Motivation In Accounting Decisions To Managers Accounting Essay

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Motivation is an essential element in performing decision tasks, yet it has received limited attention and less explored study in accounting decision research. This literature review is divided into two major sections. The first section describes the comparison of findings in motivation research of employee motivation through both financial and non-financial incentive programs in firms. In the second section, a review of the accounting literature illustrates the current emphasis of incentives as motivation in accounting decisions to managers.

2.2 Employee Motivation

When examining methods or ways of motivation that can actually be applied in the workplace, we normally categorise them into financial and non-financial methods. Some of the firm's management are motivated by recognition whilst others are motivated by cash incentives.

Prior literature has found that evaluators tend to rely on performance outcomes rather than actions or non-financial drivers of performance outcomes when evaluating the performance of managers (Ittner et. al. 2003; Lipe 1993). In the context of yearly bonus compensation, Ittner et. al. (2003) find that managers tend to decrease the "balance" in bonus awards by shifting weights from non-financial to financial measures of performance. The extent to which non-financial performance measures are used in promotion decisions is an open empirical question.

2.2.1 Financial Incentives

The keys to financial success and a profitable business are not the strategies or the systems of the firm. The success of any business depends largely on the motivation of the employees. Financial incentive programs are designed to inspire and boost employee loyalty and also, to increase productivity among employees to eventually result in better financial position of a firm.

Herzberg (1959) stressed that pay and other forms of financial remuneration are key methods of ensuring the satisfaction of workers. Herzberg proposes that motivation is a function of motivator and hygiene factors. Motivator factors include type of work, recognition, advancement, and responsibility. Hygiene factors include company policies and administration, technical supervision, salary, working conditions, and interpersonal relations within the workplace. Motivator factors are associated with positive feelings of job satisfaction while hygiene factors are associated with negative feelings of job satisfaction. Herzberg's theory holds that only motivator factors lead to individual motivation. Hygiene factors can prevent job dissatisfaction, but cannot lead to job satisfaction. Meagher (1979) used Herzberg's theory to study accountants in industry. He found that accountants placed much higher importance on motivator factors than hygiene factors. Salary, the equivalent of reward structure, appeared to be less important than type of work. This is also consistent with cognitive evaluation theory where the enjoyment of the task itself is more important than reward structure.

The use of monetary or other financial incentives or rewards in the classic "work performance paradigm" is based on reinforcement theory. Reinforcement theory emphasizes on the relationship between a target behaviour (e.g., work performance) and its consequences (e.g., pay), and it is premised on the principles and techniques of organizational behaviour modification. Organizational behaviour modification is a framework within which employee behaviours are identified, measured and analyzed in terms of their functional consequences (i.e., existing reinforcements) and where an intervention is developed using principles of reinforcement.

 In multi-person organisational environments, researchers have found that performance-related contracts, linking rewards to monitoring variables, motivate individuals to improve their performance in a range of tasks, as compared to contracts with fixed rewards (Sprinkle, 2003). Economists widely use performance based rewards in their belief that incentives are necessary to stimulate subjects' cognitive effort which in turn ensures that decision errors are largely avoided and performance is measured reliably. What impact do monetary incentives have on motivation?

Early research suggested that when extrinsic rewards such as monetary incentives were linked to performance on interesting and appealing tasks, intrinsic motivation decreased. The reason for this effect was that when workers were rewarded for doing work they already enjoyed, they observed themselves accepting a reward and inferred that they must be working for the reward rather than for intrinsic enjoyment of the task. Extrinsic rewards thus dampened intrinsic interest (Deci; Lepper, et al.). Extrinsic motivation

Extrinsic motivation arises from a condition or conditions in the external environment. Condry and Stokker (1992) define extrinsic motivation as the drive for a goal outside of the individual. In a business context, this is represented as working hard to receive, for example, a financial reward or recognition from an employer.

The study of extrinsic motivation has largely been driven by two theories: operant theory (Skinner, 1953) and drive theory (Hull, 1943). Operant theory holds that all voluntary behaviours are extrinsically motivated by operationally separable reinforcements.

However, a common environment for employees with decision-making authority is one in which the two roles for information are combined. Employees have access to information that could enhance their performance of a task, and their task performance is monitored. Thus, an interesting question, relating to the use of formal performance-related rewards as well as to the provision of accounting information, is whether, in these more complex yet widespread environments, formal performance-related rewards enhance the use decision-makers make of valuable decision-related information and, therefore, improve task performance.

To put the issue another way, the two functions of information may not be independent: if an employee could improve decision-making by accessing and utilising information, but needs to be motivated to do so by a formal linking of subsequent extrinsic rewards to some measure of performance, then it is reasonable to suppose that an employee with formal performance-related rewards would make better use of decision-facilitating information, and on average also perform better as a result, than an employee with fixed rewards.

A study by McGraw and McCullers (1979) indicated that extrinsic incentives can result in less cognitive flexibility. Intrinsic motivation

Both the drive and operant theories of motivation have failed to completely explain curiosity or exploratory motivation. In response to this failure, Maslow (1943), White (1959) and Harlow (1958) proposed that another type of motivation exists (i.e., intrinsic motivation).

Maslow (1943) suggested autonomy as the basic psychological need to be the source of one's actions. While Maslow recognized the importance of drive theory, he held that there are other innate needs, such as autonomy, that are not derivatives of the basic drives associated with tissue deficits. The innate needs of Maslow's theory are grouped into five hierarchically arranged categories. From the lowest to the highest need they include: 1) physiological needs (e.g., food, water, etc.), 2) needs of security (e.g., safety, stability, etc.), 3) needs of affiliation (e.g., friendship, belonging, etc.), 4) esteem needs (e.g., autonomy, self-worth, respect, etc.), and 5) self-actualization needs (e.g., acceptance of self and others). Maslow claimed that, in general, the lower-level needs must be met before an individual is motivated by the higher-level needs.

Maslow, White, and Harlow presented the first evidence of a different type of motivation that is now known as intrinsic motivation. Intrinsic motivation is somewhat related to the motivation described in drive theory because it is based on innate needs. However, it differs from drive theory motivation in that intrinsic motivation is based on innate psychological needs instead of physiological needs. Intrinsic motivation can be defined as an innate drive for an activity itself. In contrast to extrinsic motivation, there is no separable goal or reinforcement outside the activity (Condry and Stokker, 1992). Deci (1992) claims that intrinsically motivated behaviours are performed out of interest and require no "reward" other than the spontaneous internal experience of interest and enjoyment. This type of motivation may be exhibited when a rat runs in a spinning wheel but receives no food for its efforts. Extrinsic versus intrinsic motivation

Harackiewicz (1979) replicated the finding that extrinsic rewards decrease intrinsic motivation and expanded prior research by studying different reward structures. Harackiewicz employed two different reward structures, task-contingent and performance-contingent. Task-contingent rewards are defined as incentives given to work on or to complete a task. There is no specific level of performance to reach. In many respects, this might resemble a salary. Performance-contingent rewards, on the other hand, are given only for a specified level of performance. With performance contingent rewards, completion of the task is not enough; some degree of achievement must be shown in order to receive the reward. Performance-contingent rewards resemble a bonus or piece-rate pay scheme. Types of Financial Incentives

Buchan et al offer the following typology or range of incentives that can be concluded in remuneration packages: Financial and Non financial.

Clark and Wilson (1961) differentiate between three types of incentives:

Material incentives: tangible rewards often monetary -- wages, fringe benefits, patronage

Solidary incentives: intangible rewards from the act of association -- sociability, status, identification

Purposive incentives: intangible rewards related to the goals of the organization --- e.g., working on an election of a supported candidate.

Relationship between financial rewards and financial performance

Financial rewards practiced by an organizations plays an important role in motivating employees to perform. Organization's financial performance ultimately affects by employee performance. It also considered that improper reward practices may result below average financial performance of organisations. Most agree that reward practices act as motivators that shape the employees behaviours. According to prior researches, it is commonly believed that if financial rewards are effectively used, employees are motivated to perform high and that ultimately results financial performance. Financial performance is improved if there is a carefully crafted reward practice ( Allen & Helms;2001). It is difficult to relate financial reward with organisational financial performance (kerr, 1999).

2.2.2 Non- financial Incentives

The use of non-financial methods of motivation is attempts by employers, to apply in the workplace the ideas behind the theories of Mayo, Maslow and Hertzberg. Examination of these theories has shown us that motivation to achieve quality of output is best achieved through satisfaction of higher needs (Maslow), awareness of the role of groups in the workplace (Mayo), and the need to provide Motivators (Herzberg).

Non-financial performance measures may play a large role in promotion decisions in organizations. In particular, promotion in organizations serves two important functions: matching and the provision of incentives (Baker et. al. 1988; Gibbs 1995). Promotions provide incentives when they reward past performance with increased pay and rank in the organization. Promotions serve a matching function when they sort employees into the jobs for which their skills and abilities are best suited.


Much of the accounting literature has focused on extrinsic motivation. The work that has addressed intrinsic motivation has mostly adapted a macro analytic approach and has accordingly been restricted to field studies.

2.3.1 Field Studies

Using Maslow's (1943) hierarchy of needs theory, Carpenter and Strawser (1971) examined the needs of academic accountants. Smith and Uecker (1976) also applied Maslow's theory to test job satisfaction of internal auditors.

Consistent with the theory, they found that the degree of satisfaction decreased gradually up the Maslow's needs hierarchy. The biggest difference between satisfied and unsatisfied needs occurred between the affiliation and esteem levels. Although Maslow's theory is not the focus of this study, it is worth noting that both the Carpenter and Strawser (1971) and Smith and Uecker (1976) studies provided support for the notion that accountants recognize a need for autonomy and affiliation, two needs central to cognitive evaluation theory.

McClelland's (1962) trichotomy theory proposes that individuals have three strong needs: achievement, affiliation, and power. McClelland asserts that when a need is strong it will motivate an individual to use behaviour to satisfy the need. Harrell and Stahl (1984) used McClelland's trichotomy to explain why some individuals experience job satisfaction and others do not. As hypothesized, they found that partners' and managers' need for affiliation correlated negatively with job satisfaction. Harrell and Stahl explained that difficult personnel decisions made by partners would cause the partners with high affiliation needs to have lower satisfaction. It was also predicted in the study that the influence activities associated with job positions would allow those with high needs for power to experience satisfaction. As expected, the need for power correlated positively with job satisfaction for partners and managers, as well as for junior level audit/tax specialists. Need for achievement correlated positively with hours worked by junior-level audit/tax specialists but not for partners, managers or junior level consultants. Need for achievement also correlated with the firm's performance ratings of partners, managers and junior-level audit/tax specialists, but not junior level consultants. The Harrell and Stahl study confirms that accountants need affiliation and achievement (i.e., an aspect of efficacy), two basic psychological needs found in cognitive evaluation theory.

In a later study, Snead and Harrell (1991) examined job satisfaction of senior auditors as it is related to McClelland's trichotomy. Using path analysis, the authors concluded that job satisfaction is a direct determinant of the number of hours an individual was willing to work. This seems to be analogous to the relationship between task interest and response persistence found throughout the psychology literature and cognitive evaluation theory (e.g., Harackiewicz 1979; Ryan, Koestner, and Deci 1991; Deci et al. 1994).

Parker et al. (1989) asserted that motivation in accounting has been most frequently described using expectancy theory. Ferris (1977a, 1977b, 1978) studied the effect of environmental uncertainty on the predictive-ability of the expectancy model. A common hypothesis of all studies is that the level of perceived environmental uncertainty varies inversely with the level of job satisfaction. This was supported in one accounting firm but not the other. Performance, as measured by supervisors' ratings, was also studied. Ferris found that as environmental uncertainty increased, expectancy estimates decreased, and the predictive-ability of the expectancy model decreased with respect to performance. Overall, the predictive-ability of the model with respect to performance was low. This supports the case for needing a better theory of motivation in accounting.

2.3.2 Accounting Software as incentive to managers

For better accounting decisions, data has to be used in better ways. Data, on its own, has little impact on organisational structure and culture. The manager can be provided with accounting software in order to test all his decisions and see the correlation or impact on financial performance. Often, in the process of accounting knowledge, the accountants need intelligent products through which they can verify and implement accounting reasoning produced by the most valuable experts in the field.


Five categories of assumptions to managers will be presented:

1. Basic goals

2. Role of management

3. Nature of Decision-making

4. Role of the accounting department

5. Nature of accounting information

Emphasis is laid on these 2:

Decision-making Assumptions - A critical managerial function is decision‑making. Decisions which management must make may be classified as marketing, production, and financial. Decisions may also be classified as strategic and tactical and long‑run and short‑run. A primary objective of decision‑making is to achieve optimum utilization of the business's capital or resources. Effective decision‑making requires relevant information and special analysis of data.

Accounting Department Assumptions - The accounting department is a primary source of information necessary in making‑decisions. The accounting department is expected to provide information to all levels of management. Management will consider the accounting department capable of providing data useful in making marketing, production, and financial decisions.

2.4 Orientation of Variable

2.4.1 Financial performance

Researchers consider business performance as the aggregate results of the activities undertaken by an organization. That implies organizational performance includes different types of financial and non-financial success. Financial success includes sales, profit, cash flow, turnover, returns on investment, growth return on capital and inventory turnover.

Measuring performance includes three dimensions such as effectiveness, efficiency and adaptability. There is always trade-offs among these three. Success in one dimension compromises success in other dimensions. So, it does not guarantee the accuracy of performance (Richard & Marilyn; 2001).

Here are some indicators about several financial performances:

Return on assets

Net income

Cash flow

Return on Investment


2.4 Comparison in motivation research

The economic slump offers business leaders a chance to more effectively reward talented employees by emphasizing non-financial motivators rather than bonuses. Companies around the world are cutting back their financial-incentive programs, but few have used other ways of inspiring talent. Numerous studies have concluded that for people with satisfactory salaries, some nonfinancial motivators are more effective than extra cash in building long-term employee engagement in most sectors, job functions, and business contexts. Many financial rewards mainly generate short-term boosts of energy, which can have damaging unintended consequences.

A recent McKinsey Quarterly survey underscores the opportunity. The respondents view three noncash motivators-praise from immediate managers, leadership attention (for example, one-on-one conversations), and a chance to lead projects or task forces-as no less or even more effective motivators than the three highest-rated financial incentives: cash bonuses, increased base pay, and stock or stock options (exhibit). The survey's top three nonfinancial motivators play critical roles in making employees feel that their companies value them, take their well-being seriously, and strive to create opportunities for career growth. These themes recur constantly in most studies on ways to motivate and engage employees.

Although it must be remembered that both financial and nonfinancial methods have costs to the employer, either through direct costs such as extra pay, or indirectly through the provision of training or management time spent. The existence of these costs is one of the main reasons why a consistent approach to motivation is hard to achieve in the long run.

According to an organisational survey, on corporate attitudes, carried out by the professional services company KPMG in early 2007 reveals the leading role of financial rewards and bonuses in motivating workers and increasing their commitment to the company they work for. Nevertheless, the combined influence of non-financial incentives, such as showing recognition to employees and seeking their opinions, is also an important factor influencing workers' motivation.

How do owners of company usually agree with an incentive program? What kind of financial information do you think the business heads are looking for? Broadly speaking, it falls into two camps: Historical Performance and the "Future". Company owners or shareholders will want to upgrade talents of and retain managers for better accounting and better decisions to improve performance.

2.4.1 Variation in incentives used in companies

The breakdown of companies by sector, size and ownership type shows some divergence in the incentives used to encourage employees' commitment and performance. Different sectors of companies can be

Financial Services

IT, communications and entertainment

Infrastructure, government and healthcare

Consumer and industrial markets


Purpose of Study:

The purpose of the study is to identify the relationship between both financial and non-financial rewards and financial performance. In prior researches, the researcher found positive significant relationships between various financial rewards and financial performance which were considered evidential proof about the relationships and a rational need to investigate relationships between rewards and performance. In this study, the research paper of Richard &Marilyn (2001) had been used as a skeleton.

To verify whether research revealing facts about incentives use affect financial performance of companies.

To assess whether employee behaviour or performance has changed due to an incentive program. It is useful to use data from employee's performance evaluation reports.

Identifying and classifying the motivation factors on financial performance.