Behavioural Framework for Compensation

Behavioural Framework for Compensation

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BEHAVIOURAL FRAMEWORK

FOR COMPENSATION

COMPENSATION MANAGEMENT


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OBJECTIVES At the end of this section students will be able to:

Account for the role of motivation in the design and development of compensation.

Distinguish between content and process theories of

motivation. Describe each of the main theories in each category of

motivation theory.

Use the theories to analyse relevant workplace situations


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MOTIVATION Three elements of motivation:

What’s important to a person

The offering of what’s important to an individual in exchange for some desired behaviour

The desired behaviour itself


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Employee’s preference Employee’s prefer pay systems that recognizes:

Individual performance Changes in cost of living Seniority Market

Cafeteria Style compensation


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The use of compensation for motivation To understand a person’s behaviour, one

needs to understand the person’s motivation

Two useful set of motivation theory are:

Content theories Process theories


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Content theories Focus on identifying and understanding

underlying needs, based on the common-sense notion that people behave in ways they think will help them satisfy their key needs.

Example: Need for survival


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Content theories Maslow Hierarchy of Needs

Herzberg’s Two-factor Theory

Job Characteristics Theory


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Content Theories Maslow Hierarchy of Needs

Five sets of needs – arrange in hierarchy

Lower level needs – must be satisfied first

A satisfied need no longer motivates behaviour


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Content Theories - Maslow

Self-Actualization

Ego or Esteem Needs

Social Needs

Safety/Security Needs

Survival/Physiological Needs


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Content Theories Maslow Hierarchy

Survival/Physiological needs

Basic life needs– air, shelter, water, food, sleep , sex

Safety/Security Needs Affection, home, affection, relationship, work group, family, society

Social Needs Love and belonging

Ego or Esteem Needs Self-esteem and also recognition from other

Self-Actualization Ultimate, becoming everything we are capable of becoming


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Content Theories Maslow’s Hierarchy of Needs

Essential Features Predictions about Performance-Based Pay

So What?

1. People are motivated by inner needs.

2. Needs form a hierarchy from most basic (food & shelter) to higher-order (e.g., self-esteem, love, self-actualization).

3. Higher-order needs become motivating after lower order needs have been met.

4. When needs are not met, they become frustrating

1. Base pay must be set high enough to provide individuals with the economic means to meet their basic living needs.

2. An at-risk program will not be motivating since it restricts employee’s ability to meet lower-order needs

3. Success-sharing plans may be motivating to the extent they help employees pursue higher-order needs.

1. Performance-based pay may be demotivating if it impinges upon employee’s capacity to meet daily living needs.

2. Incentive pay is motivating to the extent it is attached to achievement, recognition or approval


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Content Theories Herzberg's Two-factor Theory

Argues that:

Intrinsic factors influence work motivation - MOTIVATORS

Extrinsic factors influence job satisfaction - HYGIENE


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Fredrick Herzberg asked a sample of employees to list factors that:

made them feel good about their jobs Those that made them feel bad about their jobs

Factors differ in both listing Example of expected result:

high pay – feel good Low pay – unhappy


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Real Result:

Feel good factors – job content, mastering a difficult task, learning a new skill, completing a major job accomplishment

Feel bad factors - low pay, poor relationship with supervisor/co-workers, poor working conditions


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Content Theories Herzberg’s two-factor theory

Two factors: Hygiene – factors causing dissatisfaction -

EXTRINSIC

Motivators – INTRINSIC


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Content Theory Herzberg’s two-factor theory

Distinguishes between what is described as motivators and hygiene (or maintenance factors).

States that people seek to achieve hygiene needs because they would be dissatisfied without them.

Hygiene needs (maintenance factors) – if they are not present, good behaviour could not be maintained.


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Content Theory Herzberg’s two-factor theory

Hygiene factors can remove dissatisfaction but cannot motivate.

It only brings about short-term improvements in job attitudes

Example of hygiene factors: Working conditions, salary and job security, status,

relationship with subordinates – peers and supervisor, personal life, company policy and administration, salary,


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CONTENT THEORY Herzberg’s two-factor theory

Motivators – factors that truly motivates

Motivators are considered capable of producing long-term positive effects in job performance

Example: Recognition, promotion and achievement,

responsibility, advancement, personal growth and work itself


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Hygiene – compares to Maslow’s lower-order needs

Motivators – compares to Maslow’s higher-order needs


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Content Theories Herzberg’s Two-Factor Theory

Essential Features Predictions about Performance-based Pay

So What?

1. Employees are motivated by two types of motivators: hygiene factors and satisfiers

1. Base pay must be set high enough to provide individuals with the economic means to meet hygiene needs, but it cannot motivate performance

1. Pay level is important – must meet minimum requirements before performance-based pay can operate as motivator


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ESSENTIAL FEATURES PREDICTION ABOUT PERFORMANCE –BASE PAY

SO WHAT?

1. Hygiene or maintenance factors, in their absence, prevent behaviours, but in their presence cannot motivate performance. These are related to basic living needs, security and fair treatment.

1. Performance is obtained through rewards, payments in excess of that required to meet basic needs.

2. Performance-based pay is motivating to the extent it is connected with meeting employees’ needs for recognition, pleasure attainment, achievement and the like

1. Security plans will induce minimum, but not extra, performance, Success-sharing plans will be motivating. At-risk plans will be demotivating


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Essential Features Predications about Performance-Based Pay

So What?

3. Satisfiers , such as recognition, promotion and achievement motivate performance

4.Other factors such as interpersonal atmosphere, responsibility, type of work and working conditions influence the efficacy of performance-based pay

Other conditions in the working relationship influence the effectiveness of performance-based pay.


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Content Theories Job Characteristics Theory

Richard Hackman and Greg Oldham extended Herzberg’s work by attempting:

to identify the specific job characteristics that cause intrinsic motivation and

By developing a method to calculate the amount of intrinsic motivation in a particular job


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Jobs high in the following areas are enjoyed by people because of the satisfaction they derived from doing them rather than the extrinsic rewards they received from them.

Intrinsic motivators

Task identity Task significance Skill variety Job autonomy Job feedback


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Task Identity

The extent to which a worker performs a complete cycle of job activities

From start to finish

Task Significance

The perceived importance or social value of the job in the general scheme of things

Ex. Job of a lawyer carries more task significance than that of a street cleaner


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Skill Variety

The extent to which a substantial number of skills are required for task completion

Job Autonomy

The degree of freedom workers have in deciding how to perform their jobs

Job Feedback

The extent to which the job itself provides feedback on worker performance


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Originally felt that only employees with a high growth need would respond to the 5 areas identified

Most people wants it

Job enrichment – allows


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Content Theories Comparison of Content Theories and

their relationship to Managerial StrategiesManagerial

StrategyMaslow’s Needs Hierarchy

Herzberg’s Two-Factor Theory

Hackman/Oldham’s Job Characteristics Theory

High Involvement Self-ActualizationEgo or Esteem Needs

Motivators Intrinsic Characteristics

Human Relations Social Needs Hygienes Extrinsic Characteristics

Classical Safety/Security NeedsSurvival/Physiological Needs

Hygienes Extrinsic Characteristics


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Content Theories Money as a motivator

Salience of Needs (high or low)

The degree of urgency an individual attaches to the satisfaction of a particular need

The extent to which an individual will go to satisfy a particular need.

Personal Characteristics and Personal circumstances interact with basic human needs to determine need salience


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Content Theories Salience of Needs

Two key factors:

The amount of need deprivation The importance of the need


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Process Theories Process theories of motivation:

Expand on the Content Theories by describing how the motivation process works.

Focus on the exchange relationship between the employer and employee


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Process Theory Three Process theories are:

Expectancy Theory

Reinforcement Theory

Equity Theory


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Process Theories Process theories of motivation

Behavioural Scientist

found it easier to defend and support process-related theories.

Reward System designers

found it more helpful and useful than Content Theories because they treat motivation as a process


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Process Theories Expectancy Theory

Developed by Victor Vroom

Definition

States that individual are more likely to attempt to perform a particular behaviour if they believe that behaviour will lead to valued consequences and if they expect they can perform the behaviour


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In a work environment people evaluate the expected behaviour against the reward or compensation that management is prepared to offer in exchange for that behaviour

The employee would only be motivated to perform if the reward is seen as being personally valuable

Brings together worker motivation in interaction with the management function


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Assumes that employees will be motivated if they believe that:

There is a positive correlation between effort and performance

A desirable reward will result from satisfactory performance


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Assumes that employees will be motivated if they believe that contd. :

The reward received will satisfy an important need

The effort invested would be worthwhile once there is a strong desire to satisfy the need


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Is base on three beliefs

Valence Is the task worth doing? Do the rewards exceed the cost

Expectancy Am I actually able to do the task

Instrumentality Will I actually receive the rewards if I perform the task


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Valence

The Net Value (valence) of the consequences of the behaviour

Value of the outcome of the person versus indifference or aversion

Refers to the type and extent of the emotional attachment the individual has to a reward.

i.e. - How strongly does he/she feel about receiving an extrinsic reward (e.g. money, promotion, time-off) or an intrinsic reward (e.g. personal satisfaction)

Management must find out what employees value


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Expectancy

The perceived likelihood of actually being able to perform those behaviours (expectancy)

Employee assess how capable they are at doing a job and their confidence level corresponds to that assessment.

Management must identify the resources, training/supervision employees need to enhance their capability to perform.


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Instrumentality

Refers to the perception employees have- that once the job is performed, they will receive the promised reward.

Management must ensure that the promise of a reward is fulfilled in a timely fashion.

Employees belief….if I do better, I get a better reward


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PROCESS THEORIES EXPECTANCY THEORY


So What?

Motivation is the product of three perceptions:ExpectancyInstrumentalityValence

Expectancy is employee’s assessment of their ability to perform required job tasks

1. Job tasks and responsibilities should be clearly defined.

2. The pay-performance link is critical.

3. Performance-based pay returns must be large enough to be seen as rewards.

• Larger incentive payments are better than smaller ones.

• Line-of-sight is critical – employees must believe they can influence performance targets.


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Process Theory Expectancy theory

Essential Features Predictions about performance-based pay

So What?

Instrumentality is employee’s belief that requisite job performance will be rewarded by the organization

Valence is the value employee attached to the organization rewards offered for satisfactory job performance

People choose the behaviour that leads to the greatest reward.

Employee assessments of their own ability are important – organizations should be aware of training and resource needs required to perform at target levels.


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Process Theories Reinforcement Theory

Definition

States that a behaviour will be repeated if valued outcomes flow from that behaviour, or if performing the behaviour reduces undesirable outcomes

Distinguishes between positive reinforcement and negative reinforcement

Other names: Behavourism, Operant Conditioning, Behaviour Modification


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Process Theory Reinforcement Theory

Key Elements:

Learning is behavioural change

Behaviour is the result of an individual’s response to events taking place in one’s environment.


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Key Elements contd.

The individual receives messages (stimuli) from the environment and these elicit responses from the individual.

With repeated occurrences of the stimulus-response (S-R) pattern, the individual is conditioned to respond in a particular way,


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Positive When a reward follows a valued behaviour

Negative When an undesirable consequence occurs whenever the

valued behaviour does not occur

The closer in time the reward is to the behaviour the better

Unrewarded behaviours eventually disappear


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Challenges:

Practical application of theory may be problematic – assumes that all desired behaviours are measurable

The theory considers only those rewards that the organization can control

What happens when reward stops? – will behaviour stop


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So What?

Reward reinforce (i.e. motivate and sustain) performance.

Reward must follow directly after behaviours to be reinforcing.

Behaviour which are not rewarded will be discontinued

1. Performance-based payments must follow closely behind performance

2. Rewards must be tightly coupled to desired performance objectives

3. Withholding payments can be a way to discourage unwanted behaviours

Timing of payouts is very important


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Process Theory Equity Theory

Employees tend to compare the rewards they receive (outcomes) against the various elements that they bring to the task (inputs) in order to assess whether the exchange process is fair.

The Exchange ratio obtained is compared to the ratio of others performing the same or similar types of jobs


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Employees are motivated when they perceive that their outcomes are equal to their inputs.

If they perceive others are being paid more for the same task – negative reaction.


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Essential Features

Predictions about Performance-Based Pay

So What?

Employees are motivated when perceived outputs (i.e. pay) are equal to perceived inputs (e.g. effort, work behaviours)

1. The pay-performance link is critical; increases in performance must be matched by commensurate increases in pay

2. Performance inputs and expected outputs must be clearly defined and identified

1. Performance measures must be clearly defined and employee must be able to affect them through work behaviours

2. If payouts do not match expectations, employees will react negatively


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Process Theory

Equity TheoryEssential Features Predictions about Performance-Based pay

So What?

A disequilibrium in the output-to-input balance causes discomfort.

If employees perceive that others are paid more for the same effort, they will react negatively (e.g. shirk) to correct the output-to-input balance.

Employees evaluate the adequacy of their pay via comparisons with other employees

Fairness and consistency of performance-based pay across employees in an organisation is important.

Since employees evaluate their pay-effort balance in comparison to other employees, relative pay matters

Timing of payouts is very important


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Rewards Desired Reward Outcomes

Three key employee behaviours

Membership behaviour Occurs when employees decide to join and remain with a firm

Task behaviour Occurs when employees perform the tasks that have been

assigned to them.

Organizational citizenship behaviour Occurs when employees voluntarily undertake special

behaviours beneficial to the organization


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Three key employee attitudes

Job satisfaction The attitude one holds towards one’s job and

workplace, either positive or negative Leads to membership behaviour

Work motivation The attitude one holds toward good job performance Leads to task behaviour


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Three key employee attitudes contd.

Organizational identification A sense of shared goals, belongings and desire

to remain a member of the organization Leads to organizational citizenship behaviour


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Rewards Job Satisfaction

Job Satisfaction does not necessarily increase motivation Satisfied, happy workers are not necessarily more

productive workers

They are less likely to quit, be absent or submit grievance

They are more likely to be pleasant with other employees and customers


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Rewards The more complex the desired

behaviours – and the higher the performance level required – the more complex the reward system


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Rewards Causes of reward dissatisfaction

Violation of the psychological contract Expectation about the rewards offered by a given job and

the contributions necessary to perform the job

Perceived Inequity Employees base perceptions of equity (fairness) on a

comparison of their contributions/rewards ratio to the ratios of others perceived as similar

Personal valuation of the reward received Comparison of reward with relevant others


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Rewards Causes of reward dissatisfaction

Relative deprivation

Is perceived when: There is a discrepancy between the outcome they want and what

they actually receive They see that a comparison shows that others receive more than

they do Pass experience has led them to expect more than they now receive Future expectancies for achieving better outcomes are low They feel a sense that they are entitled to more They absolve themselves of personal responsibility for the lack of

better outcomes


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Rewards Lack of Organizational Justice

Distributive Justice

The perception that overall reward outcomes are fair Which is what equity theory is all about

Procedural Justice

The perception that the process for reward determination is fair.


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Rewards Procedural Justice is achieved if the Pay System meets

the following conditions, the pay system must be:

Flexible There must be procedures for employees to appeal pay

system decisions.

Consistent Procedures are applied uniformly to different jobs and time

periods

Free of bias Personal interests do not enter into application of the

procedures


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Rewards

Accurate Application of procedures must be based on factual

information

Ethical Accepted moral principles must guide application of the

procedures

Representative All affected employees must have an opportunity to

express their concerns, which are given serious consideration by the organization


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Rewards Consequences of Reward Dissatisfaction

Attempt to increase rewards

Find more rewarding job Acquire illicit rewards Demand higher pay/unionize Increase effort/performance Demand improved job duties

Attempt to reduce contributions

Demand reduced job duties Reduce effort/performance Increased absenteeism Find less demanding job


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Rewards Types of reward problems

Failure to produce desired behaviour

Production of desired behaviour and undesirable consequences

Production of reward dissatisfaction

Behavioural Framework for Compensation

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