Performance Related Pay and Motivation

This section presents a review of literature and current debates on effectiveness of Performance related Pay in employee motivation.

In order to critically discuss and evaluate the impact of Performance-Related-Pay scheme on employee motivation it is essential to define the following two concepts at first.

Concept of Motivation

Philip Lewis (2007) defines motivation as an "internal and external factors that stimulate desire and energy in people to be continually interested in and committed to a job, role or subject and to exert persistent effort in attaining a goal". In other words, motivation is stimulant of behavior and foundation of all actions. It also helps companies in finding the ways how to encourage their employees to use more skills and efforts in a manner that will benefit both the company and person's individual objectives. Arnold et al (1991) divides motivation into three main components: direction – what a person is attempting to do, effort – how hard he is attempting, and persistence – how long a person continues to attempt.

Motivation at work appears from two sides. First is self-motivating factors that direct a person to behave in a certain way, expecting that his goals will be achieved. This type of motivation is called intrinsic motivation. Responsibility, freedom to act, autonomy, interesting and challenging work, career opportunities, personal growth (skills and abilities) are examples of such intrinsic factors. Second type of the motivation is extrinsic. These include all the methods used by management to encourage or discourage their employees to behave in a certain way. It can be increased pay, praise, promotion and/or punishments (e.g. criticism, withholding, etc.). Armstrong (2003), points out those extrinsic motivators can result in immediate and powerful effect, but in a long-run it loses its power. On the other hand, intrinsic motivators have strong and long-lasting impact as they are innate in person and not imposed from outside.

Over the years there have been developed lots of theories explaining the complex model of motivation. In their theories researchers give different reasoning for the person's actions/behavior.

One of the mostly recognized and influential theories is Abraham Maslow's Hierarchy of Needs. His concept is widely used in personnel development, employee motivation and management training. Main concept of the theory is that all behaviors are motivated by unsatisfied needs, and the level of importance of needs depend on individual situation and previous experience of a person. As it can be seen from the figure below, Maslow divided people's needs into 5 main layers (starting from basic physiological needs ending with self-actualization) that are arranged in a hierarchy of importance. He states that people continuously desire better conditions, or want what they do not have. The important matter to be mentioned is that person cannot satisfy higher level needs before lower level needs are met (Schultz, 1982)

Instrumentality theory was innovated in second half of XIX century, and is rooted in Taylor's (1911) work. It refers to materialistic reward as source of motivation, when person will perform better if he/her receives higher pay for it. However, it ignores other human needs such as moral and social.

In 1964 Vroom developed expectancy theory, which states that motivation is probable only when there is existence of certain relationship between performance and the outcome which will satisfy the need. Porter and Lawler (1968) developed this theory furthermore by suggesting that there are two variables that impact how much effort person puts into the job: value of the reward and probability that this reward depends on efforts.

Goal theory considers three conditions that increase motivation and performance. It was introduced by Latham and Locke in 1979. These conditions are: goals, accepting and committing to the goals, and feedback on performance.

Reactance theory by Brehm (1966) assumes that person is not passive receiver and responder, but active individuals who knows what he needs and how to act to satisfy those needs. According to this theory, in order to motivate person, his values and orientations should be understood and motivation methods are based on this perception.

In 1965 Adams proposed equity theory, which is very popular nowadays. The basis of this theory