October 05, 2008

Human Resource Management Lesosn 3 Exercise

Question 1. Reflecting on your experience as an employee and as a manager, to what extent do you think pay motivates or demotivates employees? Why?

One of the things that I have leaned from my experience as manager in IBM is that pay is not equally important in all situations or to all individuals. For example, if one employee is facing a complicated financial situation it's going to give a critical importance to pay while an employee with their 'basic necessities' covered will probably give more importance to other factors such as career opportunities. On the other hand, young employees usually give more importance to cash when the older ones are more interested in job security or retirement options. Many more situations and employee individual characteristics can affect the extent pay is important for employees.

But what do the employees say about pay and motivation?

When employees are asked for the main motivational factors at work, pay hardly ever appears in the first position. Instead, security, job interestingness, possibility of promotion and others show up as the principal motivators at work above pay. Some studies have corroborated this view. For example Jurgensen (1978)collected information from more than 50,000 applicants to the Minneapolis Gas Company over a 30-year period concluding that pay ranked fifth in importance to men, and seventh in importance to women. Towers Perrin (2003) surveyed more that 35000 US employees concluding that competitive base pay ranked sixth in retaining employees, but pay didn't even appeared in the top ten in terms of motivating employees.

However, during my time in IBM I have seen so many people leaving the company only because they were paying more in another firm (specially during the dot.com fever) that I wonder if people are really being frank when answering those surveys. Reflecting on this, I think that people do not put pay on the first positions in surveys because of the culture or social norms that view money as a less noble motivator factor in comparison with challenging or meaningful work. This suggests me that money is more important to people than people admit.

On the other hand, I have seen people accepting one promotion even when this implied losing money (at least in the short term) because some salary incentives didn't apply to the new position. Hence a lot of factors apart of money can influence people's behaviours and (probably) motivation.

In my experience I have also found that the motivational effect of money is nonlinear across different pay levels. For example giving a salary increase of 100€ to a person who earns 1000€ a month will be more motivating than giving the same increase to a person that makes 5000€ a month. This is in line with Hertzberg’s (1966) two-factor theory of motivation. In this regard I believe that salary is a hygiene factor in the sense that, when certain level is reached, the motivational effect will decrease, but on the other hand if this level is not reached, the pay will be more a demotivating factor. Other motivational factors will be of little use when the employee is below the hygienic salary level, however these will be needed to motivate people above it.

Finally, Equity theory (Adams, 1963) focuses on people’s perceptions of the fairness (or lack of fairness) of their work outcomes (pay, rewards...) in proportion to their work inputs (effort, skills...). If one employee perceives that their outcome/input is inferior than another worker's ratio, he will feel that is not getting the outcomes that he should and will try to rebalance the situation either by asking for a raise of by reducing their inputs (demotivation).

In my experience, the equity issues are one of the most important aspects to consider in reward management, as people judge the fairness of pay in relative terms, although this can vary among different cultures.

Question 2.Thinking about different pay system that you have experienced, which have been the most effective? Why?

In my opinion, the aspect of pay that will most directly motivate performance, is the extent to which pay is contingent on performance. If raises make no differentiation on the basis of performance, pay won't make much influence on motivation.

IBM has a complicated pay system that in general follows the rule to reward the best organizational performers. Among some others, existing reward methods comprise:

* Broadbanding (Armstrong and Brown, 2001)

* Performance Related Pay (PRP)

* Incentive plans

*Awards recognizing job well done

* Awards for achieving one particular objective

* Bonuses linked to organizational performance

* Employee share ownership

Not all the methods are available to all kinds of employees. For example, incentive plans are open only for employees with certain responsibilities and above some "band level".

Among them, the most influential one in people's motivation is in my opinion PRP. Under this scheme people's performance is evaluated using the following scale:


2+=Above Average Contributor

2=Average Contributor

3=Below average


The employee achievement is used to calculate the amount of the variable part of the salary that the employee will receive and also determines, in a considerable extent, the next salary increase. This method is a powerful motivator but only for the top performing employees and individuals with high needs for achievement. As the method include quotas for the number of 1's and 3's that one particular department have to achieve, many people fall into the middle ground where the pay incentive is very low.

PRP is awarded on the basis of individual performance appraisal by employee's manager against pre-agreed objectives aligned with organizational strategic objectives. This introduces the problem of the subjectivity of the assessment and also the issue coming from the fact that the appraisal process is viewed just under the PRP view but not under the view of the employee's development and recognition for well done work . Another significant issue is inconsistency, as quotas are deployed by department, hence managers with different "quality standards" will give inconsistent evaluations when comparing different departments.

Incentive plans could be an important motivational tool if they were used correctly, which apparently is not happening in IBM today. The objectives that a particular employee has to achieve (normally financial objectives such as gross profit or revenue) are being set in a highly bureaucratic way for the financial department, who doesn't know the intricacies of a particular project. Most of the time, the objective being set is either very easy or very difficult (most of the times impossible) to achieve. In the first case the motivational effect is very low, in the second it has a powerful demotivating effect (If you make the basket smaller than the ball, people won't even try playing). First line managers should have influence in the objective setting, in order to improve this process.

Awards in recognition for the job well done, if used correctly, have the ability to reinforce the desired individual behaviours and signal them for others.

On the other hand, bonuses linked to organizational performance and share ownership have little (if none) influence in performance as is very difficult to relate individual performance with organizational performance although it can maybe boost a "community" feeling.

Finally, awards for achieving a particular objective can be very useful to motivate people in order to achieve particular organizational objectives and as a way to signal strategic priorities, however employees can "get used" to it leading to demotivation in absence of these "one time" rewards.


Adams, J. S. (1963). Toward an understanding of inequity. Journal of Abnormal Psychology, 67, 422–436.

Armstrong M (2002). Employee Reward, 3rd edition, London

Hertzberg, F. (1966). Work and the Nature of Man. Cleveland: World Publishing Co.

Jurgensen, C. E. (1978). Job preferences (What makes a job good or bad?). Journal of Applied Psychology, 63, 267–276.

Towers Perrin. (2003).Working today: Understanding what drives employee engagement. The 2003 Towers Perrin Report.

- One comment Not publicly viewable

  1. Hi

    Q1. Very good reflection on a range of ‘pay/motivation’ perspectives. Good use of sources to support the discussion. If you wanted to develop it further you could consider how your views support or contradict ‘conventional’ motivation theory? Also you might like to reflect on why money based incentives are so common if they are only partially effective?

    Q2. Good reflection on IBM practice. But given what you write in Q1, could it be that eliminating the pay dimension might actualy improve the outcomes? For example if performance was managed by line managers without the lever of pay, would they focus on what it (performance) acually meant in terms of each job and then facilitate employees behaviour to deliver to their maximum – irrespective of money issues? Would such an approach work and if not why?

    Hope that helps you think creatively about this topic.


    06 Oct 2008, 11:16

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