The complex question of whether money can motivate people to work has been a major source of worry to both employers and managers alike as pointed out by (Bartol and Locke, 2000) in Bratton and Gold (2007). According to Bratton and Gold (2007), much work has gone into answering this question using theories of motivation and expectancy theory. 'Needs' theories of motivation lay emphasis on what motivates people over how they are motivated. While Maslow (1954) is of the opinion that higher-order needs become progressively more important when lower-order needs have been satisfied, Herzberg (1966) pointed out that pay takes on significance as a source of satisfaction when it is seen as a form of reward or recognition. Vroom's (1964) expectancy theory however sees monetary variables as a key component; giving a prominent role to rewards.
Bratton and Gold (2007) defines reward as all of the monetary, non monetary and psychological payments that an organization provides for its employees in exchange for the work they perform. This is a mixture of extrinsic and intrinsic types of reward. Extrinsic rewards seek to satisfy employee's basic needs for survival, security and recognition from the job context. This includes the financial payments, working conditions and the behavior of management towards him or her. The intrinsic type of reward on the other hand, according to (Bartol and Locke, 2000; Caruth and Handlogten, 2001) in Bratton and Gold (2007), is the psychological enjoyment and the satisfaction of challenge derived. This may be called the psychic income that an employee gets from his or her work, which tends to satisfy higher level needs for personal development and self esteem. These rewards are derived from the job content.
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Performance related pay came about in the 1980's as the answer to the question of how to motivate people and thereby develop performance oriented cultures. Performance related pay thus provides individuals with financial rewards in the form of increases to basic pay or cash bonuses which are linked to an assessment of performance, and this is more often than not, in relation to previously agreed objectives Armstrong (2002).
According to Marchington and Wilkinson (2005), employers from both the private and public sectors are laying emphasis on paying for performance and working towards incentivizing pay to improve individual and organizational performance thereby creating a new performance based culture; which will base an individuals pay on an assessment of his performance on the job. Based on this, pay is linked to performance measured by agreed objectives like sales targets and as pointed out by Fowler (1988), this tends to reward output over input, using qualitative instead of quantitative indices to assess performance, focusing on working objectives instead of personal qualities, bringing an end to normal general annual increase in pay.
Kohn (1993), in his article 'Why Incentive Plans Cannot Work' published in the Harvard Business Review declares that "any incentive or pay-for-performance system tends to make people less enthusiastic about their workâ€¦.
Alfie Kohn states that even though a large number of managers and their advisers believe in the power of rewards and that people will do a better job if they are promised some sort of incentive, studies carried out in laboratories, classrooms and workplaces have come up with evidence that rewards do not necessarily work.
Research, according to Kohn points to the fact that rewards only succeed at securing temporary compliance and does not produce a lasting change in attitude or behavior. This is because once the reward is no longer forthcoming; people will go back to their old ways of behavior. He argues that because rewards are extrinsic motivators, they do not change the way people behave and therefore do not create an enduring commitment to their values. At least two dozen studies carried out over the last thirty years according to Kohn, has come up with the conclusion that people who expect some form of reward or another for completing a task successfully do not do as well as those other people that are not expecting any reward. Other studies which have looked at whether or not pay leads to a higher level of organizational performance and profitability have found some correlations between pay and performance, they however reveal that higher pay does not produce better performance.
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To further discuss the link between pay and performance based on Kohn's article, we find out that even though people were primarily concerned with their salaries, it does not prove that money is motivating because it does not mean that paying them will make them do more work or work better. Professor Frederick Herzberg of the University of Utah shares this view and argued that because too little money can demotivate does not mean that more money will increase motivation, because even if a persons pay is doubled, it may not result in better work. Leaders of the Total Quality Movement have also emphasized that performance related pay does not do well for cooperation among employees because every individual will be working towards achieving personal reward and not for the collective gain of the organization which will in the long run create bad blood among the employees. Again, employees may actually cover up any problems they have from management so as to be seen to be competent, problems which will eventually harm the organization.
When employees know that reward is coming at the completion of any given task, they tend to be less creative and focus more on just finishing the task. They may even go to the extent of doing unethical things or using illegal means just to reach the desired goal. More studies in this area have found out that employees will rather not take up challenges when a reward is in sight. This is not because employees are lazy but because they tend to lower their sights when they think of the reward for putting in their effort. Kohn is of the opinion that if employees strive to achieve excellence, intrinsic motivation will be their drive rather than reward. This is because, according to Deci and Ryan, if an employee receives a reward for a particular behavior, it has a somewhat control on future behavior and this feeling of being controlled will negatively affect future tasks. Other theorists are also of the opinion that if rewards are given as a prerequisite, the receiver will view the task more negatively as if he were been bribed to do it and this will make it less desirable Kohn (1993).
The article by Luthans, F. and Stajkovic, D. (1999) 'Reinforce for performance: The need to go beyond pay and even reward' suggest that the reinforcement theory whose basic premise is that human behavior is a function of contingent consequences, is another approach to pay for performance. They are of the view that an organizations strategies, designs and technology may have little or no effect if organizational participants are not reinforced for their performance related behaviors. Based on this, they suggest that for managers to get what they want, they have to reinforce rather than reward or pay for performance. This is because, while a reward is seen as valuable by the giver, a reinforcer increases the strength and frequency of the desired functional performance related behaviors.
Through the organizational behavior modification approach (The O.B Mod. Approach), managers are presented with a framework for performance improvement which is to identify, measure, analyze, intervene and evaluate employee's behaviors. This approach uses other methods including performance feedback, social recognition and attention as forms of reward which have been proved effective by studies carried out. Even though pay in itself is a reinforcer and not just a reward, attention, social recognition and performance feedback are equally effective.
Erickson, T.J. and Gratton, L. (2007) 'What it Means to Work Here' in their article gives another insight into the question of if performance related rewards really work. From their perspective, even though pay matters to an employee, an employee will choose and become engaged with a particular job, based on how well their own preferences and aspirations are in tune with that of the organization. Erickson and Gratton are of the opinion that if an employee really likes the work he is doing and the working environment he is operating in suits him, he will naturally become deeply engaged in his work, thereby making pay or reward less important. Commitment by the employee to the organization will in turn grow and this has a sort of multiplier effect which will infect other colleagues and in the long run increase performance.
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Gross, S. E and Friedman, H. M. (2004) in their article, 'Creating an Effective Total Reward Strategy: Holistic Approach Better Supports Business Success' state that organizations understand the important role reward plays in the achievement of its aims and objectives. Organizations have come to acknowledge that a good total reward strategy can help it to deliver on its goals. Based on this, for an organization to have a total reward package that will increase the performance of its employees, the package will include compensation which includes basic pay and short and long term incentives. The package will also include benefits like health, holiday and retirement benefits. These have to be tailored in such a way that it fits individual employee's needs. Apart from pay and benefits, an employee who sees himself as being able to build a career in the organization that he works in will be a better motivated thus increasing performance.
Green, C. and Haywood S. (2008) in their article, Does Performance Pay Increase Job Satisfaction? states that the use of performance pay schemes by employers has been shown to increase workers' productivity, effort and earnings (Lazear 2000; Paarsch and Shearer 2000; Parent 1999). However, the assumption remains unclear what effect performance pay schemes have on worker satisfaction with the job. They pointed out that while increase in pay will increase an employee's satisfaction; other aspects of performance pay schemes may have less beneficial effects on job satisfaction. Pay schemes based on performance may introduce large variations in periodic earnings, reducing the usefulness of some employees. The performance monitoring associated with pay schemes may result in increased effort that employees dislike. While some types of performance pay like profit sharing may increase job security, others will increase earnings dispersion within the organization and may reduce perceptions of fairness or lower morale and motivation. In this way, performance pay schemes may increase worker satisfaction with pay while reducing their satisfaction with other dimensions of the job, such as effort, risk or perceived fairness.
Marsden, D. (2009) in his article, The Paradox of Performance Related Pay Systems: 'Why Do We Keep Adopting Them in the Face of Evidence that they Fail to Motivate' looks at one of the paradoxes of incentive pay used in Britain's public services which is that in spite of the evidence that it does not motivate employees, it is still been used. He argues that the anticipated or expected consequence of performance related pay, which is to improve the motivation of public servants, has proved rather difficult to achieve. Rather, the unintended or unanticipated consequence of performance related pay was that although performance appears to have increased in several cases, it achieved this through other ways than motivation. He concluded his article by positing that the long road travelled by performance related pay and performance management in the public services has lead to the emergence of a new channel of employee voice, albeit, at the individual rather than at the collective level.
In another article by Marsden, D (2004), The Role of Performance-Related Pay I in Renegotiating The 'Effort Bargain': The Case of The British Public Service, he argues that alternative explanation can be found in the use of performance pay, and of performance management more widely, to provide a frame work for renegotiating performance standard the "effort bargain" with public employees. This he said is consistent both with rising organizational performance, which would explain top management's perseverance, and with the repeated evidence that performance related pay has failed to motivate many public employees.
Armstrong (2002) states that because of the failure of performance related pay to deliver the results expected of it, there was widespread criticism against it in the 1990's. This was because research had failed to show that there was any causal link between performance and pay. Nevertheless, a number of research surveys carried out showed that pay was impacting on performance of employees in organizations.