Incentive Schemes as a Means of Motivating Employees

“The limitations of incentive schemes as a means of motivating employees.”

Introduction

        Workers in many fields of employment are evaluated based on their constant level of performance. The logic behind this stems from the concept of incentive theory, which suggests that people in general are motivated to perform certain tasks or do certain things because of external rewards. In general, this theory has proven accurate in its implementation, as it evidently increases performance levels, especially in sales and front-line positions. For example, a company under management change replaced their previous hourly wage pay with piece-rate pay, and saw a 44% increase in performance (Lazear, 2000). Researchers at the University of Iowa strengthened that claim and through extensive research in manufacturing plants, demonstrated that individual financial incentives increase employee performance and productivity by an average of 42% to 49% (Rynes, 2004). The application of incentive schemes is not secluded to labour environments, but is also used in other aspects of society, such as sports. For example, incentives are offered to athletes to achieve a certain goal, such as a soccer player receiving a percentage bonus of their wage for scoring a goal, or Olympians receiving cash rewards for winning a medal. The expectations of managers, or the person in charge who is enacting the incentive, is that it will firstly motivate and increase employee effort, and that this increase in motivation will lead to an increase in productivity. However, the benefits of incentives are not always so clear, for although there is ample research that employees will achieve their intended goals when offered a monetary reward, there remains a lack of research, as well as lack of understanding, on the effects of incentives in relation to motivation, behaviour, and overall job performance. From this we can assume that although incentive schemes are powerful and persuasive, they have serious limitations. Although we are not asking for incentives to become obsolete, recent findings in psychology have found that monetary incentives should be used with severe caution, and must also be complemented by several non-monetary, intrinsic incentives.

Behavioural Limitations

        The effect of pay for performance, and incentive schemes in particular, has made a large impact on the way organizations view their pay schemes in general. In general, monetary incentives have gradually improved sales activities in certain fields where the sale of a product takes place, such as insurance companies, banks, and especially manufacturing plants where piece-rate pay is used. In other situations, incentives have proved counterproductive for several reasons. In many cases, there has been a negative impact on employee behaviour, inequality, and an overall reduction in factors affecting intrinsic motivation.

Long-Term vs Short-Term

        Many studies done on the notion that incentives increase performance on a short-term, but other studies have effectively proved that once an incentive is decreased or even withheld, performance goes down drastically (Bussin). The reason for this is that when an organization, or an individual within an organization, focuses on short-term achievements, they tend to undermine contributions which provide long-term achievements. To demonstrate such a point, one merely has to look at the financial collapse of 2007-2008 in the United States. Several CEO's were receiving stupendous cash incentives for targets they were reaching and profits they were making on a short-term basis. This led them to forget about the effects their choices would have on the company and the markets in the long run – an oversight which proved to be crippling to the global economy.

Individual vs. Group

        Group incentives, such profit or gain sharing, or any other incentives which encourage organization wide achievements have proven to be beneficial more often than not. Even though they are incentives nonetheless, they encourage teamwork and continue to condone good behaviour between coworkers. Average group output has also been proven to be higher than individual output due to a resonance in goals. However, the same cannot be said for individual incentives due to the effect selfishness and singularity have on motivation, and the relative high cost of implementation.

Morals and Ethics

        A study at the University of Zurich showed that monetary incentives targeted at promoting moral behaviour may in fact do the opposite of what it sets out to do, and adulterate it in the process (Fehr; Falk, 2002). When intrinsic incentives are replaced by extrinsic incentives, such as monetary reward, it leads to a changing of standards for what people perceive to be right or wrong. That is, when fair extrinsic rewards are already in place, additional attempted performance boosts prove inefficient or even counterproductive. Performance incentives tend to force an employee to focus solely on rewarded tasks of the job, and neglect non-rewarded tasks. A behavioural study suggests that although we may like the idea of the tangible incentive itself, we dislike the fact that it is being used as a tool to manipulate our behaviour. By the mere virtue of being controlling, they're more likely to be aversive in the long run. We have to measure what the individual is already doing, for if it is already intrinsically rewarding, the worst thing you can do is take away that reward and replace it with extrinsic reward. There is a ton of psychology research done on rewards, and they have all found that the more you reward someone for good performance, the less motivated they will be to perform (Kohn, 1995). In one study, participants were asked to play entertaining games with one another, and after an elapsed amount of playing, were offered an incentive in return for success. Following more elapsed time, the incentives were then no longer offered to the participants, and the results were astounding. Not a single participant wished to continue playing, for their original intrinsic interest had been replaced with an extrinsic interest, in what is known as the overjustification effect (Lepper, 1973). Another example of such a study belongs to Deepak Malhotra from Harvard University, who conducted a research study on employee wage increases. He found that an increase in wage did not increase productivity, unless the additional wage was offered as an unannounced gift. "We attribute this to the salience of the gift: It was obvious to them that we didn't have to give this additional compensation, but that we had chosen to." From this study, the discovery was that the same amount of compensation can be structured in ways that will be more welcome by the employees and will also induce higher productivity (Malhotra,