Variable Pay and the Role of Motivation

Friday, October 01, 2010

Why are variable pay plans more effective at linking employee behavior with specific organizational goals than traditional merit or bonus plans? Many organizational assume that employees are “motivated” by the likelihood of some type of “reward”. Anecdotally, many organizations perceive that the desired reward is tangible or extrinsic in nature, e.g., money, a private office, rank, club memberships … etc.

Victor Vroom (Yale, School of Management) argues that an employee’s behavior is altered when that employee perceives that they will be rewarded for their behavior. Vroom (along with Lawler and Porter) believes that the basis for employee behavior is tied directly to the employee’s knowledge, skill, ability, personality, and prior experiences. Vroom’s Expectancy Theory sees an employee’s behavior as far more complex than say Pavlov or Skinner, as such the reward system required to shape the desired employee behavior and achieve the desired outcome, must also be more complex than a simple bonus plan.

To paraphrase, “What is one person’s motivation is another person’s de-motivation.” Many organizations believe that ALL employees are motivated by money. If I just pay enough money to the “right” employees, I will achieve my goal of the top performing design, manufacturing, sales or service organization. I once worked for a large ($1 billion) southern commercial bank. As our position was eroded by competitor’s we elected to hire very high priced marketing, trust, and leading officers from the major banking centers in Texas. Afterwards, we learned that such individuals were really focused on reaching the major banks in Chicago and New York. Our billion-dollar bank was merely a short-lived stepping-stone in their career plan. At the same time, we overlooked the local long-term employees who knew our markets, our clients, and had established relationships. Not only did we fail to motivate our high priced new talent to transform a 150-year-old organization into a modern regional financial powerhouse, we succeed in de-motivating our current talent as well and ultimately the bank was sold to a junior organization in an a joining state.

Determining what and how to motivate a single employee or a group of employees is no easy task. Administratively, it is often impractical to design a reward system for an individual employee except in extremely small groups. In one organization I worked for, we designed a variable pay plan for our location managers around net operating margin. While each location had a separate target value, the key metric was still operating income after expenses. The plan contained a degree of discretion. Should a significant change occur in the management of the location, marketplace competitors, the legal environment or the economy; the organization’s management had the ability to alter the plan’s parameters. As part of the plan, the managers of our 60 plus locations were treated to several days of award (rewards) presentations, spa treatments, golf outings, gifts, and meals. This annual “director’s conference” had been held for many years. During these conferences, location managers were recognized for attainment of their specific goals, both with financial and non-financial rewards. In addition, financial rewards were provided to the non-management administrative staff of the location in recognition of their contributions towards goal attainment.

How can an organization’s management provide for an environment that stimulates employee motivation? If different employees are motivated by different rewards, how does an organization identify these reward factors? The simple answer is to survey the organization’s workforce as to what rewards are important to the employees, collectively. I once surveyed a sample group of approximately 4,000 part-time nurses and applied health care workers as to what would “motivate” them to work more hours. Prior to the survey, the organization’s management argued that respondents wanted more money. However, the survey indicated that the majority of the respondents desired paid time off in exchange for working more hours.  The following year I re-sampled the same employee group and got the same answer, “paid-time off”.  In the end, the organization’s management elected to take no action with regard to either increased pay rates or paid-time off.