Pay for Performance and

Financial Incentives

Presented by: Aeint Pyae Sone

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Learning Objectives
 Explain how you would apply four motivation theories
in formulating an incentive plan.
 Discuss the main incentives for individual employees.
 Discuss the pros and cons of commissions versus
straight pay for salespeople.
 Describe the main incentives for managers and
executives.
 Name and describe the most popular organization-
wide incentive plans.
 Explain how to use incentives to improve employee
engagement.
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Money and Motivation

Fair Day’s Work

Scientific Management
Movement

Incentive Pay

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Money’s Role in Motivation
 Frederick Taylor
– An American mechanical engineer who sought to
improve industrial efficiencies.
– He made three major contributions in the late
1800s.
• First, he defined a fair’s day work using stadards of
output.
• Second, he is known as the father of the scientific
management approach. This approach emphasized
improvement of work methods.
• Finally, he recognized the use of financial incentives for
those whose output exceeded standards.

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Incentive Pay Terminology
 Pay-for Performance
 Variable Pay

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Incentive Pay Terminology
 Pay-for Performance
– Ties employee’s pay to the employee’s
performance
 Variable Pay
– Is an incentive plan that ties a group or team’s
pay to some measure of the firm’s (or the unit’s)
overall profitability
• Example: profit-sharing plans
– May include incentive plans for individual
employees

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Motivation and Incentives
 Theories that have relevance to designing
incentive plans are:
1. Motivators and Fredrick Herzbergs
2. Demotivators and Edward Deci
3. Expectancy Theory and Victory Vroom
4. Behavior Modification/ Reinforcement and
B.F Skinner

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Motivation and Incentives (cont.)

Herzberg’s
Two-Factory Hygiene
Theory

Motivators

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Motivators and Fredrick Herzbergs
 Frederick Herzberg said the best way to motivate
someone is to organize the job so that doing it
provides the challenge and recognition we all need to
help satisfy “higher-level” needs for things like
accomplishment and recognition.

 These needs are relatively insatiable, says Herzberg,

so challenging work provide a sort of built-in
motivation generator.

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Motivators and Fredrick Herzbergs (cont.)

 Doing things to satisfy a worker’s “lower level” needs

for things like better pay and working conditions just
keeps the person from becoming dissatisfied.

 Herzberg says the factors (“hygienes”) that satisfy

lower-level needs are different from those
(“motivators”) that satisfy or partially satisfy higher-
level needs.

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Motivators and Fredrick Herzbergs (cont.)
Hygiene factors (extrinsic factors) Motivators (intrinsic factors)
Better pay and working conditions Recognition, appreciation and
providing challenging work
These factors just keep the The best way to motivate a person
employees from becoming is to provide with motivator factors.
dissatisfied
Adding more of these factors will not Adding more of these factors will
generate extra motivation for the enrich the job and get the
employees. employees further motivated.

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Demotivators and Edward Deci
 Psychologist Edward Deci’s work highlights another
potential downside to relying too heavily on extrinsic
rewards. They may backfire.

 Extrinsic rewards could at times actually detract from

the person’s intrinsic motivation.

 The point may be stated thusly:

– Be cautious in devising incentive pay for highly motivated
employees, lest you inadvertently demean and detract from the
desire they have to do the job out of a sense of responsibility.

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Expectancy Theory and Victor Vroom
 People won’t pursue rewards they find unattractive, or
where the odds of success are very low in general.

 Psychologist Victor Vrooms expectancy motivation

theory echoes these commonsense observations.

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Expectancy Theory and Victor Vroom (cont.)
 A person’s motivation to exert some level of effort
depends on three things:
– the person’s expectancy (in terms of probability) that his 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.

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Expectancy Theory and Victor Vroom (cont.)
 Motivation (E x I x V)
– If any factor (E, I, or V) is zero, then there is no motivation
to work toward the reward.

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Expectancy Theory and Victor Vroom (cont.)
 Expectancy theory suggests that a person’s
motivation to exert some level of effort is a function of
three things.
– First is the person’s expectancy (in terms of profitability) that
his or her effort will lead to performance.

– Second is the instrumentality or the individual’s perceived

connection (if any) between successful performance and
actually obtaining the rewards.

– Third, valence, represents the perceived value the persone

attaches to the reward.
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Behavior Modification/ Reinforcement
 Behavior modification – changing behavior through
rewards or punishments that are contingent on
performance.

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Behavior Modification/ Reinforcement (cont.)
 Behavior modification boils down to two main
principles.
– The behavior that appears to lead to a positive consequence
(reward) tends to be repeated, whereas behavior that
appears to lead to a negative consequence (punishment)
tends not to be repeated; and

– The managers can therefore get someone to change his or

her behavior by providing the properly scheduled rewards (or
punishment).

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