Bauer, Human Resource Management
SAGE Publishing, 2020
Lecture Notes
Chapter 12: Rewarding Performance
Learning Objectives
12.1 Describe the motivating potential of pay and other rewards.
12.2 Identify the prevailing theories of motivation and goal setting.
12.3 Explain how pay can be used strategically to motivate desired behavior.
Chapter Summary
This chapter aims to describe the characteristics, benefits, and risks of pay-for-performance programs
and the interplay between individuals’ performance, behavior, and rewards. The chapter begins with an
overview on relating pay and motivation, differentiating between the effects of extrinsic and intrinsic
Annotated Chapter Outline
I. Pay as a Motivator: relating pay and motivation
i. Traditional-pay programs: reward employees based on the content of their job
description, job title, and/or organizational level
a. Correspond to the relatively stable and fixed base-pay component of
individual employees’ compensation package
ii. Pay-for-performance programs: reward employees for the behaviors they
actually exhibit at work and for the results or goals they actually achieve
a. More strongly linked to motivation on the job
B. Defining Motivation
i. Motivation: psychological force that propels an individual to enact certain
behavior or to strive for a goal or result
a. Direction: behaviors, goals, or results on which an individual focuses
attention
Bauer, Human Resource Management
SAGE Publishing, 2020
e. Extrinsic motivation: motivation that originates outside of an individual
and the work itself, serving as an external, environmental force that
compels an individual to action
a. Extent of an extrinsic motivator effect varies between
individuals.
intrinsic motivation.
II. Theories of Motivation: Three prominent motivational theories are explained and provide
frameworks for designing, explaining, and understanding how pay can motivate behavior.
A. Reinforcement Theory
i. Framework for understanding pay as an extrinsic motivator, particularly when
pay is used for behavior modification
a. Rooted in behaviorism and operant conditioning
B. Expectancy Theory
i. Offers a set of propositions that can be useful for understanding the cognitive
processes via which pay-for-performance programs drive the direction, form,
effort, and duration of behavior
ii. Frames motivation in terms of expectancy, instrumentality, and valence
a. Expectancy: perceived connection between individuals’ effort and
performance, such that individuals perceive greater expectancy when
they expect that exerting more effort will lead to better performance
C. Goal-Setting Theory
Bauer, Human Resource Management
SAGE Publishing, 2020
i. Performance-based pay tied to specific goals can increase the motivating
potential of a pay-for-performance program
iv. Team- or group-based goals and team performance
III. Strategy and Pay for Performance: Pay can be an instrumental force for motivating
employees to attain strategic goals.
i. PayScale survey results
a. Strategic value of pay for an organization
IV. Pay-for-Performance Programs: describing the more common types of pay-for-performance
programs
A. Individual Pay-for-Performance Programs
i. Merit pay: pay distributed to employees based on the ratings and/or feedback
they receive on a performance evaluation measure
a. Links between higher performance and merit pay increases
b. Management perspective: need for thoughtful budgeting and a well-
designed performance evaluation and unbiased performance ratings
iv. Individual incentives: distribution of pay in response to the attainment of certain
predetermined and objective levels of performance, generally nondiscretionary
v. Piecework plans: employees are compensated based on their respective
production levels
a. Straight piecework plan: Employees’ variable pay is based on the units
they produce in a given time period, such that there is a direct
Bauer, Human Resource Management
SAGE Publishing, 2020
vi. Standard-hour plans: Employee pay is based on the completion of a particular
vii. Sales commissions: reward the sale of a product or service as opposed to the
production of a product or provision of a service
a. Target metrics consequences for incentivized behaviors
a. Sales volume versus customer satisfaction metrics
B. Group Pay-for-Performance Programs
i. Can improve group performance under certain circumstances
ii. Tend to be more effective when the group is relatively small
iv. Gainsharing: rewards a group of employees for achieving certain milestones by
having individual employees share in the success of the overall gains of their
group
a. Example: Beth Israel Medical Center’s gainsharing program
b. Effects may not be as consistent or as large as those of individual pay-
for-performance programs
v. Profit sharing: pay-for-performance programs in which employees share in their
organization’s profits when targets are met or exceeded
vi. Stock options: makes employees partial owners of the organization, allows
employees to purchase a certain number of stock shares at a fixed price in a
given time frame
vii. Employee stock ownership plans (ESOPs): reward employees when company
Bauer, Human Resource Management
SAGE Publishing, 2020
i. Predicated upon sound performance measurement
ii. Characteristics of performance measures
a. Well designed, relatively free of bias and judgement errors, and
transparent and easy to understand
a. Example: Lawsuit against Yahoo Inc. for alleged distortion and
manipulation of the performance evaluation rating system
B. Incentive and Sorting Effects
i. Incentive effects: extent to which pay-for-performance programs motivate
employees’ on-the-job behavior and pursuit of goals
ii. Sorting effects: processes of attraction, selection, and attrition related to
individual gravitation toward reward systems that fit their disposition
a. Understood by applying the attraction-selection-attrition model
a. Proposes organizational employees become more homogenous
over time resulting in a more uniform organizational culture
C. Labor Costs
i. Can account for 70% of an organization’s total costs
ii. Pay-for-performance programs can make it challenging to predict future labor
costs
iii. Use of statistical modeling and expert judgement to plan for anticipated labor
costs
a. Limitations of statistical modeling
Bauer, Human Resource Management
SAGE Publishing, 2020
b. Limitations from cognitive biases, perceptual errors, and
decision-making errors
D. Unintended Behavioral Consequences
i. Occurs from lack of monitoring from management or poorly thought out
programs
ii. Organizational citizenship behaviors