Money and Motivation

Financial incentives

Financial rewards paid to workers whose production exceeds some predetermined standard.

Frederick Taylor popularized using financial incentives financial rewards paid to workers production exceeds some predetermined standard in the late 1800s. Taylor was concerned with what he called systematic soldiering – the tendency of employees to work at the slowest pace possible and to produce at the minimum acceptable level. What specially intrigued him was the fact that some of these workers had the energy to run home and work on their houses, even after a 12 hour day, Taylor knew that if he could harness this energy during the workday. Midvale Steel could achieve huge productivity.

Fair day’s work
Output standards devised based on careful scientific analysis

Scientific management

Management approach based on improving work methods through observation and analysis

At the time primitive piecework incentive plans were already in use, but were generally ineffective (due to employers’ propensities for arbitrarily assigning and changing incentives rates). Taylor made three contributions. He saw the need for formulating what he called a fair day’s work, namely standards of output which employers should devise for each job based on careful, scientific analysis. He spearheaded the scientific management movement, a management approach that emphasized improving works method through observation and analysis. And, he popularized the use of incentive pay.

Performance and pay

Today, tying workers’ pay to their performance is widely popular. Indeed with the emphasis on competitiveness productivity and delivering measurable bottom line results the trend for virtually all employers is to tie a least some portion of their workers pay to the workers and /or the company’s performance.

The problem is that doing so is easier aid than done. Many such programs are ineffective or worse (one plan, a Levi’s is widely assumed to have been the last nail in the coffin of Levi’s US based production) Mercer Human Resource Consulting found that just 28% of the 2,600 US workers it surveyed said they were personally motivated by their companies incentive plans. Only 29% said their firms rewarded their performance when they did a good job. Employees don’t see a strong connection between pay and performance and their performance is not particularly influenced by the company’s incentive plan said one Mercer expert. About 95% of companies tie employee pay to their individual work performance to some extent, according to consultants Hewitt Associates. About 83% of companies with such programs say their programs are only somewhat successful or not successful at all.

There are, as we’ll see, many reasons or such dismal results. Many employers perhaps ignorant of Taylor and history institute and change their plans standards arbitrarily. Others ignore the fact that incentive pay is at its heart psychologically based. Therefore, not everyone reacts to a reward in the same way, and not all rewards are suited to all situations. Compensation experts therefore argue that managers should be aware of the motivational bases of incentive plans.

Motivation and Incentives

While it may seem obvious the manager devising an incentive plan should first remember that different people react to different incentives in different ways. To choose just one example, one study focused on high and low positive affective (PA) individuals, High PAs are energetic active and alert. Low PAs are more lethargic, listless and apathetic. In this study, the low PAs actually responded much more favorably to merit raises than did the high PAs, (perhaps because the raise gave the relatively unhappy low PAs relatively more to be happy about). A survey of how employees react to non cash incentive recognition rewards (such as gift certificates) further illustrates how differences affect incentive choice.

In India, pay for performance is gaining wide acceptance and having a Performance Linked Pay (PRP) plan is considered as a good HR practice. The Sixth Central Pay Commission of the Government of India, in the report submitted in March 2008, has made recommendations that supported the adoption of performance linked pay / incentives for Government of India employees. PRP is also widely prevalent in the private sector and multinational firms operating in India.

Several motivation theories have particular relevance to designing incentive plans.

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  • VK Shrotryia

    Good writeup…. I shall like to share my views on this.
    Money and Incentives play very important role in motivating an employee to perform his/her best in the interest of the organization and to achieve one’s individual goals. However the importance of money is limited to fulfilling ones modest living standards. (of course Modest living is highly subjective and would certainly vary, person to person, org to org, country to country). Once we have enough to fulfill our basic needs there are many more other things which drive us to work better. Non-monetary incentives start playing better role than monetary incentives.
    Further there is Easterlin Paradox which believes in the role of money to be Happy but just to the extent that the basic/modest needs are met. Beyond it there are relationships, sense of achievement, quality time use, leisure time activity, etc etc. which contributes to ones happiness in a greater way than becoming billionaire…..

    vijay k shrotryia