc. ; http://www. marketingsource. com/articles/view/3313 (15 April 2007). Gibbons, R. 1998, ‘Incentives in organizations’, Journal of Economic Perspectives, vol. 12, pp. 115-132. Govindarajulu, N. , and Daily, B. F. 2004, ‘Motivating employees for environmental improvement’, Industrial Management & Data Systems, Vol. 104, no. 4, pp. 364-372; ttp://www. emeraldinsight. com/Insight/viewContentItem. do? contentType=Article=lnkhtml=850202 (13 April 2007). Gupta, N. , Jenkins, J. G. D. , Mitra, A. , and Shaw, J. D. 1998, ‘Are financial incentives related to performance? A meta-analytic review of empirical research’, Journal of Applied Psychology, vol. 83, pp. 777-787. Katz, N. R. 2000, ‘Incentives and performance management’, June, pp. 1-11; http://www. ksg. harvard. edu/visions/performance_management/katz_incentives. htm (16 April 2007). Mae, L. D. , ‘Does money motivate employees? http://www. personnelsystems. com/motivate. htm (15 April 2007). McCausland, W. D. , Pouliakas, K. , and Theodossiou, I. 2005, ‘Some are punished and some are rewarded: A study of the impact of performance pay on job satisfaction’, International Journal of Manpower, vol. 26, no. 7/8, pp. 636-659; http://0www. emeraldinsight. com. library. vu. edu. au/Insight/viewPDF. jsp? Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/0160260703. pdf (12 April 2007). Vecchio, R. P. 2003, Organizational Behavior Core Concepts, 5th Edition, Thomson, South-Western.

Wiersma, U. J. 1992, ‘The effects of extrinsic rewards in intrinsic motivation: a meta-analysis’, Journal of Occupational and Organizational Psychology, vol. 65, no. 2, pp. 101-114. Wiley, C. 1997, ‘What motivates employees according to over 40 years of motivation surveys’, International Journal of Manpower, vol. 18, no. 3, pp. 263-280; http://0www. emeraldinsight. com. library. vu. edu. au/Insight/viewPDF. jsp? Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/0160180303. pdf (14 April 2007).