Incentive Compensation and Motivation
The fierce competition of business has generated a situation of increased competition for job offering for skilled workers. Under the circumstances, they tend to be more demanding than ever since they realize their skill are needed everywhere.
From the corporations’ point of view, they need to create attractive compensation scheme in order to keep their employees in the right track and keep motivated all the time. One of common method is to offer attractive compensation since they believe it become the factor that determines an employee to be productive and creative employees or poorly performing ones.
Concerning the issue, this paper discusses the roles of motivation in human resource management and how incentive compensation tactics influence employees’ motivation. At the end, we will provide recommendation on creating incentive/compensation plan for employees.
Management articles often revealed human resources’ position as the most important asset within an organization. It is human resources, whether they are regional managers, supervisors, or labors that often discover new efficiency opportunities in the workplace, and they are also the ones that perform the necessary work to take advantage of those opportunities and create enhancements on firm’s competitive advantages. Even the largest corporations in the world must realize that they owe their successes to their dedicated workers and managers. Similarly, failures in achieving corporate goals are also often tracked-down to poorly performing workers and managers.
This paper is a discussion regarding one factor that could make the difference between having a productive and creative employees and poorly performing ones. This paper discusses the roles of motivation in human resource management and particularly how incentive compensation strategies affect employees’ motivation. In the final chapter there will be a short elaboration in how to create an effective incentive plan in order to maintain good working motivation.
III. Theories on motivation
Motivation is said to be the core aspect of human resource management strategies. If human resource is the most important factor in developing a successful organization, and motivation is the core of human resource management efforts, then it is safe to believe that employee motivation can be the difference between a successful and a troubled company. Firms all over the globe have been living under this believe and thus various strategies to nurture and maintain employee motivation have been developed today.
Strategies to enhance workers motivation vary from a simple compliment from superior managers to the complex incentive plans. Some of the efforts to generate and sustain working motivation are:
· Making the work fun
Some believed that by decreasing the tension level of daily work, workers will deliver better performances as a whole. This strategy is sometimes performed by having office parties and birthday cakes, having seasonal decoration, occasional lunches, etc.
· Displaying the Value of their Work
Another way to increase motivation out of managers and workers is by showing them how their work makes a difference in the organization. Today’s managers no longer ‘orders’ their subordinates to do anything, but rather explain the situation and ask subordinates how they can be of assistance. This gesture displays a sense of respect toward subordinates’ intelligence and gives managers the benefit of having new ideas in creating solutions for their problems.
· Helping Employee Progress
Modern employees have a constant drive to grow, learn and progress. If organizations can address these needs, employees will feel that working for the organization is actually working for themselves. Today, we witness various efforts from corporations to give employees new achievable challenges and new experiences that would allow them to grow.
It is well-known that managers will only get what they are reward. Today, there are wide selections of financial and non-financial rewards provided for even the lowest level workers. These rewards could be in the form of compliments, cash rewards, stock options, promotion, vocational trip, etc (Weller, 2005. Employee Motivation, 2008).
All of the mentioned efforts are strategies and systems created by companies to place their employees in the right position and feel motivated to do their work. Practical goals of these motivational strategies include: to encourage employees to commit through their scheduled working hours, to educate employees to work in flexible ways to achieve determined goals, to increase employees’ teamwork capabilities, etc.
IV. Incentive Compensation and How they Influence Motivation
IV.1 Job Performance and Motivation
There are three aspect of employees’ behavior: the willingness to perform, the willingness to keep serving the current employer and the willingness to work within the agreed upon time and place (Schuler). The three aspects are affected by one major thing, the motivation.
Huitt (2001) refers motivation as an internal condition, which composes of a need, desire, or want, that generate or energize behavior and give it direction. To be precise, motivation comprises three following acts:
Internal state or condition that support behavior and direction
Desire or want that give confidence to employees in performing goal-oriented behavior
Influence of needs and desires on the intensity and direction of behavior
Other influencing elements on employees’ motivation also include recognition, good internal communication, rewards, and career development. Unfortunately, managements often overlook employees’ role in making critical decision while in fact, employees will feel valued when they become parts of decision making cause it will encourage them to make positive contribution to organization (see Figure 1).
There is equation regarding the relationship between employee performance, ability and motivation can be described with the following equation:
Job performance = f (ability) (motivation)
According to the Hierarchy of Needs theory by Abraham Maslow, he suggested a guideline which consists of seven strategies encouraging the creation of employee motivation.
1. Positive reinforcement (high expectations)
2. Effective discipline and punishment
3. Treating people fairly
4. Satisfying employees needs
5. Setting work related goals
6. Restructuring Jobs
7. Base rewards on job performance
(“Employee Motivation”, 2005)
Figure 1 Relationship of Remuneratiion, Benefits, and Career
Source: Gilber, Ken. (2006).
IV.2 Incentive Strategy
Most human resource managers all over the globe believes that incentive strategy is one of the most direct and practical ways to increase working motivation. Not all however, share the same perspective. There are still unpopular debates regarding how incentives really affecting employees’ motivation. Some considered that bonuses and other forms of incentives will only lead to a working condition where all the employees are only paying attention to their bonuses instead of doing the best things for their companies.
This argument is rebutted with the sentiment that as long as companies have the ability to properly arrange the compensation system, workers will perform as expected. In reality however, many firms believe that a simple compensation system would be sufficient to increase employees’ motivation, which lead them to a surprising ending where employees took advantage of the system for their own gain instead of thinking of the firm’s well being. This lack of capacity to generate a proper incentive system leads these firms to assume that incentives are perhaps tools to create employee motivation, buy not employee loyalty (Bebchuk, 2003).
Therefore, some decided that it is better to simply improve the working environment, get the people to enjoy their work more and get to the better nature of their employees rather than spending money on expensive incentive system that would finally take all the work to the wrong direction. This opinion does not represent the general truth, but rather add logic and considerations to the efforts of increasing and sustaining employee motivation.
V. Creating an Effective Incentive Plan
V.1. Influential Aspects of an Incentive Plan
The sentiment stated previously did not however, prevent organizations from giving incentives to their employees as a part of their reward system. In light of the opinion however, managers today have growing understanding regarding the role of careful planning and diligent consideration in creating an incentive plan. In this sub-chapter we will discuss what aspects of an incentive plan actually influences employee motivation.
Employees, especially young and productive ones, are constantly looking for opportunities to learn, expand their horizons and grow. Few people or even none would settle for the same working environment, the same salaries, the same challenges and the same state of career for their entire lifetime.
Employees are also looking whether they will be appreciated for their hard work with suitable compensation. They are observing whether everyone within the organization is getting the compensation they deserve, achievement for rewards and poor performance for punishment.
People also looking for leaders they can communicate with. A working environment where the ‘why’ questions are always answered is usually more motivating than working environments where everyone simply ‘do as they are told’.
A smart company always shows their employees what they can achieve by working within the organization. Developing wide range of opportunities within a working environment is a good strategy to sustain spirited workers.
Some workers, especially smart ones, generally would like having their opinion listened to. Sometimes the feeling of being involved into something important is much more valuable than the paycheck itself.
Few people enjoy being invisible. Most prefer having colleagues and superiors at their working environment know their names, etc. It is also frequent that a dedicated worker leaves a job because he/she felt like there is no one really paying attention to what he/she is trying to do.
· Trust and Respect
People also looking for good people to work with. Choosing a community means choosing your life as well, and educated people know this. Having a working environment that is nurtured with trust ad respect is much more preferable for most employees.
V.2. Targets of Incentive Plans
In the growingly modern business environments, all parts of the organizations today are being evaluated for their performances. This is due to the increasingly sharp competition in all aspect of a corporation that efficiency and effectiveness of work must be achieved in all departments. In the light of this development, the logical set of actions is to develop compensation plans to include all workers and managers. The objects of modern compensation plans are therefore: frontline employees, sales and marketing officers, employees in the training and development department, service agents and management.
V.3. Characteristics of Effective Incentive Plans
Today’s incentive plans involved various kinds of compensations, including cash bonus, trip bonus, stock options, stock ownerships, etc. There are debates of which type is the more efficient one. For example, stock-options have been a popular choice among today’s MNC. However, researches indicated that there are obvious weaknesses of using stock options like the fact that options can become almost worthless when the stock price falls far below the option’s exercise price. The research suggested the use of real stock ownership rather than stock options like has been performed by DuPont and General Motors, to be more effective than stock options (Hall, 2003. Hall, 2005).
In spite of the debate between different types of compensation schemes, there are similar characteristics possessed by all effective incentive plans. For instance, effective incentive plans should be:
· Simple, this is important because people need to understand how a incentive plan work in order to be motivated by it
· Flexible, this means a good incentive plan is aware of its surrounding environment and changes if no longer suitable for the organization. On the other hand, changing the incentive plans too often will make it difficult for employees to keep tabs on it.
· Timely, which means payouts should be recent enough to ensure that employees are progressing as time goes on.
· Measurable, means that the plan is specific enough to provide employees with road maps to follow.
· Attainable, all incentive plans must only use targets which are attainable
· Controllable, effective incentive plan only involves elements which employees have control upon.
V.4 Rewards, Incentives, and Appraisals
There are three common things usually associated with employees’ retention; they are rewards, incentives and appraisals. According to Babylon.com, rewards mean prize, payment, compensation. Incentives mean stimulus, inducement, and encouragement while appraisals mean estimation of value or assessment. The three programs share similar things in common; they are to maintain the good performance of employees or in many cases, the companies conduct this kind of assessment try to increase the employees’ job performance.
Bill Coleman, Senior Vice President of Compensation, reveals the reasons behind this situation are “most organizations today claim to conduct “pay for performance” system since they belief in the meaningful linkage of an employee’s work contribution, management’s performance evaluation of the employee, and related compensation decisions is virtually universal” (“Seven”).
In addition, Bob Nelson also mentions that many corporations’ rewards program come in the form of goods that employees do not want such as corporate-logo-printed merchandises (watches, notes, pens, wallets, T-shirts, mugs, trophies, and plaques, to name a few)
In the simplest form, Bob Nelson suggests the most effective way to recognize employees by saying sincere thanks that mean the most. Others might be in types of praise: personal, written, electronic, and public.
The elaboration of incentive compensation strategies and how it relates with motivation give corporations the ideas that they need to create attractive compensation plan that will keep their employees in. The condition also highlights that managements of companies play important role in helping their employees to achieve their personal goals, which in turn support the achievement of corporate goals.
Concerning the issues, Dean and Mary Tjosvold (1995) says that the duty of managements are to sets policies, while their managers conduct some key decisions and do problem solving, employees do their tasks. It means that as long as their employees feel fulfilled, they will do the assigned tasks properly.
The above elaboration also suggests that managements of companies are responsible to set up competitive working environment like the presentation of attractive remuneration schemes that their employees deserve. This strategy is important since employees who feel underpaid will also feel undervalued and are more open to potential offers from competitors, which may endanger the companies since the employees may disclose the critical and confidential information to their new employers.
Therefore, remuneration has a critical effect on how employees feel about their jobs, so corporations must ensure that the offered remuneration is always be attractive over time and keep up with the market. This is due to fair and competitive remuneration will help us to reduce turnover and the costs associated with it.
In addition to remuneration scheme, another factor that favors the creation of competitive working environment is the provision of career paths and personal development for both permanent and non-permanent employees. This is also important since uncertainty in the future career will lead to decreasing motivation and thus lower employees’ performances.
The needs for having superior employees in order to achieve the corporate target are accompanied with the strategy to keep their employees by offering attractive remuneration packages and career paths. Concerning the issue, Peter Drucker reveals that economic incentives become more as rights than rewards where employees expect more from their employer regarding the financial rewards.
In short, there are several elements that portray the significance of attractive financial reward system as following:
§ Financial compensation now becomes the main factor that attracts and retains employees to an organization
§ An attractive compensation system becomes one key success in attracting the best candidates in job offer
§ A good compensation system is considered to be the main factor that prevent employees from moving to another company, reduce turnover rate and save the company from having costs associated with turnover.
In order to comprehend the compensation issue, we will consider the importance of a sound compensation schemes from two perspectives: corporations and employees. From the companies’ point of view, they need to develop a good and appealing compensation plan because it will:
§ Attract talented, skilled, and the best employees in job offers
§ Reduce the level of turnover and therefore, save costs associated with turnover and recruitment of the replacement employees
§ Increase productivity and output
Meanwhile, from the employees’ point of view, there are needs to provide attractive compensation plan to obtain
§ Financial fulfillment, sense of security
§ A sense of appreciation
§ Achievements, comfort within the job (emotional fulfillment), etc
Bebchuk, Lucian Arye and Jesse M. Fried. 2003. “Executive Compensation as an Agency Problem.” Journal of Economic Perspectives. 17:3, pp. 71–92.
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‘Employee Motivation: Theory and Practice’. 2008. Accel Team. Retrieved February 17, 2008 from http://www.accel-team.com/motivation/index.html
Gilber, Ken. (2006). Aligning your total rewards strategy with your business goals. Retrieved February 21, 2008 from www.ceoforum.com.au/article-detail.cfm?cid=6274
Hall, Brian J. and Kevin J. Murphy. 2003. “The Trouble with Stock Options.” Journal of Economic Perspectives. 17:3, pp. 49–70.
Hall, Brian J. and Thomas M. Knox. 2005. “Underwater Options and the Dynamics of Executive Pay-to-Performance Sensitivities.” Journal of Accounting Research. 42:2, pp. 365–412.
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Tjosvold, Dean, and Mary M. Tjosvold. 1995. Psychology for Leaders: Using Motivation, Conflict, and Power to Manage More Effectively. John Wiley and Sons
Wells, Mary Jane. 2008. Well-designed incentive plans lead to maximum performance. Virgo Publishing. Retrieved February 17, 2008 from www.moderncarcare.com/articles/ management/688_571feat8.html
Weller, Matthew. 2005. ‘General Principles of Motivation’. Retrieved February 17, 2008 from http://honolulu.hawaii.edu/intranet/committees/FacDevCom/guidebk/teachtip/motivate.htm
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