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Introduction:
Incentives are ways in which one can motivate individuals to perform certain
actions. In a business environment, incentives are crucial. They can motivate employees
to realize their maximum work efficiency or encourage customers to consume more of
your product. By providing incentives, such as pay raise, improved benefits, bonuses,
or comprehensive compensation packages, businesses are able to drive employee
behavior in ways that can benefit the company by rewarding a particular behavior or
performance. By “aligning the interests of managers and shareholders, managers bear
the full costs of any prerequisites they consume through a deterioration in the value of
their incentive compensation… and [they] will be motivated to take actions that
maximize shareholder value”(Feldman, 2015). In essence, as a manager becomes
impassioned by company values, his productivity rises as work is driven by more than
substantive incentives. Therefore, by providing motivators for individuals, a business
is better able to prosper and grow.
Incentives, however, do not always increase employees’ motivations and, in
turn, increase the productivity; sometimes, large incentives can decrease productivity
by distracting employees’ attention or making low-status employees feel inadequate.
“Using a computational model, we show that firms can improve performance by
offering low-powered rewards for the sselection and implementation of employee ideas.
Low-powered incentives provide a sufficient stream of good ideas, but few exceptional
ones. Higher-powered incentives, in contrast, do not systematically translate into
exceptional ideas either, but generate an excessive number of good ideas” (Baumann,
2013). According to Baumann, the proper approach and use of incentives are also very
important to a firm’s success.
Problem Statement:
Many business leaders believe that compensation is the most effective incentive
for employee performance. However, the effectiveness of monetary based incentives
differ from one employee to another. Hence, it is essential for company leaders to
distinguish which type of incentives work best to increase the productivity of their firm.
Our group aims to analyze the importance of incentives and to demonstrate the role that
they play in a business environment.
Research Questions:
1. What are the most effective incentives for employee motivation/productivity?
2. How do we know when a company is incorrectly providing incentives?
3. How can companies implement incentives to drive employee productivity?
Research and Findings:
1. What are the most effective incentives for employee motivation/productivity?
Incentives work to motivate employees in different ways. One of the ways in
which incentives work to motivate employees is by involving them in some kind of
competition. Since incentives are not given to everyone, the employees know that they
have to compete for them. This competition works to make them motivated and very
active in their work places (Gómez, 2005). This even makes such employees volunteer
their spare time in order to be more productive and get these incentives.
Another way in which incentives work to motivate employees is that it allows
a company’s seniors to demonstrate their appreciation towards an employee’s work.
Incentives allow employees to feel as if they were a bigger part of the organization as
opposed to feeling as if they were just a mere employee. When a business is able to
align their strategic goals with that of an employee through the use of incentives, the
employee’s satisfaction increases and he will work harder as if he were working for his
own personally owned organization; they now feel a greater sense of belonging in the
firm (Hoffmann, 2012). Once they feel like they fit in, the employee will evaluate his
job satisfaction positively and become a composite of the business (Judge Ch. 5,
2015).
This way of thinking has allowed businesses to increase their firm’s
productivity as a greater sense of teamwork is felt in the company.
This empowered
team mentality is seen in both top-level management, that are constantly looking for
ways to motivate their employees, and lower-level employees that feel a part of a team.
Through team-oriented incentives, companies can achieve the previously stated
goal of aligning the company’s strategic goals with that of its employee. Teamoriented incentives are those that are given to all individuals of a team, rather than
individuals within the team. These incentives create a sense of teamwork that
motivates employees by bringing them together as opposed to alienating the socially
inept or productivity stragglers.
Teams become more effective as employees
communicate effectively amongst themselves and share their refined mental model to
achieve a common objective. Motivated by a common objective, individuals within the
group are less likely to try to outdo one another to get an individualized incentive.
When employees compete for an individual incentive, certain employees will
refuse to communicate effectively with each other and some employees inevitably get
alienated and dejected by their team. These repeatedly dejected employees will
become social loafers, and may even experience employee burnout (Judge, Ch. 11,
2015). This type of exclusionary competition is especially seen in individualistic
countries where people are driven more by individual accomplishments and
achievements that improve society’s perception of himself. Because of their selfcentered
motives,
it
can
be
hard
to
create
team
players
in
these
environments. However, managers who implement team-oriented incentives can
create a sense of teamwork that brings together their employees to become a team,
greater than the sum of their parts. Although actual businesses may seem more
nuanced than “teams”, management systems like Google’s 2004 Founders’ Awards
Program has shown resounding success through the use of team-oriented
incentives. In Google’s Founders’ Awards program, Google provides restricted stock
options, valued at upwards of $12 million, as quarterly rewards to teams that came up
with the best ideas to increase productivity (Baumann, 2013).
There are two types of incentives, monetary related incentives and nonmonetary. While monetary incentives are usually lump sum cash bonus, non-monetary
incentives are associated with a pleasurable experience rather than functional items.
(Dhar & Wertenbroch, 2000). More often than not, businesses engage in non-monetary
incentives as they prove to be the cheapest alternative to encourage maximum
efficiency. Non-monetary motivators include high-end company vacations, training
employees so they can better perform at their jobs, and acknowledging and offering
tangible recognition for staff who excel, such as an employee of the month award to
showcase their efforts in the company.
Since these extrinsic, non-monetary rewards can be publicly announced and
shared amongst coworkers, they tend to have a prolonged effect, as compared to a
privately given bonus. Because feelings are difficult to monetize, cognitive research
suggests the perceived value of these awards to be inflated (Kunda, 2011). For
example, people tend to fantasize the best-case scenarios about consumption of the
reward. This means that if a team of employees were given an all-expense paid trip to
Big Bear Mountain, they are more likely to imagine drinking, skiing, and being merry
in the snow than any possible negative aspects of the trip. Whenever the team of
employees thinks about the incentive, they will feel positively affected by it and exert
extra effort to achieve their dream. Even though the thought of a cash bonus can have
positive associations as well, the economic value of money is easily calculated. This
makes it less susceptible to the biases that inflate the perceived value of a non-monetary
reward.
Though non-monetary incentives can create a drive for employees to pursue
more work recognition, research shows it is not the most effective. According to
researcher and psychologist, Kunda, “Incentives tend to be more effective when the
employee is actually motivated by cold, hard cash or additional forms of payment that
increase his total compensation” (Kunda 2011). The only way to create a good
motivator for an individual is to provide them with a tangible reward that makes them
better off. Such monetary rewards can vary from larger benefit packages, to a higher
paying job positions. Though monetary incentives are the most effective in increasing
productivity they can often times lead to negative employee behavior if not
implemented properly.
2. How do we know when a company is incorrectly providing incentives?
Although the purpose behind incentives is to boost employee satisfaction and
maximize their work efficiency, incentives can often times backfire. When a company
does a poor job at communicating their strategic vision with their employees, the
company can actually put themselves at risk by implementing incentives. One of the
biggest flaws in compensation projects is that they do not always consider all the
essential factors that make a company profitable. All the successful incentive plans
align with a firm’s strategic plan, financial goals, productivity processes, and finally
their clientele development.
For example, a company whose profits heavily depends on the amount of sales
they make might implement an incentive strategy of giving bonuses to employees who
exceed a certain amount of sales for a given period. This, however, is not a good way
of encouraging their employees to sell more. Employees may become so fixated on
attaining those cash bonuses that they will begin to neglect customer service and
satisfaction as they will only pay attention to helping customers who have a desire to
purchase store items on that particular day. Companies can lose valued, long-time
customers from their deal-hungry employees and end up with a weaker client base then
they had before the cash bonuses were implemented. A weak clientele base will make
it harder for a company’s market share to grow and be attractive to buyouts or mergers
(Feldman, 2015). Therefore, a company must always take into consideration all the
key aspects of what it is that makes it profitable and thus align its incentive strategies
with its vision.
A poor compensation strategy can also lead to unethical behavior and discontent
amongst employees. In The Case for Motivated Reasoning, Kunda states that, “When
strong financial incentives are in place, many employees will cross ethical boundaries
to earn them, convincing themselves that the ends justify the means. When we value a
reward, we often choose the shortest, easiest path to attaining it — and then persuade
ourselves that we did nothing wrong” (Kunda 1990). Psychologist Kunda argues that it
is in the human nature to look for ways to minimize the amount of work while looking
for ways to maximize the payoff from that work. An example of sacrificing business
ethics can be seen in the case of Scott Clifford, VP of the Control Systems Division
of ProTech, Inc. in 1997. Upon discovering that corporate was thinking of eliminating
the systems control line, Clifford submitted a bid to ExxonMobil for the “sophisticated,
computer-based process control system for the Beaumont, Texas plant”. When his
best managers questioned whether they were, in fact, dumping the business and moving
out of this line of work, Clifford refused to give a clear response (Swanton,
2003). Though incentives can increase work performance, they do not guarantee that
employees will follow the morally ethical path to attain them. Just as the case is for a
company that engages in poor incentive strategies, employees can overstate their sales
and performances or can ship unfinished products in order to meet deadlines.
If a company has goals that are too difficult to attain, feelings of dissatisfaction and
contempt are likely to arise amongst its employees. Avoiding such negative results is
possible by the use of clear communication and giving employees realistic set goals
within their reach. Rather than create an organization tolerant of failure, setting realistic
goals allows organizations to create more adaptive employees by raising the degree of
lower-level autonomy. Furthermore, allocation of resources away from a highpowered reward search creates employees that explore different individual skillsets
rather than exploit the same said skill sets (Baumann, 2013).
Other reasons why incentives often fail and cause negative backlash from
employees is that they are not properly followed by the company’s supervisors. For
example, if the head company gives the goal to its smaller firm to increase sales but
does not specify the amount, a clear case of miscommunication has risen and employees
are left confused as to how much harder they should work to attain the compensation
package.
In order to avoid the negative results of incentives, it is crucial for companies to
know how to examine, revise, and forge incentives according to their strategic needs.
Constantly performing employee evaluations is a good way to ensure employee ethical
behavior remains in check at all times and by clearly communicating goals and aligning
them to the company’s plans is a good way of keeping employee satisfaction high.
Though incentives can sometimes backlash negatively, there are ways that companies
can ensure that they have the intended result of increasing employee productivity.
3. How can companies implement incentives to drive employee productivity?
Our analysis so far demonstrates that incentives can be presented in many forms,
for example monetary incentives versus non monetary incentives. Research also shows
while both types of incentives drive productivity, ultimately, monetary incentives
produce the greatest motivation (Kunda, 2011). However, if not properly implemented
monetary incentives can lead to employees focusing on the
“bonus” while
undermining the company’s ultimate goal. It can also lead to unethical behavior as seen
with ProTech’s vice president. When all of the above is taken into consideration it is
evident that correct implementation and enforcement of incentives is crucial for driving
employee productivity. Research shows several effective methods to implement
incentives however I will focus on two methods in this discussion. In order for
incentives to be effective while also avoiding distractions and unethical behavior
companies should integrate recognition of exceptional behavior into its company
structure and also integrate incentives that produce increased thought frequency in their
employees.

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