Management commonly expects more, that employees take advantage, organize themselves, continue to learn new skills, and be reactive to business needs and in return employees expect their organization to provide fair salary package, safe working environments, and fair management (Beer, Spector, Lawrence, Mills, & Walton, 1984). (Carnegie, 1975) Emphasizes the human aspects of management. They propose that as it is individuals who make a business flourish - or fail - it is the organization's main responsibility to motivate their people so that they will promise success. The authors consider that each individual has the potential for creativeness and for attaining goals. The common theme of the above authors is the belief that people need to be valued, appreciated and treated as precious human capital, more important to an organization's efficiency than its financial capital. People are now perceived as the major source of a company's competitive advantage. Consequently, the way people are treated gradually determines whether an organization will flourish or even survive (Lawler, 2003). Organizations are under perpetual pressure to improve and progress their performance and are recognizing that a dependent relationship occurs between organizational performance and employee performance. According to (Motta, 1995) "motivation is simply the reason individuals have for doing the things they do when and how they do them."
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The requirement of subjective performance evaluation increases issues of systematic bias in organizations. Indication of potential bias in performance appraisals comes from a number of sources. (Bretz. R and G. Milhovich., 1989) Find that supervisors often provide performance assessments higher than those merited by employee performance. They feature the variance to personal relations and the real and psychic costs of communicating poor assessments to workers. (Kratger. K. and J. Ford., 1985) Survey of the effects of race on ratings stated that the race of both the rater and the ratee affect evaluations. Moreover, supervisors give higher ratings to subordinates of their own race. Numerous studies by psychologists have found that the ultimate use to which evaluations are put affects appraisal outcomes. For example, assessments used to make administrative decisions such as merit pay or promotion are much lenient, and have less difference, than assessments used for employee feedback (Redly, C. and W. Balzer, 1988). Additional results demonstrate political aspects of performance appraisals (Longenecker, 1989). For example, (BJerke, 1987) find that navy supervisors appraise favored subordinates so as to maximize the chance of promotion. The finding from the study (Cinton. O. Longenecker, 1987) is that accuracy is not the prime concern of the performing executive in appraising subordinate. The main concern is how best to use the appraisal procedure to encourage and reward subordinates. Hence, managerial preference and effectiveness, not accuracy, are the real watchwords. Manager made it clear that they would not allow particularly accurate ratings to cause problems for themselves, and that they endeavored to use the appraisal process to their own benefit.
Specifically, favoritism is an important factor because superiors have rewards to allocate, which gives rise to inter-personal 'influence activities' as a form of rent-seeking in organizations (Milgrom. P. and J Roberts, 1990). As compensation becomes more complex to subjectively measured performance, unproductive rent seeking will increase as workers seek to influence the assessment process. For example, (Argyris, C., 1964) describes how managers covered by a bonus plan tied to budgets spent treasured work time bargaining with superiors to get a majestic than would otherwise be optimum, which reduces rent seeking. Even without influence activities, it may be optimal to reduce the unfairness of rewards so as to equalize the effects of supervisors' preferences. (Prendergast. C. and R Topel, 1992) Argue that organizations normally use performance appraisals for (at least) two purposes: compensating individuals for their struggles and determining their true abilities. The latter information is used to allocate persons to different duties and to identify training needs. Yet, as we noted above, supervisors are more likely to bias their judgments when those evaluations have direct financial values for employees. This organization problem with supervisors means that larger inequality of rewards decreases the informativeness of supervisors' reports. The wrong performance assessment of employee raises issues of systematic bias in organizations. Supervisors often give higher performance rating to the unmerited employee. On the basis of difference on personal relations they give poor evaluations to employees. Sometime assessment of employees are influence on the basis of race, supervisor often give higher rating to their own race or cast or community.
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Bias in rewards and giving incentives make employee feel that they are categorized by the organization which will result in increase of turnover and loss of human capital in organization. Biases reduce employee confidence and will lead to less efforts and outcome. (Prendergast & Topel, 1993). Discriminating firms may have less talented and less dedicated workforces, high operating costs due to turnover, absenteeism, and job dissatisfaction, poor reputations with varied customers, and lower organizational obedience (Nishii, Gelf, Raver, & Schneider, 2007).
Agency theory proposes that peoples are motivated by extrinsic rewards and that employees will only accomplish tasks for which they are rewarded (Jensen and Meckling;Eisenhardt;Baiman, 1976;1989;1990). This means that employee will only work to the best of their capabilities if they consider the reward to be sufficient. According to (Meckling, Jensen and, 1976) agency theory states that persons are wealth maximizes. Altruism is not reflected to be a part of the major/agent relationship. (Gupta, N. & Mitra, A., 1998) Using meta-analysis establish that financial incentives are strong motivators. They found that financial incentives were generally powerful with respect to performance extent. Still, results were uncertain when concerning performance quality - an important reflection in the human services sector. (Williams, 1998) Points out that people have different morals, aims, and observations and are not inactive recipients who will automatically respond to work systems as management desires. In keeping with the findings of (Etzioni, 1988) and (Larson, 1977) values are reflected to be important in the enlargement of an individual's commitment to an organization.
(Prendergast, C., Topel, R., 1996) Show how favoritism can bias the assessment of agents' performance in organizations and, in turn, their behavior. Likewise, large-scale public expenditure judgments can be distressed by such behavior: for example, the choice of attaining partner by government departments (Naegelen, F. and Mougeot, M. , , 1998) and the regional division of public goods in the presence of political bias (Zantman, 2002). In fact, it seems likely that most people will distinguish circumstances in which favoritism has (or could have) been implemented by principals, and this increases the important question of how such behavior may be controlled. (Prendergast & Topel, 1993) Many possible issues rise when performance evaluation is based on noncontract able data. Most employees of huge organizations are evaluated by supervisors. Sometime monetary incentives are not rewarded as per the performance. By this carelessness employee start thinking that their performance is unrecognized on the other hand supervisor in politics give rewards to their favorite and unworthy employees which decreases employee morale and performance.
The role of favoritism and societal connectivity in firms has increased extensive attention in theoretical economic research in recent years.(Prendergast, C. J. and R. H. Topel , 1993)Were among the first to point out that personnel partialities towards employees may lead to favoritism and biased performance appraisals in organizations. High driven worker incentives lead to a stronger bias in performance assessments. Further- more, favoritism leads to a misallocation of workers to jobs and a misrepresentation in incentives. Separating workers' pay from performance appraisals and presenting pure organizational rules may restrain favoritism in their model. (Prendergast, 2002) Extends this context and shows that when performance appraisals become usually less valued under ambiguity, the additional costs of favoritism related with an increase in worker incentives are low.
There are also some empirical studies on the theoretically harmful effect of favoritism. (Longenecker, 1987) And (Bjerke, 1987) for illustration, studied factors of performance evaluations in a US company and the US Navy respectively. Both studies mention that political influences rather than true performance are reflected in subjective evaluations. This is particularly true if performance appraisals are tangled to bonuses. (Ittner, 2003) Examine a well-adjusted scorecard bonus design which is based on supervisors' subjective assessments. Even if financial processes for evaluating subordinates are presented, supervisors' decision leads to strong favoritism in employees' bonus payments in the considered company and finally to the abolishment of the scorecard.
(Breuer, 2010) Evaluate personnel data from a call center organization in dispute that social ties generated by frequent interaction or small team size lead to biased performance assessments by supervisors. Numerous other studies have observed restaffing decisions in the presence of family ties, which can be seen as a noticeable case of favoritism in firms. (Pérez-González, 2006)Report a faster career as well as greater wages for family members in family firms. (Kramarz, 2007) Find that young Swedish men frequently work in their father's plant while having greater initial wages and worse school grades than comparable companions. (Bennedsen, 2007) And (Vilallonga, B. and R. Amit, 2006) also find that CEO family succession leads to a substantial drop in family firm performance presenting the inefficiencies caused by favoritism in succession and promotion politics.
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One remarkable recent exception is (Bandiera, 2009) who examine an exogenous change from a fixed wage to bonus structure for supervisors in a large agricultural company. Under fixed wages managers favor socially related workers by giving them a stronger support which leads to a huge productivity gap among socially connected and socially unconnected workers. When super- visors receive a bonus based on workers' productivity they reallocate their support headed for high ability workers causing a considerable overall increase in productivity. It indicates that managerial bonus payments also extensively affect the quality of promotion decisions and provide indication based on a large and representative sample of firms.
(Burns, 1978) Identified two basic elements in the interaction between leadership and employees. One element stems from the leader's capability to deliver rewards and punishments. The second element is the leader's ability to rally his staff and desire them to collaborate in achieving the organization's goals. The expectancy theory (Vroom, 1964), the social exchange theory, (Blau, 1964)and the leader-member exchange (LMX) theory (Graen, 1976), (Wang, 2005) sustained the need for a more balanced relationship between leaders and followers and the idea of fair treatment of the individual. Mutual benefit, fair exchange, and a low level of organization politics appear to be significant in the framework of leadership style and performance. The study considered the relationship between two types of leadership and formal and informal performance in the light of the knowledge gathered in recent years regarding organizational politics. The findings determine that organizational politics can be considered an important mediator between leadership and performance beyond the direct relationship already established in the literature. As suggested by (Ammeter, 2002) and others, a perpetual tension survives between the individual's involvement in political dynamics, his objective to develop and encourage self-interests, and the goal of enhancing organizational performance. According to this study, transformational leadership may have a positive direct effect on employees' performance by organizing an environment that is apparent as less political in nature and is rooted in concepts of justice and equity. Such an environment should encourage employees to give excellent performance, both formally and informally, by advanced levels of in-role behaviors and enhanced organizational citizenship performance.
Where should decision rights be wedged in organizations? (Jensen, Michael C. and Meckling, William H., 1992) Argue that moving a decision away from the integrally best-informed party involves costs in communication and perverting but may lodge it with somebody who has better incentives to make good decisions. But largely we expect that incentives are part of the organizational strategy. Why not just provide incentives to individuals with the best information so that they make the right decisions? An authority-based hierarchy then appears endogenously, with some representatives being given the right to make organizational decisions over projects that others discovered. Additionally, as in (Simon, Herbert, 1951,) those in authority will make the decisions in a self-centered way. Simon highlighted that this will not be efficient. By designing the incentives properly, however, the inefficiency may be lessened. Organizations don't wanted to make policies and strategies that influence their budget but they cut cost or may manipulate the result of performance evaluation just to save their training cost and incentives (Prendergast & Topel, 1993).
The research was based on the low motivation of health workers. (Imhoff, 2006) In his research indicates that many health workers were demotivated and frustrated because they were unable to satisfy their professional conscience due to lack of HRM tool. The findings confirmed that the non-financial incentives and HRM tools play an important role to increase the motivation of health workers. (Taljaard, 2003) Conduct research in three automotive industries. The results of the analysis of the empirical data have proved that non-monetary rewards are useful tools that can be utilized to motivate employees to improve performance.
According to the study (Nandanwar M.V., 2000), an incentive schemes can be a tool towards achieving organizational success of a small entrepreneur business. This study was conducted in a small scale pharmaceutical enterprise established in year 2000. The findings indicate that a well design monetary and non-monetary incentive schemes could be perceived positively and likely to increase motivation. As a result, employees remain more jobs satisfied and thus the schemes are able to increase the overall organizational success. The study (Valerie L. Kisseloff)examines the impact of financial and non-financial rewards with respect to overall level of employee motivation. The survey research was in the form of a questionnaire that collected quantifiable data with the financial and non-financial rewards and the impact they had on employee motivation levels. The survey result concludes that non-financial rewards are more valued than financial rewards from nearly all individuals surveyed. Although non-financial rewards were rated higher, the research concluded that both financial and non-financial reward impacts employee motivational levels, which are linked to higher level of satisfaction and performance.
The paper (Locke, 2004) integrates research concerned with a long-neglected topic in psychology: the relationship between conscious goals and intentions and task performance. The basic promise of this research is that an individual's conscious ideas regulate his actions. Studies are cited demonstrating that: (1) hard goals produce a higher level of performance (output) than easy goals; (2) specific hard goals produce a higher level of output than a goal of "do your best"; and (3) behavioral intentions regulate choice behavior. This paper also views goals and intentions as intermediaries of the effects of incentives on task performance. A theoretical analysis supports the same view with respect to three other incentives: participation, competition, and praise and reproof. It is concluded that any adequate theory of task motivation must take account of the individual's conscious goals and intentions.
(Bjornanger, 2009.)Describe how an incentive reward system can work in practice and how it may influence the employee in term of motivation and stress. Qualitative interviews were performed to answer the research question. According to the result of the study, it is very important that the company has good communication and clear goals. It is also crucial that the salesman can be involved in the goal setting process to get more motivated. To a large extent the employees in the studied company are satisfied with the incentive reward system but there are still a few stress factors present. Motivated employee is the corner stone of any successful organization. (Lai, 2009) The objective of this research was to explore the motivational factors and the effectiveness of these incentive programs pertaining to work motivation. The result from the study showed that incentives do have a very strong motivational potential to influence the employees' willingness to work harder. The three most motivated factors valued by employees are interpersonal relationship, workplace environment and interesting work, all of which have the potential to motivate employees at higher levels. Surveys found that most of the sampled companies used ratings to determine the amount of pay endowed to employees and that it appears the norm that is to rate employees at the top end of the scale to just show their employees are best in effort relatively then they are not (KANE, BERNARDIN, VILLANOVA, & PEYREFITTE, 1995)
Planning the appraisal process is a major subject in the government's official system which is annually lead in the governmental organizations, spending a large amount of time and expenses to reach the objectives like: manpower development, including enhancements, promotions and assignments in managerial positions, encouragement and punishment, salary increase, personnel's performance response and determining their educational needs. Appraisal is an important tool in the manpower management, if it is performed appropriately and sensibly, it can conduct the organizations to their objective and the personnel will achieve their benefits. The study shows the effects of performance appraisal outcomes on the employees' motivation and job promotion in Toyserkan's health system (Yadollah Hamidi, Leila Najafi, Sudabeh Vatankhah, Rahim Mahmoudv and Aghdas Behzadpur, Azadeh Najafi, 2010). For to reach the objectives of an organization, every person must have appropriate awareness of her/his position with such as awareness, the employees will perceive the strong and weak points of their performance and activities, so that they will probably resolve the problems and lacking and will turn them into more efficiency and effectiveness. Therefore, appraisal can be reflected as an important factor in identifying the people's talents and abilities and its results can make them aware of advancements, plans and goals. An organization, itself, needs to identify the employee's efficiency to improve the manpower's status, for the purpose of increasing the volume of the production and services and making positive changes in its development (Kavussi Shal, 1999).
In most organizations agency relationships are cryptic. Supervisors needs information to assess subordinates' performance and to distribute rewards, but supervisors are not themselves the outstanding claimants of subordinates' output. That's why supervisors' do evaluation preferences and they can be bias, to affect rewards by operating the appraisal system. The compensation systems and organizations must clear this perception to make evaluation system fair. Those who got the high rating appreciated by the managers in contrast the employee who got low rating is treated poorly and discouraged by the organization (Prendergast & Topel, 1993). The most common finding on performance appraisal is manager humanity towards rating; sometime supervisors don't want to give unkind rating to any employee. (Pregengest & Topel, 1993).