Money Motivates



Behavioral scientists tend to downplay money as a motivator. They prefer to emphasize the importance of challenging jobs, goals, participative decision making, feedback, recognition, cohesive work teams, and other non-monetary factors. We argue otherwise here—that is, money is the critical incentive to work motivation.

Money is important to employees because it’s a medium of exchange. People may not work only for money, but take the money away and how many people would come to work? A study of nearly 2,500 employees found that although these people disagreed over what was their number-one motivator, they unanimously chose money as their number two.

As equity theory suggests, money has symbolic value in addition to its exchange value. We use pay as the primary outcome against which we compare our inputs to determine if we are being treated equitably. When an organization pays one executive Rs9 Lacs a year and another Rs11 Lacs , it means more than the latter’s earning Rs2 Lacs a year more. It’s message, from the organization to both employees, of how much it values the contribution of each.

In addition to equity theory, both reinforcement and expectancy theories attest to the value of money as a motivator. In the former, if pay is contingent on performance, it will encourage workers to generate high levels of efforts. Consistent with expectancy theory, money will motivate to the extent that it is seen as being able to satisfy an individual’s personal goals and is perceived as being dependent on performance criteria.

However, maybe the best case for money is a review of studies that looked at four methods of motivating employee performance: money, goal setting, participative decision making, and redesigning jobs to give workers more challenge and responsibility. The average improvement from money was consistently higher than with any of the other methods.


Money can motivate some people under some conditions, so the issue isn’t really whether or not money can motivate. The answer to that is: “It can.� The more relevant question is: Does money motivate most employees in the workforce today? The answer to this question, we propose, is No.

For money to motivate an individual’s performance, certain conditions must be met. First, money must be important to the individual. Yet money isn’t important to everybody. High achievers, for instance, are intrinsically motivated. Money would have little impact on these people.

Second, money must be perceived by the individual as being a direct reward for performance. Unfortunately, performance and pay are poorly linked in most organizations. Pay increases are far more often determined by non-performance factors such as experience, community pay standards, or company profitability.

Third, the marginal amount of money offered for the performance must be perceived by the individual as being significant. Research indicates that merit raises must be at least 7% of base pay for employees to perceive them as motivating. Unfortunately, data indicates average merit increases in recent years have been typically only in the 3.3 to 4.4 % range.

Finally, management must have the discretion to rewards high performers with more money. Unfortunately, unions and organizational compensation policies constrain managerial discretion In non unionized environments, traditionally narrow compensation grades create severe restrictions on pay increases. For example, in one organization, a Systems Analyst IV’s pay grade ranges from Rs 40,000 to Rs 45,000 a month. No matter how good a job that analyst does, her boss cannot pay her more than Rs 45,000 month. Similarly, no matter how poorly she performs, she will not earn les than Rs 40,000. So money might be theoretically capable of motivating employee performance, but most managers aren’t given enough flexibility to do much about it.

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