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o Attributions illustrate the effects of perceptual set—that is, people tend to perceive
what they expect to perceive.
o The relatively passive idea of perceptual set extends into the behavior of individuals
when we witness the power of the self-fulfilling prophecy, or the Pygmalion effect.
▪ The self-fulfilling prophecy suggests that a manager’s expectations for an
employee may cause the manager to treat the employee differently and that the
employee will respond in a way that confirms the initial expectations.
• Applications of Attribution
o The attributional model can be easily integrated with other motivational approaches.
o Although goals are most motivational when they are challenging, employees will
examine them closely to determine if they are too difficult to attain.
o In conjunction with the expectancy model, an employee who fails on a task may feel
that the environment prevents success, and therefore, may reduce the level of future
efforts.
o The employee, who believes that success was the result of ability or effort, may
experience a decline in motivation for the lack of a reward.
o Managers benefit from greater awareness of their own attributional processes and how
those processes affect their behavior toward employees.
▪ They could also seek to reinforce among the subordinates the belief that success
is due to the workers’ own efforts (effort-performance expectancies) and abilities,
while discouraging the employee attribution that failure is due to task difficulty
o Both the Pygmalion effect and the Galatea effect rest on the underlying belief that
people’s behaviors tend to be consistent with (someone’s) expectations (either their
own or another’s).
o Overly simple attributions by managers should be avoided, since employee behavior is
also partly determined by the task, social context, and environment.
• Other Perceptual Problems
o Numerous perceptual distortions (inaccurate mental records or interpretations of
events) often arise during the performance assessment process.
o If perceptual distortions are not recognized, they can have seriously detrimental effects
on the validity of the appraisal process.
o A few of these distortions, which result in rating errors are:
▪ Halo effect—allowing an appraiser’s overall assessment of an employee (whether
positive or negative) to affect the rating of specific performance factors.
▪ Central tendency—the act of avoiding the use of very high or very low ratings
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(even when they are legitimate), such that the vast bulk of individual ratings fall
into the middle of the scale.
▪ Leniency effect—the distortion or skewing of most ratings toward the high end of
the scale, either consciously (to make one’s employees, and therefore oneself
look good to others), or unconsciously (to avoid conflict when giving feedback).
▪ Harshness effect—this is the opposite of leniency; it is the distortion of ratings
toward the low end of the scale.
• Managerial Effects
o Conducting performance appraisals also has substantial impact on the appraiser.
o On the positive side, appraisal system encourages the manager to do more analytical
and constructive thinking about their employees.
▪ The requirement of a face-to-face interview encourages managers to be more
specific about identifying each employee’s abilities, interests, and motivation.
▪ Managers often begin to perceive that each employee is truly different and must
be treated that way.
o Realistically, however, managers sometimes avoid giving appraisals because they do
not want to disrupt an existing smooth relationship with an employee by providing
negative feedback.
▪ In other cases, managers do not see any organizational rewards coming to them
from the appraisal process.
▪ With no extrinsic or intrinsic incentive to perform the task, managers may neglect
it entirely.
o Even when appraisal interviews are capably confirmed, they still may fail to produce
long-term performance changes by themselves.
▪ The appraisal acts only as a source of feedback and a psychic reward, and
economic incentives are still needed to obtain employee motivation.
Economic Incentive Systems
Purposes and Types
• Performance management stems from a belief that employee performance can be managed
and improved, whether it comes about through goal setting, a streamlined organizational
structure, better technology, new arrangements of working schedules, high involvement of
employees, or better motivation of employees.
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o One component of performance management is the use of various systems of rewards
and incentives to encourage better productivity.
• The success of the system implicitly rests on four key pillars:
o Clearly defining the desired objective
o Identifying a cause-effect model to assess drivers of results that are both persistent
(reliable) and predictive (valid)
o Defining specific activities that employees need to engage in for success
o Collecting data regularly to demonstrate the results to employees
• An economic incentive system of some type can be applied to almost any job.
o The basic idea of such systems is to induce a high level of individual, group, or
organizational performance by making an employee’s pay contingent on one or more of
those dimensions.
o Additional objectives include:
▪ Facilitating recruitment and retention of good employees
▪ Stimulating desirable role behaviors such as creativity
▪ Encouraging the development of valued skills
▪ Satisfying key employee needs
• The criteria for the incentives could include.
o Employee output
o Company profit
o Cost savings
o Units shipped
o Level of customer service
o Ratio of labor cost to total sales
• Evaluation of performance may be individual or collective, and the payment may be
immediate or delayed, as in a profit-sharing plan.
• The discussion of economic incentives focuses on their overall nature, purpose, and behavior
implications.
o The programs selected for presentation are wage incentives, which are a widely used
individual incentive, and profit sharing and gain sharing, which are popular group
incentives.
o Skill-based pay systems are increasing in popularity, especially in new industrial
operations.
• Incentives are combined with other parts of wage administration to make a complete pay
program.
Incentives Linking Pay with Performance
• Several broad types of variable reward incentives link pay with performance; major ones are
shown in Figure 6.8.
o Perhaps the most popular measure is for the amount of output to determine pay, as
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illustrated by a sales commission or a piece rate.
▪ Those workers who produce more are rewarded more.
▪ Often pay is determined by a combination quantity-quality measure in order to
ensure that a high quality of product or service is maintained.
• Regardless of the type of incentive used, its objective is to link a portion of a worker’s pay to
some measure of employee or organizational performance (output, goals, etc.).
• Difficulties
o Potential equity is offset by other developments that are perceived as inequities.
o In behavior modification terms, certain unfavorable consequences exist alongside the
favorable consequences of more pay, so they tend to reduce the potential advantages of
incentive pay.
o To establish a fair basis for incentive pay—one that motivates higher performance
across a broad range of employees without producing undesirable side effects—is
difficult.
o Some incentive systems are also costly to monitor, requiring extensive record-keeping
procedures.
Wage Incentives
• Pay for Performance
o Wage incentives, which are a form of merit pay, provide more pay for more output or
results, often referred to as pay for performance.
o The main reason for the use of wage incentives is that they nearly always increase
productivity while decreasing labor costs per unit of production.
▪ Workers under normal conditions without wage incentives have the capacity to
produce more, and wage incentives are one way to induce employees to work up
to their potential.
o In order to be successful, a wage incentive needs to be simple enough for employees to
have a strong belief that reward will follow performance.
▪ The objectives, eligibility requirements, performance criteria, and payment
system all need to be established and understood by the participants.
o When incentive systems operate successfully, they are evaluated favorably by
participants, probably because they provide psychological as well as economic rewards.
o Employees receive satisfaction from a job well done, which fulfills their achievement
drive.
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o Some incentives may encourage cooperation between workers because of the need for
employees to work together to earn incentive awards.
• Difficulties
o Wage incentives furnish an example of the kinds of difficulties that may develop with
many incentive plans, despite their potential benefits.
o Management’s job is to try to prevent or reduce the problems while increasing benefits,
so that the incentive plan works more effectively.
o At times these disruptions are severe enough to make incentive workers less satisfied
with their pay than workers who are paid an hourly wage, even though the incentive
workers are earning more.
o For any pay for performance plan to be successful, it needs to be coordinated carefully
with the whole operating system; this is a complex process leading to many difficulties:
▪ Wage incentives normally require establishment of performance standards.
❖ Rate setting is the process of determining the standard output for each job,
which becomes the fair day’s work for the individual.
▪ Wage incentives make the supervisor’s job more complex.
❖ Supervisors must be familiar with the system so they can explain it
convincingly to employees.
❖ Relationships are compounded, and supervisors are required to resolve
different expectations from higher management, rate setters, workers, and
unions.
▪ A thorny problem with wage incentives involves loose rates.
❖ A rate is “loose” when employees are able to reach standard output with
less than reasonable levels of effort.
▪ Wage incentives may cause disharmony between incentive workers and hourly
workers.
❖ The incentive workers earn more for their increased output, but the hourly
workers do not.
▪ Another difficulty with wage incentives is that they may result in output
restriction, by which workers limit their production and thus defeat the purpose
of the incentive.
❖ This phenomenon is caused by several factors:
➢ Group insecurities that the production standard will be raised
➢ Resistance to change by the informal social group
➢ The fact that people are not comfortable always working at full
capacity
Profit Sharing
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• Nature and Merits
o Profit sharing is a system that distributes to employees some portions of the profits of
business, either immediately or deferred until a later date.
o Basic pay rates, performance pay increases, and most other incentive systems recognize
individual differences, whereas profit sharing recognizes mutual interests.
▪ Employees become interested in the economic success of their employer when
they see that their own rewards are affected by it.
▪ Greater institutional teamwork tends to develop.
o Small organizations in competitive industries that demand high commitment from
employees in order to make technological breakthroughs or bring new products to
market faster are prime candidates for profit-sharing programs.
o In general, profit-sharing tends to works better for fast-growing, profitable
organizations that offer opportunities for substantial employee rewards.
▪ It also works better, when general economic conditions are favorable.
▪ It is less likely to be useful in stable and declining organizations with low profit
margins and intense competition.
▪ It generally is well received and understood by managers and high-level
professional people, because their decisions and actions are more likely to have a
significant effect on their firm’s profits.
▪ In situations where it has worked effectively, managers have:
❖ Openly shared financial reports with all levels of workers
❖ Actively trained employees to understand financial statements
❖ Provided on-site computer terminals for immediate access to relevant
information whenever employees want it
• Difficulties
o Even in those situations where profit sharing seems appropriate, some general
disadvantages exist:
▪ Profits are not directly related to an employee’s efforts on the job.
▪ Employees must wait for their reward, and this lengthy delay diminishes its
impact.
▪ Since profits are somewhat unpredictable, total worker income may vary from
year to year.
▪ Some union leaders have been suspicious of profit sharing.
❖ They fear it would undermine union loyalty, result in varied total earnings
from company to company, and weaken their organizing campaigns.
Gain Sharing
• Another useful group incentive is gain-sharing, or production sharing.
• A gain-sharing plan establishes a historical base period of organizational performance,
measures improvements, and shares the gains with employees on some formula basis.
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• Examples of the performance factors measured include:
o Inventory levels
o Labor hours per unit of product
o Usage of materials and supplies
o Quality of finished goods
• The idea is to pinpoint areas that are controllable by employees and then give them an
incentive for identifying and implementing ideas that will result in cost savings.
• Behavioral Basis
o Gain-sharing plans use several fundamental ideas from organizational behavior and are
much more than pay systems.
▪ They encourage employee suggestions.
▪ They provide an incentive for coordination and teamwork.
▪ They promote improved communication.
o Union-management relations often improve, since the union gains status because it
takes responsibility for the benefits gained.
o Attitudes toward technological change improve because workers are aware that greater
efficiency leads to larger bonuses.
o Gain sharing broadens the understanding of employees as they see a larger picture of
the system through their participation rather than confining their outlook to the narrow
specialty of their job.
• Contingency Factors
o The success of gain sharing is contingent upon a number of key factors, such as:
▪ The moderately small size of the unit
▪ A sufficient operating history to allow the creation of standards
▪ The existence of controllable cost areas
▪ The relative stability of the business
o Management must be receptive to employee participation.
▪ The organization must be willing to share the benefits of production increases
with employees.
▪ The union should be favorable to such a cooperative effort.
Skill-Based Pay
• In contrast to salaries and wage incentives, skill-based pay (also called knowledge-based pay
or multiskill pay) rewards individuals for what they know how to do.
o Employees are paid for the range, depth, and types of skills in which they demonstrate
capabilities.
• Employees start working at a flat hourly rate and receive increases for either developing
skills within their primary job or learning how to perform other jobs within their work units.
o Substantial amounts of training must be made available for the system to work, and
methods for fairly pricing jobs and certifying employee skill levels need to be
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established.
o Some skill-based pay systems have supervisors evaluate the knowledge and skill of the
employees; others allow work teams to assess the progress of each trainee.
• Advantages
o Skill-based pay systems provide strong motivation for employees to develop their
work-related skills
o They reinforce an employee’s sense of self-esteem.
o They provide the organization with a highly flexible workforce that can fill in when
someone is absent.
o Since workers rotate among jobs to learn them, boredom should be reduced, at least
temporarily.
o Pay satisfaction should be relatively high for two reasons:
▪ The employee’s hourly rate received is often higher than the rate that would be
paid for the task being performed, since only in a perfect system would all
employees be constantly using their highest skills.
▪ Workers should perceive the system as equitable both in the sense of their costs
and rewards being matched and in the knowledge that all employees with the
same skills earn the same pay.
• Disadvantages
o Skill-based pay presents several disadvantages and some firms have backed away from
early experiments with it:
▪ Since most employees will voluntarily learn higher-level jobs, the average hourly
pay rate will be greater than normal.
▪ A substantial investment in employee training must be made, especially in the
time spent coaching by supervisors and peers.
▪ Not all employees like skill-based pay because it places pressure on them to
move up the skill ladder.
❖ The subsequent dissatisfaction may lead to a variety of consequences,
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o Under these conditions, the program is consistent with the other incentives, since it
links employee pay with the potential for increased performance.
Suggested Answers to Discussion Questions
1. Explain how money can be both an economic and a social medium of exchange. As a
student, how do you use money as a social medium of exchange?
Students’ answers will vary. Money as an economic exchange enables people to purchase
2. Think of a job that you formerly had or now have.
a. Discuss specifically how the expectancy model applied (applies) to your pay.
b. Discuss how you felt (feel) about the equity of your pay and why you felt (feel) that
way.
c. Develop and explain a cost-reward comparison chart for your pay and effort.
a. Students should demonstrate familiarity with expectancy, instrumentality, and valence.
Students could come up with answers like “I didn’t try, because I knew I couldn’t do
3. Think of a time when you assessed, either formally or informally, someone else’s level of
performance and found it deficient by your standards. To what did you attribute the
reasons for the inadequate performance? Were you engaging in any attributional
tendencies? How could you avoid doing so?
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consent of McGraw-Hill Education.
have may not be shared with others.
4. Assume that, in the first six months of your first job, your manager asks you to
participate in filling out a feedback form describing his or her strengths and weaknesses.
How comfortable will you feel in doing this? Now assume your manager asks you to
engage in the same process, seeking feedback from your peers, manager, and customers
about yourself. Now what is your reaction? Explain.
5. What are the major measures used to link pay with outputs? Which ones, if any, were
used in the last job you had? Discuss the effectiveness of the measure or measures used.
6. Would you use profit sharing, gain sharing, skill-based pay, or wage incentives in any of
the following jobs? Discuss your choice in each instance.
a. Employees in a small fast-growing computer company
b. Teacher in a public school
c. Insurance claims processor in an insurance office
d. Automobile repair mechanic in a small repair shop
e. Farm worker picking peaches
f. Production worker in a shoe factory making men’s shoes
Students’ answers may vary. In choosing an incentive method for these situations, it is helpful
to look at each plan first.
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consent of McGraw-Hill Education.
Wage incentives should be used when increased productivity is desired; employees are paid
according to how much they produce.
Based on these facts, profit sharing would be appropriate for the first situation, skill-based pay
would suit the second and fourth examples, and wage incentives would be the best for the
third, fifth, and sixth situations.
7. Divide into small groups, each led by a member who has worked for a sales commission.
Discuss how the commission related to both equity theory and expectancy theory, and
report highlights of your discussion to your entire classroom group.
Students’ answers may vary. The cornerstone of any compensation system, especially one
8. Have you ever participated in restriction of output in a job or in an academic course? If
so, discuss why you did it and what its consequences were.
Students’ answers will vary. Output restriction happens when workers (students included) limit
their production, defeating the purpose of incentives. There are a variety of causes that lead to
9. “Skill-based pay is a waste of company money, because we are paying for potential
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performance instead of actual performance.” Discuss this statement.
Students’ answers will vary. Students should point out the advantages of the skill-based
incentive plan:
Disadvantages include:
10. Rate your level of performance in this class relative to all others. What percentage of
classmates do you think are below you? Now seek that information from your instructor
and match it with your own. If the two figures do not match, provide several
explanations for it.
Assess Your Own Skills
Students should honestly circle the number on the response scale that most closely reflects the
degree to which each statement accurately describes them when they reward employees and conduct
a performance appraisal. This section will help them understand how well they exhibit good reward
and performance appraisal skills.
Incident
Plaza Grocery
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Solutions to this case should incorporate aspects of expectancy theory, equity theory, intrinsic and
extrinsic motivators, and pay as a motivator. Most experts agree that money is a motivator for most
employees, especially if the rewards system is managed well. This means, for example, that rewards
must be valent (expectancy theory) in that they must be things that the employees actually value, that
rewards must be perceived by the employees to be fairly distributed (equity theory), and that there is
a performance appraisal system in place that adequately measures performance.
Motivators beyond pay can be considered, too. Praise and recognition are always helpful in these
settings. Management could select a “stock clerk of the week,” for example, who would receive a
letter of recognition and a ten-dollar gift certificate to be used in the store. Intrinsic motivation could
be addressed, too. By giving the workers some discretion over what stocking they do when, how
they decide who is carrying out and who is stocking, etc., some challenge can be built into the work
which would lead to higher intrinsic motivation.
Experiential Exercise
Performance Appraisal/Reward Philosophy
The students are asked to read a set of statements (given in the text) about people and indicate their
degree of agreement or disagreement on the rating scales. Meeting in small discussion groups, they
are asked to tabulate the responses to each question (frequency distribution and mean) and explore
reasons for any significant disagreements within their group’s ratings. In their group, they are asked
to develop alternative statements for any items they do not support (ratings of 3, 4, or 5) at present.
Finally, they are asked to explain how their new statements reflect their knowledge of human
behavior gained through reading the early chapters of this book.
Generating OB Insights
Students’ responses will vary for this exercise. They should however, highlight several of the major
topics discussed in the chapter such as appraisals, rewards, incentives, pay packages and various
plans of incentives.