Incentive Schemes as a Means of Motivating Employees

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In extending the breadth of the Yerkes-Dodson law, psychologists have sought to identify situations that can produce an unhealthy relationship between motivation and performance. One of the mechanisms which can cause motivation to backfire is when it leads to greater self-consciousness. That is, when a certain performance relies on automatic and habitual skills, adding any form of intrinsic or extrinsic incentive can cause people to involuntarily shift their mental paradigm from an automatic to a controlled process of thinking, thus decreasing their performance. This decrease in performance due to increased motivation is also known as “choking under pressure” (Baumeister, 1984). Studies show that if the work is already important and holds many intrinsically rewarding tasks, then it may even be better to provide no incentives for any task. (Fehr; Falk, 2002) In a study performed where participants were offered fairly high incentives for improved performance, 8 of 9 tasks examined eventually led to worse performance (Ariely, 2005).

Inequality has also been an effect of offering individual incentives, for numerous studies have shown that people judge the fairness of their pay not in absolute terms, but rather in terms of how it compares with the pay earned by peers. Although the pay scheme may not seem unhealthy on the surface, it can generate negative effects on retention and collaboration as executives engage in fierce comparisons with one another (Grant, 2011).

Effective Implementation

Although the purpose of this paper has been to outline the limitations of incentive schemes, there is no denying that with proper implementation, incentive schemes can be beneficial both to the employee and to the organization itself. To reach that point, a specific set of rules must be followed strictly and implemented with severe caution, and must take into account things such as who distributes the incentives, why they are distributed, where they are distributed and to whom they are distributed. First, the expectations and needs of managers and employees need to be negotiated for the incentives to be at least somewhat effective. Managers are hopeful that the incentives they put in place will attract and motivate workers, and expect that their performance outweighs the costs of implementing the incentives. Employees on the other hand need to take the existence of incentives are an opportunity to increase the fairness of their pay system, even thought it may not be unfair to begin with. Without a common understanding between managers and employees, there will be a misunderstanding of what each side both needs and wants. Second, employees must have the capabilities and resources available in order to deliver the expected results. Third, incentives must require appropriate and good behaviour which leads to good outcomes. Fourth, the organization implementing the incentive scheme must have a fair and proper way of measuring the outcomes of such pay schemes. Fifth, the employees must receive constructive feedback on whether their performance measured up to the expectations of the organization. Consistent, short-term validation of good or poor performance is much more effective than long-term evaluations, especially when feedback is conveyed in a positive manner, deliver immediately after observing performance levels, and specific to the behaviour that is being targeted. Lastly, the position of the implementing manager is crucial. When incentives are given by high-status leaders, employees may see them as more meaningful. When incentives are awarded in public, they confer greater status but also make inequality more salient. In other words, role modeling is essential (Lagace, 2003). Overall, companies should design compensation packages to attract the right people for implementing the company's strategy. For instance, below market salaries coupled with aggressive incentive pay linked to individual performance is likely to attract self-motivated entrepreneurial individuals (Narayanan, 2009).

Conclusion

As outlined in this paper, financial incentives clearly play an important role in employee motivation and performance, but the reality of the situation is much more complex than one that can be explained by incentive theory. There are aspects of work that are ignored by incentives entirely, such as intrinsic desires and hygiene factors. There are also aspects of work, such as problem solving, concentration, and creativity that are hindered by the use of incentives. In result, the sole use of incentives can lead to consequences that are likely the opposite of what should have occurred. Our discussed points challenge the assumption that increases in motivation necessarily lead to improvements in performance. Let's not forget, however, that it is also possible for incentives to improve performance of those at the bottom of the hierarchy, even if it does not work on top with high earning executives. Overall, the ultimate realization that this paper has achieved is that one cannot simply assume an incentive can and will work in any given situation.

“How selfish soever man may be supposed there are evidently some principles in his nature which interest him in the fortunes of others, and render their happiness necessary to him, although he derives nothing from it except the pleasure of seeing it.”

- Adam Smith, 'A Theory of Moral Sentiments'

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