Recent psychological research suggest that hybrid intrinsic-extrinsic rewards may be effective motivators and that one type of reward may not necessarily compete with the other but rather they serve as complements to each other.25 For instance, “3M offers rewards that nourish both self-esteem and personal bank accounts while Google has a policy of giving outsized rewards to people who come up with outsized ideas . . . Google set up its Founders’ Awards program with restricted stock options that were awarded quarterly to those teams that came up with the best ideas to increase profitability.”26

In a few instances, managers can justify paying workers according to a preestablished formula or measure. Traditional piece-rate systems , in which workers are paid per unit produced, represent the tightest link between pay and performance. Many piece-rate systems have been abandoned because they tend to create the kinds of problems discussed earlier, but there are situations in which piece-rate plans are appropriate. The primary requirement is that the employee has complete control over the speed and quality of the work. Interestingly enough, the Internet is creating a new type of piece-rate system in which employees have control over the speed and quality of work (because it is available 24 hours a day and it can easily trace what the person has done). It has allowed many firms, particularly high-tech companies, to have employees work elsewhere (including at home), thereby saving office space, overhead, and supervisory time. Many of the employees work on a contract basis, so the company saves on benefits.

Pay-for-performance programs are not likely to achieve the desired results unless they are accompanied by complementary HRM programs. For instance, performance appraisals and supervisory training usually play a major role in the eventual success or failure of a pay-for-performance plan. As we saw in Chapter 7, p erformance ratings are often influenced by factors other than performance. Because a defective appraisal process can undermine even the most carefully conceived pay plan, supervisors should be rigorously trained in correct rating practice.

Poor staffing practices can also damage the credibility of a pay-for-performance program. For instance, if employees are hired because of their political connections rather than for their skills and abilities, other employees will get the message that good performance is not that important to the organization.

Employees should also receive training to make them more productive so they are able to earn more. For instance, the U.S. division of Swiss giant Roche, based in Indianapolis, puts all its employees with high leadership potential through a 10-month development program.27

Even the best-conceived pay-for-performance program can fail if managers have a poor history of labor relations or if the organization has a cutthroat culture. Under these conditions, employees are likely to attribute rewards not to good performance, but rather to chance or good impression management. If a pay-for-performance program is to have a chance of succeeding, managers need to build employee trust, which may require making major changes in the organization’s climate.28

Managers should start by answering these questions from their employees’ perspective: Does it pay for me to work longer, harder, or smarter? Does anyone notice my extra efforts?

If the answers are “no,” managers need to go all out to show that they care about employees and are aware of the work they do. Even more important, they need to keep employees informed and involved when making any changes in management or the compensation plan.29

Because of the problems noted earlier, managers may shy away from using pay to reward performance.30 However, unless an organization creates an atmosphere in which performance makes a difference, it may end up with a low-achievement organizational culture. In a sense, then, pay-for-performance systems are the lesser of two evils, because without them performance may drop even lower.31 The Manager’s Notebook, “Using Incentives to Motivate Employees and Customers,” shows how some organizations try to accomplish this.

MANAGER’S NOTEBOOK Using Incentives to Motivate Employees and Customers

Customer-Driven HR

Companies spend approximately $46 billion a year on incentives, and some experts say they should retain that focus regardless of general economic conditions. “In good times or bad, organizations are well served by creating a culture of recognition for their employees as well as their customers,” says the executive director of the Incentive Marketing Association (IMA). “Incentive programs allow a company to focus people’s activities and tasks on what produces financial outcomes,” agrees IMA’s president. “They align what the individual does to what the company would like them to do, and they allow companies to keep the investment they place in people and the intellectual property they develop in those employees.”

Some firms are using incentives as simple as $5 Subway gift cards, which in one recent year helped U.S. Air Conditioning Corp. increase sales more than 7 percent. At the other extreme was the owner of a five-person business who rewarded one long-term employee with a fur coat, only to be disappointed by her less than enthusiastic reaction. “I’ve been an employee with you for 25 years and you’ve never noticed that I’m a vegetarian,” the employee explained. “I would never wear a fur coat.”

Safer incentives than fur coats, and less costly, are brand-name consumer electronics such as digital cameras, which rank among the most popular, according to Canon USA’s manager of special markets. “They’re desired by everyone,” she says, “young and old, male and female. They make the selection process much easier for the decision makers who are trying to get the right mix of items to incentivize.”

Another option is to give employees as much choice as possible. At T-Mobile USA, all employees are eligible to earn points or credits to purchase merchandise in the company’s top-rated incentive program. Top-scoring employees are honored by senior executives at banquets, and exotic trips reward the very best of the group.

Sources:Based on Fortune. (2014). The best companies to work for. www.fortune.com ; McLoone, S. (2008, December 10). How do I offer employee incentives? Washington Post, B-1; Gallo, C. (2008, April 11). A simple employee incentive. BusinessWeek, 21–26.▪▪

Because all pay-for-performance systems have positive and negative features, providing different types of pay incentives for different work situations is likely to produce better results than relying on a single type of pay incentive. With a system based on multiple layers of rewards, the organization can realize the benefits of each incentive plan while minimizing its negative side effects. For instance, at AT&T Credit, variable pay (in the form of bonuses) was based on 12 measures reflecting the performance of both regional teams and the entire business unit. Team members had to meet their individual performance goals to qualify for variable pay.32

An old saying among compensation practitioners is: “Acceptability is the ultimate determinant of success in any compensation plan.” When employees do not view a compensation program as legitimate, they will usually do whatever they can to subvert the system—from setting maximum production quotas for themselves to shunning coworkers who receive the highest rewards. The best way to increase acceptance is to have employees participate in the design of the pay plan.33 Employee involvement will result in a greater understanding of the rationale behind the plan, greater commitment to the pay plan, and a better match between individual needs and pay-plan design.34

Employee participation in designing the plan is not the same as employee dispensation of the rewards. Managers should still control and allocate rewards because employees may not be able to separate self-interest from effective pay administration. Managers can, however, solicit employee input by instituting an appeal mechanism that allows workers to voice their complaints about how rewards have been distributed. Such a mechanism is likely to enhance the perceived fairness of the system, particularly if a disinterested third party acts as an arbitrator and is empowered to take corrective actions.35

Once a pay-for-performance system is in place, employees may be tempted to manipulate whatever criteria are being used to trigger incentives. Even the tightest monitoring systems may not be able to catch all transgressions. Hence, the organization is better off if employees can monitor themselves. To this end, ethics as a corporate value cannot be emphasized enough, and training programs providing examples of “gray” or unethical behaviors may help employees better decide when it is appropriate or inappropriate to act in a particular way in order to meet performance expectations.

One of the most basic facts of motivation is that people are driven to obtain the things they need or want. Although pay is certainly a strong motivator, it is not an equally strong motivator for everyone. Some people are more interested in the nonfinancial aspects of their work. A growing trend, as shown in the Manager’s Notebook, “Healthy Living Incentives,” is for companies to offer financial rewards to attain worthwhile goals that are not directly related to performance objectives. In that sense, the company is using a mix of monetary (bonus) and nonmonetary (opportunities to improve health) rewards for employees. The company may also derive some indirect financial benefits as well (for instance, lower health insurance premiums and fewer sick leaves), making this a “win–win” situation.

MANAGER’S NOTEBOOK Healthy Living Incentives

Ethics/Social Responsibility

Half the companies in a recent survey of more than 450 firms use incentives to get employees to improve their health by quitting smoking or losing weight. The survey indicates that nearly three-quarters of firms will soon have such programs in place. Although privacy experts warn that they must be carefully designed to avoid discrimination, incentives are increasingly popular, and they seem to be working.

“Small changes in daily habits can lead to big improvements in health,” says the medical officer for Humana Inc. “We need to invest in prevention programs to keep people healthy and motivate them to do the right thing.” At Humana, that means setting up a rewards program that offers points redeemable for gift cards and merchandise for employees who undergo health assessments and coaching and follow up with preventive care. Those who meet established goals receive discounts on their company medical and dental insurance plans.

Obesity is estimated to cost U.S. companies $13 billion a year. At CFI Westgate Resorts in Florida, a company-wide employee weight-loss contest, inspired by the president’s shedding of more than 20 pounds, rewards winners with cash prices or luxury vacations. Some employees have lost as much as 60 pounds.

Pepsi Bottling Company employees earn $75 gift cards for taking a health-risk assessment and $100 if they join a lifestyle-management program. Nicotine replacement therapy is free, as are annual physicals and other basic health care services.

Aetna, the health care insurance company, has enrolled almost 60 percent of its employees in its incentive-based health program. The program was recently expanded to include spouses and family members; spouses are eligible for the same $600 cash per year that employees get for proving they exercise regularly.

Employees of the state of Alabama pay zero health insurance premiums as long as they are working on reducing their risk of high blood pressure, cholesterol, obesity, and diabetes. And diabetic employees at Affinia Group who stay on their regimen of medication, doctor visits, and blood-sugar monitoring can reduce their health care costs by up to $600 a year and qualify for free prescriptions. In Nova Scotia, Canada, the Healthy Living Tax Incentive was passed in 2013. It offers a tax credit per child of up to $500 for registering in an approved organized sport or a physical recreation program

Sources:Based on DTE Energy. (2013). Healthy living program. www.dteenergy.com ; Government of Nova Scotia. (2013). Healthy living tax incentives. http://www.novascotia.ca/finance/en/home/taxation/tax101/personalincometax/healthyliving.aspx ; Ganster, K. (2011). Incentives for healthy habits. [no longer online] http://chamberpost.com ; Kavilanz, P. B. (2009, March 26). Unhealthy habits cost you more at work. CNN [no longer online] Money.com, www.cnnmoney.com ; Business Wire. (2009, February 27). Healthy rewards: New health incentive program rewards employees and employers for healthy decision making; Appleby, J. (2009, January 19). Firms offer bigger incentives for healthy living. USA Today, A-1; Knowledge@Wharton. (2008, January 9). From incentives to penalties: How far should employers go to reduce workplace obesity? [no longer online] http://knowledge.wharton.upenn.edu .▪▪

Nonfinancial rewards include public and nonpublic praise, honorary titles, expanded job responsibilities, paid and unpaid sabbatical leaves, mentoring programs, and 100-percent tuition reimbursements.36 Even if it is impossible to provide a financial reward for a job well done, many employees appreciate overt recognition of excellent performance. However, as discussed in Chapter 10, organizations need to be careful that employees do not come to see nonfinancial rewards as a ruse to justify compensation savings at their expense.