LESSON 22: PRINCIPLES OF EXTERNAL AN INTERNAL

UNIT 3 LESSON 22: PRINCIPLES OF EXTERNAL AN INTERNAL

DIFFERENTIALS OBJECTIVES, ROLE, IM PORTANCE OF

REWARDS AND INCENTIVES Learning Object ives

i and iii.The Individual and the Incentives:

CO

• To know the Meaning of Rewards and Incentives

Different people value things differently. E nlightened managers M

realize that all people do not attach the same value to monetary

• To know the Features of the Incentive Plans

incentives, bonuses, prizes or trips. E mployees view these

• To understand the Determinants of Incentives S things differently because of age, marital status, economic need

AT

M eaning of Rew ards and Incent ives

and future objectives.

IO N

An ‘incentive’ or ‘reward’ can be anything that attracts a However, even though employee reaction to incentives varies

employees’ attention and stimulates him to work. In the words greatly, incentives must have some redeeming merits. For

of Burack and Smith, “An incentive scheme is a plan or example, there might be a number of monetary and non-

programme to motivate individual or group performance. An monetary incentive programmes to motivate employees.

incentive programme is most frequently built on monetary Money, gift certificates, praises, or merit pay are of the

rewards { incentive pay or monetary bonus} , but may also

continuous parade of promotions.

include a variety of non-monetary rewards or prizes.”

ii.The Work Situation

On the other hand, French says, the term “incentive system has This is made up of four important elements:

a limited meaning that excludes many kinds of inducements (a) Technology, machine or work system, if speed of equipment offered to people to perform work, or to work up to or beyond

operation can be varied, it can establish range of the acceptable standards.

incentive.

It does not include: (b)Satisfying job assignments, a workers’ job may incorporate a (i) wage and salary payments and merit pay;

number of activities that he finds satisfying. Incentives may (ii)over-time payments, pay for holiday work or differential

take the form of earned time-off, greater flexibility in hours according to shifts, i.e., all payments which could be

worked, extended vacation time and other privileges that an considered incentives to perform work at undesirable times;

individual values.

and (c) Feedback, a worker needs to be able to see the connection (iii)premium pay for performing danger tasks. It is related with

between his work and rewards. These responses provide wage payment plans which tie wages directly or indirectly to

important reinforcement.

standards of productivity or to the profitability of the (d)E quity, worker considers fairness or reasonableness as part organization or to both criteria.”

of the exchange for his work.

The use of incentives assumes that people’s actions are related Incentives, in general, are important motivators. Their to their skills and ability to achieve important longer-run goals.

effectiveness depends upon three factors: drives, preference

E ven though many organizations, by choice, or tradition or value, and, satisfying value of the goal objects. Misra says: contract, allocate rewards on non-performance criteria, rewards

“Beyond subistence level, becoming needs (self-actualization should be regarded as a “payoff ’ for performance.

needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival).

An Incentive Plan has the follow ing Important Features:

Below the subsistence level, however, the reverse holds true.”

1. An incentive plan may consist of both ‘monetary’ and ‘non-

He makes the following generalizations:

monetary’ elements.Mixed elements can provide the diversity needed to match the needs of individual

(i) Incentives, whether they are monetary or non-monetary, tend to increase the level of motivation in a person.

employees. (ii) Financial incentives relate more effectively with basic

2. The timing, accuracy and frequency of incentives are the very

motivation or deficiency needs.

basis of a successful incentive plans. (iii) Non-financial incentives are linked more closely with higher

3. The plan requires that it should be properly communicated to

motivation, or becoming needs.

the employees to encourage individual performance, provide feedback and encourage redirection.

(iv) The higher the position of a person in an organization’s hierarchy, the greater is his vulnerability to non-financial

Determinants of Incentives

ncentives.

These features are contingencies, which affect the suitability and “While budgetary restrictions and temporary improvements in design of incentives to varying degrees. The effective use of performance place a limit on the potency of money as a incentives depends on three variables - the individual, work motivator, non-financial incentives involve only human situation, and incentive plan.

ingenuity as investment and also insure a relatively stable acceleration in output.

Monetary incentive imply external motivation, non-monetary incentives involve internal motivation. Both are important. It is

a judicious mix-up of the two that tends to cement incentives with motivation.”

Tut orial Act ivit y Objectives, Expectations, Rew ards

By E . A. Winning “Motivation comes from within: the only thing that a manager

or management can do is to provide an atmosphere in which the individual can be motivated.”

Since 1968 I have used a modified Management by Objectives (MBO) process, as opposed to a program, to generate the communications necessary in achieving results desired and stated by various structured and healthy companies.

MBO has primarily been used as a tool for individuals to make the process successful, and these employees want to know what good it’s going to do for them by following what could become an unwieldy procedure. As I asked in a 1974 article about MBO, “what’s in it for the individual?”

Many organizations that have implemented management by objectives have assumed that achievement of objectives is motivating for the employee, but this assumption has been the downfall of many MBO programs.

An awkward number of individuals still ask, “What’s in this for me?” For that reason, I believe that management by objectives is not a motivator unless it is linked to a reward system. This will appear contrary to many managers to whom I’ve told over the years that you cannot motivate an employee.

Motivation comes from within: the only thing that a manager or management can do is to provide an atmosphere in which the individual can be motivated, hence, the rewards which I’ll address in this chapter.

The rationale of organizations adopting MBO is this: Achievement is a motivator; meeting objectives is achievement; therefore, meeting objectives is a motivator — something satisfying to a person. The problem lies with defining achievement and motivation. In their dictionary of psychological and psychoanalytical terms (no longer in print),

E nglish and E nglish defined achievement as “success in bringing and effort to a desired end.”

In this case, just who is stating what the desired end is? Usually, it is the organization, the company, the manager; even when the individual has a say in the definition of the goal, it is external to that person. And achievement has quite a different base from motivation, which E nglish and E nglish describe as “the general name for the fact that an organism’s acts are partly determined in direction and strength by its own nature...and/or internal state.”

What is motivating to an individual is, then, determined by the individual. What is achievement to an individual is shaped by external forces - the supervisor, the company, for example. And how does the individual know he has achieved? He may have a sense of achievement, but it is the external reward for attaining

the desired end that overtly tells him that others recognize his achievement - an essential condition to his internal motivation.

In other words, objectives setting without tangible rewards is MBO in a vacuum. Rewards are tangible things by which the employee can measure whether or not, and how much, he has achieved, “grown,” and been recognized. Motivation depends on how well an individual’s needs are met.

If achievement is one of those needs, the employee may be motivated by his own sense of achievement, but if his sense of achievement depends on confirmation by the rewards he receives for meeting objectives, then he will need the rewards, both as a confirmation and as a device to measure how well he has achieved.

To put it a little more simply, if an individual has the need to achieve something and he accomplishes that something, he will

be motivated. However, if he is told to do something, set dates for reaching objectives, and he does what he was “supposed to do” in a timely fashion, then unless he is rewarded, there is no inherent motivation in reaching the goal.

In other words, even with mutually agreed upon goals, the employee must receive a raise, a private office, a company car, a bonus (ugh...but that’s later), or a pat on the back, the latter probably the only “true” motivator.

What is needed is a greater incentive for the individual to set and meet objectives, to be fully involved in MBO as a process. MBO is usually thought of as a program, and a program has a beginning and an end. The fact that most MBO programs do have an end - die a natural death - may point to the underlying flaw in hypotheses companies have about management by objectives and what the employee will attain from them.

The incentive should meet the individual’s needs, the driving forces that propel (motivate) an employee toward a goal that is most often self-centered, rather than company-oriented.

Because motivation is internal, it is difficult to ascertain, but achievement is external to the individual, and achievement can

be measured. Although I don’t believe that a primary goal of MBO was to

measure achievement, it can certainly be used to do so. By itself, it may satisfy only the company’s needs. It aids in planning and control.

It helps in assessing productivity, costs, overhead, and so on. If it doesn’t satisfy the individual’s needs, however, in the long run MBO won’t work for the organization either. MBO with a reward system is a viable approach to meeting corporate and individual needs, to meeting terms of the employer-employee “psychological contract.”

In an MBO/Rewards System, What Rewards? There are, of course, a number of incentive or reward plans, the

success of which is dependent on the type of organization involved. One of these incentive systems, piecework or commission, predates MBO in its present form by a century. Another, the bonus, goes back at least as far as Bob Cratchit’s Christmas turkey.

Last, we have a percentage system; it may be a percentage of salary increase based on merit (i.e., productivity), or a percentage based on sales, or profits.

The idea behind piecework was to get the employee to produce more by paying him in terms of the number of items he produced. It is still a common practice, especially in textile, electronics, and other assembly line industries. The commission, one step above piecework, is usually paid in sales areas, the sales person reaping a percentage of the sales he has generated. One step further is, of course, salary-plus- commission. These three (two-and-one-half ?) systems have one common underpinning: the individual is rewarded, or paid, according to his own productivity.

Is the piecework or commission system a good one? To the extent that both have at times excluded other motivational factors, no. To the extent that both place the responsibility for productivity on the individual, yes. The individual sets his own pace and in doing so has set certain objectives within corporate standards to be met.

Both systems are MBO approaches without being labeled as such. Further, piecework and commissions standards are relatively contractual in favor of the employer, thereby making it easier to either reward the employee or dismissing him fairly.

The bonus is probably the oldest form of incentive system and has been popular at upper-management levels for the past 20 years. The bonus is usually based on the individual’s present salary, his status in the organization, his productivity, and/or the company’s profit picture.

It is an incentive, but it loses much of its motivational impact because it is too far separated in time from performance, or it may be given across-the-board without regard for individual productivity. Moreover, its impact is limited; it does not reach far enough down into the company to affect the middle- or lower-level employee.

The lower-level employee who gets no bonus feels that he is doing the “real” work, while upper-management reaps a percentage of the profits the employee has been instrumental in attaining. If such is the case, why should the lower-level employee write objectives and try to meet them? He may do it because he has been told to, but he will really want to write and meet objectives only if there is something in it for him, a tangible reward when the goal has been reached.

If the bonus is given once a year, then how does one sustain the momentum to reach the desired goal? Perhaps the bonus will have to be a large one, or perhaps it should be given out several times a year - for instance, at the end of every objectives- review period. If a bonus system is used, it should be related to objectives and based upon productivity. For that matter, all incentives should be based on productivity, or value to the company.

If bonuses are handed out across-the-board, they will satisfy only a few, and may actually de-motivate those who feel that they have been more productive than others who are receiving the same reward.

Some of the defects of a bonus system may be avoided in a percentage system, which, all in all, is probably the most palatable and most productive when combined with MBO. The percentage of salary would be entirely an individual matter. The employee’s performance, and only his performance, would be the basis for such a reward. His performance would be measured by how well he met the objectives he was committed to and had “contracted” for with his supervisor.

Since objectives can be set for anyone at any level in the company, all employees could benefit from such a program. Moreover, since a manager is supposed to be in control of his organization and his subordinates’ reaching or not reaching their objectives will reflect on his abilities, it is a fair system to use in both the evaluation of the manager’s performance and his reward.

A percentage increase of salary can be seen as a type of bonus, but it is more specific and does not have some of the drawbacks of other bonus systems. It is related only to the individual’s performance and on what he has agreed to attain, and the distance-in-time objection can be eliminated if it is tied to fairly short-term objectives, if, for example, objectives are set on a quarterly basis, and percentage increases are given (or not given) at those intervals.