Organizational behavior implications of incentive pay systems 1
Organizational Behavior Implications of Incentive Pay Systems
Ahren Ebling
Penn State University
MGMT 51- Behavioral Science in Business
Denise Potosky
Organizational behavior implications of incentive pay systems 2
The fundamental principle behind employment is that an organization pays an individual
to complete a task, provide a service, or produce a product. Having said that, it is not nearly as
simple as that statement implies. In the United States there are many different ways to
compensate employees for the performance of their duties. With that in mind, studies have
shown that employees are not primarily motivated by compensation, and that there are other
significant factors that affect employee performance (De Vos, A & Meganck, 2009). As such, it
is important to understand that employees will not necessarily behave in the manner that they
think to be best for the company. Instead they behave in the manner that meets their personal
expectation for their own performance as long as they do not feel that their compensation is in
jeopardy. Many organizations treat employee compensation in the same fashion and maintain it
at a fairly constant level assuming that the employee is meeting the needs of the organization and
the market is supporting the organizations production. Some organizations however, choose to
use compensation systems that are variable and linked with a particular outcome. This is done by
using large bonuses for salaried employees and incentive wages such as piece rate, day rate, or
any other performance based pay scales. A very important factor that employers need to take into
consideration is that under normal circumstances compensation is a “need based motivator” as
described by Maslow’s Hierarchy of Needs (Healy, 2016). When compensation becomes
quantified by an outcome it then becomes an extrinsic motivator that is most closely reflected by
Vroom’s Expectancy Theory (Kurian, 2013). Since compensation is the most valued reward, and
the employees knows that the company will pay them if they obtain the objectives that are
specified, they will often have the propensity to do whatever it takes to get the reward. The
manner in which they go about it does not necessarily have to be aligned with the company’s
original objective when offering the reward. As such, organizations must very carefully
Organizational behavior implications of incentive pay systems 3
scrutinize how they will manage product quality, workplace safety, and organizational
citizenship independently.
There are many examples of this phenomenon in both small and large organizations,
some of which became costly and highly publicized scandals. There seems to be three common
factors in these event chains. The first factor is a compensation plan that is incrementally more
lucrative to employees that cheat or cut corners in some fashion. This may not even be
intentional by the employee, but may just be a result of the employee doing what is most
productive from their perspective in regards to time and effort invested as compared to
compensation. The second factor is when managers are held accountable to or incentivized for
the same objectives as the frontline employees. The third and final factor is when top leaders fail
to thoroughly scrutinize results and analyze the data for signs of unrealistic performance when
