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How to effectively link compensation with performance.

How to Effectively Link Compensation With Performance

To effectively link compensation with performance, it's important to have a clear understanding of basic motivational factors, such as those discovered by Frederick Taylor. Next, it is necessary to analyze the impact of the intrinsic-extrinsic approach on rewards management. Then, the expectancy theory defines the effectiveness of the reward or compensation. Lastly, an action plan must be implemented to assure the link is made and that it is effective.

In the past, business and industry tied compensation programs to productivity. Such programs were first introduced and pioneered by Frederick Taylor, also known as the father of scientific management. These programs were widespread from around the turn of the century until World War II. They were based on the belief that money was a prime motivator of people's work efforts. In such a context managers could properly be expected to asses whether their compensation programs did effectively motivate employees to the extent and in the direction established by the organization.

However, after World War II the belief that money was a prime motivator of performance was seriously challenged. By the 1960s, behavioral scientists with humanistic orientations like Herzberg and McGregor, developed a two-factor need theory of motivation that divided rewards into two categories: intrinsic and extrinsic. The theory claimed that intrinsic rewards like responsibility, autonomy, feelings of accomplishment, etc. were the only real motivators of work behavior. Extrinsic rewards like pay, benefits, working conditions, etc. were consigned to secondary roles. These rewards were needed to prevent dissatisfaction with one's job, but they had no positive influence whatsoever in motivating performance.

This distinction between intrinsic and extrinsic rewards became the foundation for a different approach to the management of reward systems. Its influence was so persuasive that it also became an integral part of the manager's thought vocabulary and practice.

The most common question faced by managers each working day is: "What rewards do I give to get my employees to be productive?" The intrinsic-extrinsic approach would be to provide intrinsic rewards through job redesign to include more responsibility, more autonomy, and more control.

This answer was not just new, but it was specific, and its implementation seemed possible with relatively little expense and effort. It also seemed to provide a method to prevent or redress worker alienation, which Karl Marx had predicted would result when workers were denied control of and participation in matters relating to their jobs. This long list of employees' motivational problems started several programs such as job rotation, job enrichment, flexible scheduling, and semi-autonomous work groups.

If pay and benefits did not motivate performance, then it was only logical that managers simply shrug off these rewards as an expense, an expense that was necessary but not specifically designed to influence and improve work behavior.

It is believed that a reward has, in itself, a specific potency to generate specific effects. In addition, each effect requires a special prescription that the manager provides depending on the different situations. Autonomy would be used to activate motivational adrenalin, and pay would be used to satisfy the need for material things.

The intrinsic-extrinsic approach looks at only one aspect of the behavior-reward relationship. It ignores the individuals' perceptions of and expectations about these rewards, which are critical to work motivation. It also ignores the obvious fact that a reward will influence behavior only when it is perceived to be of some value to the recipient and expected to be received as a consequence of that behavior. Therefore, any effective approach to rewards management must take into account the perceptions and expectations of the recipient.

Individuals will perform if they believe that they have the necessary ability, that they will receive a valued reward that is contingent on performance, and that the reward will be equitable relative to their actual performance. This alternative approach is known as the expectancy theory, which should be described in detail.

First, the employees must believe that they have the necessary skill or ability to perform at the required level. If the employees believe otherwise, then no reward will help. Instead, appropriate orientation and training may be the answer.

Second, the employees must believe that the rewards are contingent upon performance. In other words, the rewards are directly linked to performance in such a way that a given level of performance is an absolute precondition for receiving the reward.

Third, the employees must value the rewards. A valued reward or a reward with a high "valence" means the reward is highly desired by the employees, which is usually the case if they see it as instrumental in satisfying one or more of their needs.

The value of a reward is also affected by the employees' perceptions of its equity or fairness considering their overall efforts relative to the efforts and compensation of their peers.

Finally, the reward must be salient in the sense that the reward is uppermost in the minds of the employees. If the employees are vaguely aware of the existence of a reward and barely know the conditions for earning it, then the reward is unlikely to influence their work behavior. To make the reward salient to the employee, its existence and operative conditions must be properly and frequently communicated to them.

If the rewards are seen by the employees in terms of these attributes, then expectancy theory postulates that the rewards will, to the extent of such perceptions, have a significant influence on work motivation.

Two gentlemen by the names of Kanungo and Hartwick investigated several attributes of 48 work rewards, a mixture of both intrinsic and extrinsic items. The study found that rewards are perceived by employees in terms of three distinct dimensions with each characterized by a separate cluster of attributes. Those are:

* High performance contingent, valued, and salient (performance contingent reward dimension).

* Intrinsic viewed as self-administered, abstract and immediate rewards (intrinsic-extrinsic mediation dimension).

* Frequent and performance not contingent (reward generality dimension).

Since the emphasis is on performance, only the first dimension will be discussed.

Of the three dimensions, the performance contingency has emerged as the most important dimension of work rewards. It represents the expectancy theory which defines the motivational effectiveness of a reward. Although these rewards can be classified in terms of the other two dimensions, they seem to be unrelated and, therefore, have minimal practical utility.

The rewards for the performance contingency are split into two categories: contingent on high performance and not contingent on high performance. These rewards are listed in the figure on page 18.

The next and last step is to create an action plan to design and administer the reward system and to evaluate its effectiveness. This can be done through the use of a five-step process.

The first step is to develop a list of all the rewards the organization offers its employees. The list should include rewards which involve monetary and extra payments like compensation items and those which do not involve any payments or non-compensation items, such as responsibility, autonomy, and challenging assignments.

The next step would be to decide on the purpose of each reward that is listed. The purpose should be expressed in behavioral terms in order that realization of the purpose can be assessed.

The third step is to conduct a survey of the employees to find out how they perceive each reward. The perceptions of the employees provide vital feedback to management on the effectiveness of each reward. For example, suppose management had decided that the primary goal of the reward of promotion was to motivate employees to superior job performance and was made contingent on superior performance. Also, suppose that the survey results indicate that employees perceive promotion to be valuable. Then the findings would suggest that there was complete congruence between the objectives of the organization and the expectations of the employees. Consequently, management could conclude that its design and administration of the reward of promotion will be effective in eliciting the behavior established for it.

Step four is to examine the findings of the survey and investigate those rewards where the perceptions of the employee relative to behavior reward, contingency saliency, and valence are different from those established by the organization.

The final step is the most vital and is the review of the action program. This consists of reformulating the reward packaging objectives or redesigning the reward system or both. This is also a time for important decisions which consider how best the reward system can be creatively employed to put up with the new challenges which always confront a dynamic organization.

In conclusion, compensation's effective link with performance was first understood by briefly looking at the founders of such programs. Then the motivators and approaches were reviewed through the use of the intrinsic-extrinsic approach. This showed how to link both compensation and performance effectively. Lastly, an action plan was implemented using a five-step process which is both clear and effective.

Anthony Corbo and Brian H. Kleiner are with the department of management, school of business administration and economics, at California State University, Fullerton.
COPYRIGHT 1991 Institute of Industrial Engineers, Inc. (IIE)
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Corbo, Anthony; Kleiner, Brian H.
Publication:Industrial Management
Date:May 1, 1991
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