Vroom’s theory and Incentive plans

Another important motivational fact is that, in general, people won’t pursue rewards they find unattractive, or engage in tasks on which the odds of success are very low. Psychologist Victor Vroom’s motivation theory echoes these commonsense observations. He says a person’s motivation to exert some level of effort is a function of three things: the person’s expectancy (in terms of probability) that is or her effort will lead to performance; instrumentality, or the perceived connection (if any) between successful performance and actually obtaining the rewards; and valence, which represents the perceived value the person attaches to the reward. In Vroom’s theory, motivation is thus a product of three things: Motivation = (E x I x V), where, E represents expectancy, I instrumentality, and V valence. If E or I or V is zero or inconsequential there will be no motivation.

Vroom’s theory has three implications for how managers design pay-for-performance plans. First (looking first at just “E”), if employees don’t expect that effort will produce performance, no motivation will occur. So, managers must ensure that their employees have the skills to do the job, and believe they can do the job. That is why training, job descriptions, and confidence building and support are important. Second, (with respect to “I”), Vroom’s theory also suggests that employees must see the instrumentality of their efforts they must believe that successful performance will in fact lead to getting the reward. Managers can accomplish this in many ways by creating easy to understand incentive plans, and by communicating success stories, so that employees see they will be rewarded for doing well. Last but not least, with respect to “V”, the reward itself must be of value to the employee. Here, the manager should take individual employee preferences into account, and endeavor to use extrinsic and intrinsic rewards that make sense in terms of the specific behaviors he want to encourage.

Managers often use two terms synonymously with incentive plans. Variable pay is a team or group incentive plan that ties pay to some measure of the firm’s (or the facility) overall profitability; (profit sharing plans) are one example. However, confusing as it may be, some experts do include individual incentive plans within the category of variable pay. Traditionally all incentive plans are pay-for-performance plans. They pay all employees based on the employees’ performance. To structure our discussion, we will organize the remainder of this article around individual employee incentive and recognition programs, sales compensation programs, team/group-based variable pay programs, organization wide incentive programs, executive incentive compensation programs, and executing effective incentive programs. We first take a brief look at how employment law affects one’s choice of financial incentives.

Several federal laws apply to employer incentive plans. For one thing, the employer must comply with the overtime provisions of the Fair Labor Standards Act when designing and administering its incentive plans. If the incentive is in the form of a prize or cash award, the employee generally must include the value of that award when calculating the worker’s over time pay.

Specifically, overtime rates are paid to non-exempt employees based on their previous week’s earnings, and unless the incentive bonuses are structured properly, the bonus itself becomes part of the week’s wages. It must then be included in base pay when computing any overtime that week.

Certain bonuses are excludable from overtime pay calculations. For example, Christmas and gift bonuses that are not based on hours worked, or are so substantial that employees don’t consider them a part of their wages, do not have to be included in overtime pay calculations. Similarly, purely discretionary bonuses in which the employer retains discretion over how much if anything to pay are excludable.

The problem is that many other types of incentive pay must be included. Under the FLSA, bonuses to be included in overtime pay computations include those promised to newly hired employee, those provided in Union contracts or other agreements, and those announced to induce employees to work productively, steadily, rapidly, or efficiently or to induce them to remain with the company. Such bonuses would include and group production bonuses, bonuses for quality and accuracy of work, efficiency bonuses, attendance bonuses, length-of-service bonuses, and sales commissions. –v

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