Journal

THE MEANING OF MONEY

We all have logo-imprinted gifts from universities, employers, or customers. But do people value such trinkets more than money? Why doesn’t your organization just give you cash instead of an engraved set of glasses with the company logo? Nobel laureate George Akerlof, a pioneer in the field of behavioral economics, found the answers by studying gift exchange at the workplace. Gifts are viewed as acts of kindness by an employer, which carries more meaning than cash. But will people work harder for gifts?

This premise was studied in a German university that needed to catalog books in their library.1 Students were employed to catalog the books, and some were told they would receive a bonus of 20% more than base pay. Another group was told they would receive a gift-wrapped water bottle. A third group didn’t receive any bonus at all to establish the baseline for productivity. The results are shown in Figure 9.1. The cash bonus had no effect on the speed or accuracy of cataloging the books, but those receiving the water bottle increased their data entry rate by 25% (a productivity increase that more than offset the 7-euro cost of the water bottle). It was the thought that seemed to matter; we know this from research on engagement (as discussed in Chapter 4, most employees are searching for meaning in their work). This was reinforced by a second study done by the same authors. Money was delivered as a bonus but either as cash or a cute origami-folded shirt with a 2-euro coin that had a smiley face painted on it. The origami money gift resulted in the highest increase in productivity of all (even more than the wrapped water bottle). Another study found that paying higher wages had no effect on productivity in jobs with no future employment opportunities. However, when a portion of the wage was given as an unexpected gift (offering a bonus raise after the employee accepted the contract for temporary work), it led to higher productivity for the duration of the job.2 The implications of these studies illustrate an important point for leaders: Even a slight gesture of appreciation (such as a cash bonus) may increase motivation. However, gifts seem to work best when they are personalized to the employee. Another study3 found that presenting workers with a thank you card combined with a monetary gift resulted in higher productivity. Taking time to invest in personal caring in the presentation of a gift results in more reciprocity from workers. Even a compliment can induce reciprocity. Researchers found that when people bought ice cream and said, “You have the best ice cream in town,” they received significantly larger portions from the servers—even when not coupled with a tip.4

So, what does money really mean? Money has symbolic meaning for employees, and it represents nonmonetary aspects of life such as achievement, success, competence, autonomy, security, and power.5 Some people feel that money may even bring many friends. Employees pay attention to money and compare what they make to their peers. Perceived pay inequity motivates employees to take action, and compensation is often the focus of employee grievances and lawsuits regarding fairness. The essentials of reward systems and how they are administered are discussed in this chapter. First, the fundamentals that underlie the philosophy of reward systems as they are used in organizations are reviewed.

Description

Figure 9.1 The Effects of a Gift versus Cash on Productivity

Source: Adapted from Kube, S., Maréchal, M. A., & Puppe, C. (2012). The currency of reciprocity: Gift-exchange in the workplace. American Economic Review.

Critical Thinking Questions: The research on gifts described previously was conducted in Germany. Do you think that this would work in the United States or the culture you are from? Explain why or why not. Can you think of any potential limitations to the motivating potential of gifts?

REINFORCEMENT THEORY

Learning Objective 9.1: Demonstrate understanding of organizational behavior modification (OB mod) by providing an example.

Reinforcement theory is based upon the law of effect, which states that past actions that led to positive outcomes tend to be repeated, whereas past actions that led to negative outcomes will diminish.6 The law of effect led to the development of operant conditioning (sometimes referred to as reinforcement theory).7 In this approach to motivation, individual personality, thoughts, and attitudes don’t motivate behavior. Instead, the emphasis in operant conditioning is on the environment. The goal of reinforcement theory is to explain learned behavior. B. F. Skinner is the psychologist most associated with this approach. He conducted experiments with animals to understand how behavior could be shaped by setting up systems of rewards and punishments. These rewards (or punishments) were contingent on the response of the animals he studied (probably the most well-recognized studies are those of rats who were taught to run mazes through the shaping of their behavior with pellets of food as rewards).

Reinforcers

Reinforcement is any event that strengthens or increases the behavior it follows. Skinner’s research found there are reinforcers that increase behavior and those that decrease behavior. The two kinds of reinforcement that increase behavior are as follows:

Positive reinforcement is a favorable event or outcome presented after the behavior (e.g., praise or a bonus).

Negative reinforcement is the removal of an unpleasant event or outcome after the display of a behavior (e.g., ending the daily criticism when an employee shows up for work on time).

Punishment

Punishment, in contrast, is the presentation of an adverse event or outcome that causes a decrease in the behavior it follows. There are two kinds of punishment:

Punishment by application is the presentation of an unpleasant event or outcome to weaken the response it follows (e.g., writing a letter to an employee’s file for failing to meet a deadline).

Punishment by removal (also called extinction) is when a pleasant event or outcome is removed after a behavior occurs (e.g., withholding praise when an employee does not perform well).

Critical Thinking Question: Explain why punishment may not be the most effective way to encourage learning. What would you do to encourage learning instead?

A summary table of these contingencies of reinforcement is shown in Figure 9.2. It is important to consider whether the reward is applied or withheld and whether the event is pleasant or unpleasant. Figure 9.1 and the previously given definitions and examples refer to the type of reward or punishment that is applied or removed. For example, a pleasant event that is applied would be a manager praising an employee when they complete an excellent project report (a positive reinforcement).

Description

Figure 9.2 Contingencies of Reinforcement

Schedules of Reinforcement

Skinner’s research also found that how often a reward (or punishment) is applied predicts learning and motivation. He referred to this as the schedules of reinforcement.8 The first schedule is continuous—a specified behavior is rewarded or punished every time it occurs. This is not seen often in organizations; however, it is useful during the learning process (e.g., when an employee is learning to use a new computer program). In this example, the employee would be allowed to leave work half an hour early (a positive event) each time she completes a module of a computer training program successfully. Once the employee has attained an acceptable level of mastery, the person is moved to a partial reinforcement schedule. For example, the employee is no longer rewarded or punished every time, but they are rewarded (punished) on a more random basis, as described next.

As illustrated in Figure 9.3, the schedules of partial reinforcement are based on time (interval) or the number of times the response is given by the employee (ratio). Also, the schedule can be fixed or variable (random). These two dimensions result in four possible schedules of partial reinforcement as shown in the figure:

Description

Figure 9.3 Schedules of Partial Reinforcement

Fixed-interval schedules are those where the first response is rewarded only after a specified amount of time has elapsed. This schedule causes high amounts of responding near the end of the interval. An example of this in a work setting is the way pay is typically disbursed—every 2 weeks or every month. After a fixed amount of time, the employee receives a paycheck.

Variable-interval schedules occur when a response is rewarded after an unpredictable amount of time has passed. This schedule produces a slow, steady rate of response. An example of this would be bringing in bagels for breakfast once a week for employees but varying which day they are brought in (e.g., sometimes on Monday and sometimes Wednesday). The employees never know when they will be treated to bagels, so the element of surprise is motivating and they may come to work on time regularly so they don’t miss out.

Fixed-ratio schedules are those where a response is reinforced only after a specific number of responses. This schedule produces a high, steady rate of responding. An example of a fixed-ratio schedule would be payment to employees based on the number of items they produce (a piece-rate pay system). In piece-rate systems, the employee is paid for each article produced; for example, a worker sewing zippers into jeans is paid for each zipper correctly sewn in.

Variable-ratio schedules occur when a response is reinforced after an unpredictable number of responses. This schedule creates a high, steady rate of responding. Gambling and lottery games are good examples of a reward based on a variable-ratio schedule. This is why gambling results in such long-term and persistent behavior (it’s the element of chance that motivates the behavior). In a work setting, this might be offering praise to an employee for good performance after one time and then again after four times and then another time after another two times.

Critical Thinking Question: Discuss why the biweekly paycheck form of payment is not the most motivating schedule based upon the principles of reinforcement. What is an example of a method of payment that would be more motivating?

Description

Figure 9.4 Applied Behavior Modification

Partial schedules are more motivating than continuous reinforcement (e.g., the employee may become accustomed to praise from the leader, so it loses its motivating power over behavior). Of the partial-reinforcement schedules, research has demonstrated that the variable-ratio schedule produces the most persistent, long-term effects on behavior.9 Receiving rewards in a random fashion tends to increase effort until the reward is received.

As the previously given examples indicate, reinforcement is used in organizations in a variety of ways to increase employee motivation and performance. It is also used to extinguish undesirable behaviors. Given the strong research base supporting the principles of reinforcement theory, it represents a powerful tool most leaders use to motivate performance.10 The application of reinforcement theory in organizational behavior (OB) is known as organizational behavior modification (OB mod).

Organizational Behavior Modification

OB mod has been employed to increase performance and reduce absenteeism. Figure 9.4 shows how to apply OB mod using the principles of reinforcement theory. As shown in the figure, the first step is to pinpoint the specific behavior that needs to be changed. Failing to come to work on time every day is an example of a behavior that needs intervention. Second, measure the baseline: How many days per month is the employee failing to come to work on time? Third, perform an ABC analysis. This stands for antecedents, behavior, and consequences:

Antecedents: What is causing the behavior? Consider both internal and external factors.

Behavior: What is the current behavior? What is the desired behavior?

Consequences: What is currently reinforcing the behavior? What needs to be changed?

Fourth, develop an action plan based on reinforcement theory strategies to apply (using the contingencies of reinforcement and the schedules). Implement the plan and then evaluate the plan comparing the behavior to the baseline (after compared to before). This will provide feedback, and the plan may need to be changed or another behavior targeted for the future. A comprehensive review of OB mod interventions11 stressed the importance of following up after interventions to ensure its long-term durability. Also, the authors concluded that follow-up is needed to provide the feedback necessary to adjust the intervention if warranted. Leaders use the principles of OB mod to change employee behaviors by meeting with followers to discuss their performance. In some cases, this discussion takes place during performance management reviews (this process is discussed later in this chapter).

An example of applied OB mod for an employee who is late to work frequently is shown in Figure 9.5. As this example shows, the specific behavior desired is that the employee arrives at work on time (say, 8:30 a.m. each day).

Description

Figure 9.5 Applied Behavior Modification Example

Source: Adapted from Gagné, M., & Deci, E. L. (2005). Self-determination theory and work motivation. Journal of Organizational behavior, 26(4), 331–362.

If the employee is on time, the supervisor can praise them (positive reinforcement) or withhold criticism (this only works if the supervisor has consistently criticized the employee’s tardiness prior to the day they arrive on time, of course). If the employee is late, the objective is to decrease the behavior, so the supervisor can withhold praise to produce extinction of the behavior (punishment by removal) or write a reprimand and put it in the employee’s file, which is unpleasant (punishment). Of course, the supervisor can use more than one behavior-change strategy and should eventually move the employee to a variable-interval or -ratio schedule (i.e., apply or remove the reinforcement more randomly) once the employee is coming to work consistently on time.

Proponents of behavior modification argue that it has a strong research base and applies to all employees regardless of individual difference and national culture.12 A meta-analysis found that OB mod increased task performance by 17%; however, results of interventions using OB mod were stronger in manufacturing than service organizations.13 Critics of operant conditioning and OB mod have argued that the results can be explained using theories that involve cognitions (thoughts) of employees.14 Also, some people may react negatively to the use of operant conditioning to control the behavior of employees, feeling that it is manipulative. In response to criticisms of behavior modification, subsequent research incorporated thought processes into reinforcement theory. Social learning theory extends operant conditioning to consider the fact that people can learn from watching other people succeed or fail.

SOCIAL LEARNING THEORY

Learning Objective 9.2: Describe the four steps in the modeling process articulated in social learning theory.

Albert Bandura presented social learning theory in the 1970s, and it is perhaps the most influential theory of learning today.15 Bandura believed that operant conditioning (reinforcement) was useful but did not explain all of the ways a person can learn. Social learning theory introduced the social element into how people acquire new skills and described the ways that people learn by watching other people. Known as observational learning (or modeling), this form of learning explains much behavior in organizations. External reinforcements are not the only factors that influence motivation. Intrinsic reinforcement is related to pride, satisfaction, and a sense of accomplishment in learning something new. Social learning theory considers people’s thoughts as well as their perceptions of others (a social cognitive theory). While reinforcement theorists maintain that external rewards create permanent behavioral changes, social learning theory proposes that rewards can help people learn things but not necessarily change their behavior.

The Modeling Process

The modeling process has four steps:

Attention. To learn, a person has to be paying attention to another’s behavior. People pay attention to things that are either interesting or new.

Retention. The information must be stored for access in the future. This is important to observational learning since a person must remember what they have observed.

Reproduction. Once information is noted and retained, the next step is that the person imitates (i.e., performs) the behavior that they recall. Repeating the behavior (i.e., practicing) leads to improved performance.

Motivation. For observational learning to work, the person needs motivation to imitate. Thus, social learning theory discusses the roles of reinforcement and punishment. For example, if you see another student rewarded with extra credit points for participating in class every day, you might begin to do the same.

As noted previously, not all reinforcement comes from external rewards such as pay. OB researchers became interested in the motivational power of both external (extrinsic) and internal (intrinsic) reinforcement on motivation at work. The next section discusses these two forms of motivational rewards and what the research has shown regarding their effectiveness.

INTRINSIC VERSUS EXTRINSIC REWARDS

Learning Objective 9.3: Compare and contrast intrinsic and extrinsic rewards.

Expectancy theory (covered in Chapter 8) includes both intrinsic and extrinsic work motivation.16,17 Intrinsic motivation is when someone works on a task because they find it interesting and gain satisfaction from the task itself. Extrinsic motivation involves the performance-to-outcome instrumentality between the task and a tangible reward. Satisfaction does not come from the task itself but rather from the extrinsic outcome to which the activity leads (e.g., working extra hours to earn a bonus). Work should be set up in a manner so effective performance leads to both intrinsic and extrinsic rewards to produce job satisfaction.18 There are other sources of motivation in addition to intrinsic and extrinsic such as the enhancement of self-concept and the degree to which a person internalizes the goals of the organization.19

Does paying someone to do a job reduce their intrinsic motivation? Intrinsic motivation refers to their internal reasons for doing something such as enjoying the task or being interested in it. For example, are you reading this because you want to get a good grade (extrinsic), or are you interested in learning more about motivation (intrinsic)? The answer can be both, but OB researchers designed experiments to see what would happen if people were paid for doing something they enjoy. Extrinsic rewards can lead to reduction in intrinsic motivation. For example, in an experimental study, paying money was found to undermine college students’ intrinsic motivation to perform a task.20 These experiments were replicated in work organizations.21 That said, rewards that are delivered immediately (not delayed) increase intrinsic motivation. This occurs because immediate rewards create a perceptual fusion between the activity and its goal (i.e., the reward).22

Rewards should be administered so that they are contingent upon effective performance. However, research on the impact of paying someone to do something that they enjoy showed surprising findings. While it appears counterintuitive, pay may not motivate people to perform at the highest levels. Also, extrinsic motivation plus intrinsic motivation (for example, pay plus challenging work) may not always combine to produce the highest motivation (see the Research in Action box for further discussion of this effect).

Critical Thinking Questions: Why do you think paying someone to do something they like doing reduces their intrinsic motivation? What steps can a leader take to address this situation?

Relationship Between Intrinsic and Extrinsic Rewards

There can be synergistic effects between intrinsic and extrinsic motivation, and there are two psychological mechanisms that illustrate this. First, “extrinsics in service of intrinsics”23 refers to how extrinsic rewards may support an employee’s sense of competence if they don’t undermine autonomy (self-determination). For example, a reward can be more time to work on creative projects. This has been implemented at Google, where engineers and project managers are given 20% of their work time to work on something that they are passionate about. In other words, one day per week they can work on anything they like, even if it falls outside of the scope of their job or is unrelated to the mission of the company.24 A second mechanism is the motivation–work cycle match. This is the understanding that innovation occurs in phases, and intrinsic motivation may be more important during the idea-generation phase. Also, the type of goals that an employee has makes a difference. The effect of the intrinsic motivation to innovate is more positive for employees with higher learning goal orientation. On the other hand, extrinsic rewards matter more to employees with higher performance goal orientation.25

Research in Action: Why the “Carrot and Stick” May Not Always Work

Daniel Pink, in his 2009 book Drive: The Surprising Truth About What Motivates Us, discusses three forms of motivation as “operating systems.” Motivation 1.0 was humankind’s inherent need to survive. The next operating system, Motivation 2.0, was the carrot-and-stick approach (or the rewards and punishments we discussed in reinforcement theory research). Pink is critical of the carrot-and-stick approach, pointing out the carrot and the stick can produce results that are the opposite of what leaders are looking for because rewards can transform an interesting task into drudgery; they can turn play into work.

For those driven by intrinsic motivation, the drive to do something because it is interesting is essential for high creativity and motivation. Pink presented what he believes is the next operating system for human motivation—Motivation 3.0, which centers on intrinsic motivation. Pink highlighted autonomy as one of the most important motivating factors at work. He said that people want control over the task (what they do), time (when they do it), team (who they do it with), and technique (how they do it).26

Pink gives the example of the software company Atlassian giving all engineers 1 day a quarter without any job assignments, responsibilities, or supervision. Employees work on whatever they want, with whomever they want, and report the results. Pink says that the employees generate more new ideas on this day than any other. Pink’s Motivation 3.0 is not without its critics. In fact, Atlassian does pay its employees for performance. Employees receive an annual performance bonus of almost 30% of their salary, and their innovative output is assessed. Most of Atlassian employees’ time is paid for work that is not autonomous. However, 10 years after the publication of his book, Pink maintains that human beings, by their very nature, are self-directed, and this is the key to motivation.

Discussion Questions

Discuss Pink’s premise in light of what you have learned about the effectiveness of positive reinforcement. Do you feel that he has a valid criticism of rewards and punishments? Why or why not?

Do you agree that intrinsic motivation is a preferable way to influence performance? Why or why not? Why is autonomy so important to intrinsic motivation?

What other factors do you think are important for increasing intrinsic motivation?

Sources: Goff-Dupont, S. (2019); Larkin, I. (2019); Pink, D. H. (2009).

However, when the project is being implemented, extrinsic rewards may be needed to ensure that deliverables are produced on time and within the budget. A longitudinal study found support for this idea when looking at project teams.27 Team members reported higher levels of radical creativity in early phases of a project compared to incremental creativity at later phases. Thus, one type of motivation may not suit all types of project work. A review of over 40 years of research on intrinsic and extrinsic motivation found that intrinsic motivation predicts quality of performance, whereas extrinsic motivation (incentives) is a better predictor of quantity of performance.28 These findings may be surprising since most people think that money matters more than other rewards. In fact, paying people money for doing something they enjoy may reduce their motivation.29 Edward Deci and his colleagues developed the theory of self-determination to explain why this happens.

Critical Thinking Question: Use reinforcement theory to explain why extrinsic rewards may not produce long-term effects on motivation. What should a leader do instead to motivate workers based on the relationship between intrinsic and extrinsic motivation?

Self-Determination Theory

Intrinsic motivation is a function of a person’s needs for autonomy and competence in the theory of self-determination (also known as cognitive evaluation theory).30 Autonomy is the need to work alone without constant surveillance. Competence is the sense of mastery an employee has over their job. A review of 99 studies of self-determination theory (119 distinct samples) found that these needs for autonomy and competence significantly predict employee psychological growth, internalization (the shift of motivation from extrinsic to intrinsic), and well-being.31

The effects of a reward depend on how the person views the reward’s effect on their autonomy and competence. Rewards that diminish these perceptions tend to decrease intrinsic motivation. The issue with extrinsic rewards like money is that such rewards might be interpreted by employees as controlling by the boss rather than indicators of their competence. If the reward is seen as controlling, then the individual’s need for autonomy is challenged, and this undermines intrinsic motivation. Extrinsic rewards might be motivating if they are viewed as performance feedback. One study found that cash rewards perceived as informational lead to healthier forms of motivation, greater psychological health, and better overall work intentions than cash rewards perceived as controlling.32 For example, setting limits on a salesperson’s expense account could be seen as either informational or controlling depending on the relationship with the boss. Leaders can create a climate of trust that alters whether a person views their rewards as controlling or good feedback.33 For example, a leader can communicate a pay raise without compromising motivation by emphasizing the informational aspect of the raise as valuable feedback rather than just money. Self-determination theory views rewards as a continuum from the lack of motivation to intrinsic motivation, as shown in Figure 9.6. Extrinsic motivation is seen as complex and ranges from external regulation (rewards and punishments) to feelings of self-worth derived from job performance (introjected regulation). At the higher end of extrinsic motivation, identified regulation means employees realize that the goals of the organization are important. At the highest level of extrinsic motivation, the employee identifies with the values and integrates them into automatic performance (integrated regulation). This continuum helps the manager understand that extrinsic motivation can play an important role in encouraging employee performance. However, as shown in the figure, intrinsic motivation reflects the enjoyment of work, and extrinsic rewards may not be needed to maintain high levels of performance.34 Therefore, with respect to performance, incentives and intrinsic motivation are not necessarily at odds and are best considered simultaneously. So, it is important to keep in mind that extrinsic rewards can motivate, but they also have limitations. See Case Study 9.1 at the end of the chapter for an example of how a company combines intrinsic and extrinsic rewards. The next section discusses what money can and cannot do in terms of motivation.

Description

Figure 9.6 The Self-Determination Continuum of Rewards

Source: Ashford, S. J., Blatt, R., & Vandewalle, D. (2003). Reflections on the looking glass: A review of research on feedback-seeking behavior in organizations. Journal of Management, 29(6), 773–779. p. 775

What Money Can and Cannot Do

There are pros and cons of using money as a motivational tool.35 On the one hand, organizations that appropriately tie pay to performance and pay higher salaries than other organizations have higher rates of return.36 A study of hospitals showed that pay-level practices and pay structures combined to affect resource efficiency, patient care outcomes, and financial performance. On the other hand, tying pay directly to performance can have dysfunctional or even unethical consequences.37 For example, Green Giant, a producer of frozen and canned vegetables, implemented a pay system that rewarded employees for removing insects from vegetables. It was later discovered that some employees were bringing insects from home and putting them into the vegetables to receive the monetary rewards.38

Pay Dispersion

Another caveat regarding money as a motivational tool is that care must be taken when implementing systems in which employees receive different levels of rewards for individual efforts. This results in pay dispersion, which can cause jealousy among employees or harm team performance. If pay dispersion creates pay inequity due to discrimination, it may result in litigation under the Equal Pay Act of 1963. Pay dispersion can be horizontal (between employees at the same level) or it can be vertical (between employees at different levels in the organization). Vertical pay dispersion has been shown to have more negative effects on productivity than horizonal.39 In other words, employees are less motivated when they make significantly less money than managers above them in the hierarchy. Horizontal pay dispersion may not have negative impact on motivation if it is performance-based and fair.40

To summarize, there are five evidence-based guidelines for money as a motivator: (1) Define and measure performance accurately, (2) make rewards contingent on performance, (3) reward employees in a timely manner, (4) maintain justice in the reward system, and (5) use monetary and nonmonetary rewards.41 These evidence-based guidelines are summarized in Table 9.1.

Principles

Implementation Guidelines

1. Define and measure performance accurately.

• Specify what employees are expected to do, as well as what they should refrain from doing.

• Align employees’ performance with the strategic goals of the organization.

• Measure both behaviors and results, but the greater the control over the achievement of desired outcomes, the greater the emphasis should be on measuring results.

2. Make rewards contingent on performance.

• Ensure pay levels vary significantly based on performance levels.

• Explicitly communicate that differences in pay levels are due to different levels of performance and not because of other reasons.

• Take cultural norms into account. For example, consider individualism–collectivism when deciding how much emphasis to place on rewarding individual versus team performance.

3. Reward employees in a timely manner.

• Distribute fake currencies or reward points that can later be traded for cash, goods, or services.

• Switch from a performance appraisal system to a performance management system, which encourages timely rewards through ongoing and regular evaluations, feedback, and developmental opportunities.

• Provide a specific and accurate explanation regarding why the employee received the particular reward.

4. Maintain justice in the reward system.

• Only promise rewards that are available.

• When increasing monetary rewards, increase employees’ variable pay levels instead of their base pay.

• Make all employees eligible to earn rewards from incentive plan.

• Communicate reasons for failure to provide promised rewards, changes in the payouts, or changes in the reward system.

5. Use monetary and nonmonetary rewards.

• Do not limit the provision of nonmonetary rewards to noneconomic rewards. Rather, use not only praise and recognition but also noncash awards consisting of various goods and services.

• Provide nonmonetary rewards that are needs-satisfying for the recipient.

• Use monetary rewards to encourage voluntary participation in nonmonetary reward programs that are more directly beneficial to employee or organizational performance.

Source: Adapted from Aguinis, H., Joo, H., & Gottfredson, R. K. (2013). What monetary rewards can and cannot do: How to show employees the money. Business Horizons, 56, 241–259.

As the previous review of monetary and nonmonetary rewards shows, the ability to assess employee performance is essential to the successful implementation of any reward system. Most organizations today employ pay-for-performance incentive systems, which include individual merit pay.42 A review of this research concludes with this: “Job performance is perhaps the most central construct in work psychology.”43 The approaches to performance evaluation and guidelines for effective practice are covered next.

PERFORMANCE MANAGEMENT

Learning Objective 9.4: Illustrate the methods of performance management with examples.

As noted previously, performance management is essential for the determination of compensation and other outcomes such as promotions. But there are other objectives that are equally important. The performance management session is an opportunity to regularly discuss an employee’s performance and results. The leader can identify the follower’s strengths, weaknesses, and areas for improvement. The process supports pay equity in which followers are paid according to their inputs and results, and it supports a climate of organizational justice. Performance management thus provides essential feedback for followers. Importantly, it can recognize exceptional performance and document weak performance. Also, it can lead to effective goal setting for future performance and identify training that may be needed to improve skills. Most organizations use the performance management process for compensation decisions and performance improvement as well as to provide feedback to employees.44 Next, we discuss the sources and methods used by organizations to evaluate employee performance—who rates performance and how it is managed.

Sources of Performance Management Ratings

In most organizations, the immediate supervisor is involved in the performance appraisal and often is the only person conducting the review. This appraisal is often reviewed by the human resources department. In some cases, the process is reviewed by a manager one level above the supervisor. However, recent trends have included ratings from higher management, peers (coworkers), the employee’s followers, and customers. Performance appraisal may also include self-ratings in which the employee rates their own performance, and this becomes a part of the file. However, self-ratings are typically used for development purposes and not for compensation or promotion decisions because they suffer from self-interest bias and they don’t agree well with supervisor ratings.45 In a 360-degree performance appraisal, the input from a number of these sources is included to provide a more comprehensive view of an employee’s performance. The research evidence on 360 degree suggests it increases the perspectives that provide input into the review process.46,47 The challenge with 360-degree reviews is that organizations don’t often provide necessary training for peers to offer constructive feedback. Peers, for example, tend to be more lenient than supervisors in rating their coworkers.48,49 Despite these challenges, 360-degree feedback has been implemented successfully in numerous organizations.

An example of a successful implementation is Starwood Hotels and Resorts Worldwide. The executive team wanted to provide their managers with valuable feedback on their strengths and areas for development. They used the viaPeople 360-degree feedback system along with a proprietary, internally developed, and validated competency model, and this process produced the following individual and organizational benefits.50

Individual Benefits

A simple, easy-to-use 360-degree feedback tool

A “self-paced” 360-degree feedback report complete with targeted questions to guide the leader through the process of uncovering strengths and development areas

Specific interpretive tables and graphs in the feedback report that helped leaders analyze their data

A downloadable discussion guide for report recipients and their managers—what to focus on, how to lead and focus the discussion, and how to deal with emotions/defensiveness

Organizational Benefits

Competency/skill strengths and development areas across division and employee level

Better understanding the skill mix across the organization, Starwood was able to more effectively leverage the leadership strengths and refocus efforts where developmental opportunities may exist

Data specific for each division provided (by viaPeople) allowed Starwood to target local training efforts, thereby saving precious resources

Each divisional leader received analysis of their division’s results so they could take specific actions on the data and have a better understanding of the team strengths/development areas.

Performance Management Methods

It is best to avoid rating traits such as having a positive attitude since they may not relate to actual performance.51 Most organizations use a standard form to evaluate employee performance. There may be an overall global rating for performance, but there are also specific dimensions that are rated. These ratings are typically on a graphic rating scale having multiple points along a continuum. Here is an example:

Outstanding Performance is consistently superior.

Exceeds expectations Performance is routinely above job requirements.

Meets expectations Performance is regularly competent and dependable.

Below expectations Performance fails to meet job requirements on a frequent basis.

Unsatisfactory Performance is consistently unacceptable.

An example of a graphic rating scale is shown in Toolkit Activity 9.2 at the end of this chapter. You have the opportunity to practice using this commonly used performance management tool in the role-play exercise.

Another approach is to use behaviorally anchored rating scales (BARS) in which a vertical scale is presented with specific examples of performance provided. For example, for an executive assistant, a BARS might look like this:

Performance Dimension: Knowledge of Company Policies

Outstanding

Knows details of all policies and procedures from memory, recommends updates, and communicates policies to all employees in the office

Exceeds expectations

Maintains organized files and can look up policies; maintains updates and communications to all employees in the office

Meets expectations

Has familiarity with policies and can locate them on the organization’s website, including updates; communicates policies to most employees in the office

Below expectations

Is not familiar with policies or updates, and does not communicate policies to employees in the office

Unsatisfactory

Makes errors in locating or interpreting policies or updates; communicates incorrect information to employees in the office

As this table shows, the creation and updating of BARS can be time-consuming, but they can be more effective because they focus on specific behaviors rather than general statements such as “knowledge of work.”

Some organizations use a forced-ranking method in which all employees in the work group are ranked relative to one another. This approach was made famous by Jack Welch at GE, where he committed to firing the bottom 10% of the workforce each year.52 But GE no longer does this. Even if the bottom 10% is not fired, such forced-ranking systems may make managers uncomfortable and create a culture of competition. Recently, such forced-ranking systems have come under scrutiny by large corporations. Microsoft, for example, has done away with their long-standing practice of forced rankings. Surveys from the consultancy company Gartner found that only 27% of companies in the Fortune 1,000 in 2015 reported using a forced ranking to measure the performance of their workforce, down from 44% in 2013).53 See the What’s #Trending in OB? box for an update on why many organizations are doing away with forced rankings due to their limitations.

Critical Thinking Questions: Do you agree that forced rankings should be eliminated in evaluating performance? Why or why not? Discuss the positive side of having competition in the organization.

What’s #Trending in OB? New Directions in Performance Reviews: Beyond the Bell Curve

The logic behind forced-ranking systems is that employee performance falls on a bell-shaped curve—the normal distribution, as you learned in your statistics courses. Thus, only a small percentage of employees fall into the outstanding category, and an approximately equal number fall into the unsatisfactory category. Most employees are considered average in terms of their performance and need further coaching or training to improve. Large organizations have recently been questioning whether such systems work. Concerns have been raised that forced rankings are demotivating and harm cooperation and teamwork. Some companies removed numerical ratings from their evaluation systems after learning that employees stop listening after they get their number and don’t hear the essential feedback needed to improve their performance. Doing away with formal performance reviews is a trend that continues to grow. Fewer employers conducted formal performance reviews in 2017 compared to 2018: 91% versus 87%. According to Gallup, only 14% of employees strongly agree their performance reviews inspire them to improve. Research conducted by Gallup and Stanford University found that traditional performance reviews and approaches to feedback are often so bad that they actually make performance worse about one third of the time. Ninety-six percent of managers surveyed by Gallup said that real-time feedback and periodic performance discussions with their boss was more effective than annual reviews.

Instead of annual performance reviews, Fortune 500 companies like GE and Microsoft have replaced reviews and ranking systems with more frequent feedback and coaching conversations between leaders and employees. Employee performance comes from empowering people and not micromanaging them. Organizations are substituting or supplementing performance appraisals with coaching where leaders stay informed by asking employees questions every week such as the following:

What’s going well?

What challenges are you facing? Where are you stuck?

On a scale of 1 to 10, how happy are you? Why?

What is one idea to improve our product or service?

What are your top three priorities for next week?

Discussion Questions

What are the pros of performance appraisals? Provide an example of when a performance appraisal has a positive benefit.

What are the cons of performance appraisals? Provide an example of when a performance appraisal has a negative outcome.

Based on motivation theory, we know that employees need feedback to perform well. What is an alternative to performance appraisal that provides necessary feedback?

Sources: Hassell, D. (2019). https://www.15five.com/performance-review/; McGregor, J. (2013). For whom the bell curve tolls. Retrieved on November 20, 2013, from http://www.washingtonpost.com/blogs/on-leadership/wp/2013/11/20/for-whom-the-bell-curve=tolls; Smith, A. (2018). More employers ditch performance appraisals. https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/more-employers-ditch-performance-appraisals.aspx; Sutton, B. & Wigert, B. (2019). More harm than good: The truth about performance appraisals. https://www.gallup.com/workplace/249332/harm-good-truth-performance-reviews.aspx.

PROBLEMS WITH PERFORMANCE REVIEWS

Learning Objective 9.5: Critique the performance review process.

There are issues related to performance appraisals that a leader needs to know about. Some employees view the appraisal process as unfair and showing favoritism. Others may fear the appraisal process and view it as punitive.54 There are perceptual biases that may affect the rater’s ability to accurately rate follower performance (from Chapter 5, major perceptual errors are primacy, recency, availability, contrast, and halo). These errors have been shown by research to affect the performance rating process. In addition, there may be a tendency for a rater to be too lenient (or too strict) in their ratings.55 They might have a central tendency error in which they rate all dimensions of performance as average (e.g., rating every dimension as 3 on a 5-point scale). Cultural values such as power distance and collectivism may influence how a rater assesses the performance of another person.56 Performance appraisals should be supported by training for those making the ratings to avoid these errors and increase sensitivity to the perspectives of employees from different cultural backgrounds.

These perceptual biases may be avoided by rewarding for results rather than behaviors. For example, in profit-sharing plans, employee bonuses are based upon reaching a financial target such as return on assets or net income. Stock options are a variation of profit sharing where employees are given stock options as part of their compensation package. Gain-sharing plans are another alternative, in which compensation is tied to unit-level performance (e.g., the employees receive a percentage of the sales increase or cost savings for efficiency improvements). These plans tend to increase performance.57 However, the pay may be too variable for employees to rely solely on these plans for their total compensation. Also, the focus on results may encourage unethical behaviors to reach the targets.58

Some managers feel that performance appraisals offer little benefit relative to the time involved. Some are not comfortable with face-to-face confrontation over difficult performance issues. Finally, there is an inherent conflict in the role of the supervisor as both the evaluator and performance coach. Despite this discomfort on the part of supervisors, research has shown employees are satisfied with their performance evaluation when the process combines development with administrative reward purposes.59 Moreover, employees reported higher intentions to use developmental feedback when rewards were also discussed. One study found that all employees are unhappy with receiving negative feedback—even those with a strong learning orientation.60 It appears that negative feedback does not help employees learn more from their jobs.

Another criticism that has been leveled at the performance management process is that by focusing on individual achievement, effective teamwork is discouraged.61,62 While the critics of individual performance management have made important points, team-based reward systems also have drawbacks. Most employees prefer that their pay be based on individual merit rather than group output.63 This preference is strongest among the most productive and achievement-oriented employees.64,65 Thus, if pay is based on group performance, an organization’s best performers may become frustrated and seek other jobs. It’s best to offer mixed or aggregate compensation systems, which include individual merit pay, group incentives, and gain sharing to offset the advantages and disadvantages of the different approaches.

Other Forms of Compensation

Other benefits that employees may value as rewards include flexible working hours, which research has shown relate to employee satisfaction and motivation. Flexible working hours may be formal (e.g., allowing employees to arrive later to work and stay later) or informal (e.g., a supervisor being flexible regarding an employee’s need to pick up children from school). Another variation on flexible hours is job sharing, or splitting one full-time job into two jobs.66 Another benefit that many employees value is remote working (also known as telecommuting), or the ability to work from home—or anywhere. A study of 2,617 employees in four organizations67 found that remote working and flexible hours were related to organizational commitment. This commitment translated into higher job performance. During the COVID-19 crisis of 2020, many people were forced to work remotely. Fortunately, technology such as Zoom videoconferencing was already available to enable many workers to hold online meetings and classes from the safety of their homes.

Another reward that progressive organizations are offering is sabbaticals from work. A sabbatical is a leave taken from work to “recharge one’s batteries” or take care of family responsibilities. In some cases, sabbaticals are paid, while others are unpaid. For example, Genentech, a San Francisco breast cancer research firm, offers a 6-week paid sabbatical after 6 years of continuous service with the company. In 2015, a total of 1,100 employees took advantage of the program, in addition to their 18 paid vacation days.68

Critical Thinking Question: Explain how the management of individual performance may harm team performance. How can this be addressed?

A research report from McKinsey Consulting summarizes recent trends that reflect changes to traditional performance appraisals in organizations. These trends include the following:

Some companies are rethinking what constitutes employee performance by focusing specifically on individuals who are a step function away from average—at either the high or low end of performance—rather than trying to differentiate among the bulk of employees in the middle.

Many companies are also collecting more objective performance data through systems that automate real-time analyses.

Performance data are used less and less as a crude instrument for setting compensation. Indeed, some companies are severing the link between evaluation and compensation, at least for most of the workforce, while linking them ever more comprehensively at the high and low ends of performance.

Better data backup is being utilized to shift emphasis from backward-looking evaluations to fact-based performance and development discussions, which are becoming frequent and as-needed rather than annual events.69

What should a leader do to improve motivation given these trends in performance management? A leader should focus on what is important to the employee and what they learned from mistakes. Performance management should be about employee growth and development. Leadership consultant Jose Luis Romero suggests that growth means two things:

To help employees possess the needed skill level to achieve desired performance; and

To help employees develop the ability to exceed desired performance and move to greater levels of more complex performance.70

HR consultant Earl Silver notes that ratings can be demotivating, so it is important for a leader to separate discussions of growth and development from salary increases. He reminds leaders to make an investment in making their performance management process work effectively to motivate employees.71 Toolkit Activity 9.1, at the end of this chapter, provides some additional tips for conducting an effective performance appraisal. Then practice your skills in developing a plan for growth and development by completing the role-play exercise in Toolkit Activity 9.2.

As noted previously, one of the primary goals of the performance evaluation process is to provide feedback to employees on their performance. Research has shown that some employees seek feedback from their supervisors to enhance their performance that does not depend on the formal performance management process. Thus, the formal appraisal review process is not always enough to provide followers with the feedback they need to perform well. Research on feedback seeking by followers has demonstrated that accuracy of follower perceptions of their performance is improved by more frequent feedback from leaders.

FEEDBACK SEEKING

Learning Objective 9.6: Explain how feedback seeking by employees relates to more accurate perceptions of performance.

As noted previously, performance management systems have been criticized for emphasis on categorizing employees and failure to address the followers’ need for feedback on their work on a day-to-day basis.72 As shown in Figure 9.7, the situation affects the person’s motives for feedback seeking. People may want to defend either their self-perception or image (ego or image defense). Alternatively, their goal may be to enhance their image in the eyes of others (by asking for feedback on something they knew they did a good job on, for example). There are five patterns of feedback seeking that matter: (1) how frequently people seek feedback, (2) how they seek it (observing, comparing, or asking for it), (3) the timing, (4) whom they ask for feedback from (i.e., the target), and (5) what they ask for feedback about (e.g., success on a task assignment).73 Outcomes from feedback seeking are a more accurate perception of one’s own performance and progress on goal attainment by gaining feedback when needed. Also, one’s self-perception and image may be enhanced through the five strategies of feedback seeking. Research on feedback seeking suggests seeking negative feedback does improve an employee’s image (unless the feedback seeker is a poor performer). However, seeking positive feedback can be detrimental to a leader’s image as seen by subordinates.

Critical Thinking Questions: Is it a bad idea for a leader to seek feedback from followers? Why or why not?

Description

Figure 9.7 Antecedents and Consequences of Feedback Seeking

Source: Ashford, S. J., Blatt, R., & VandeWalle, D. (2003). Reflections on the looking glass: A review of research on feedback-seeking behavior in organizations. Journal of Management, 29(6), 773–779, p. 775.

LEADERSHIP IMPLICATIONS: MOTIVATING WITH REWARDS

Leaders play an important role in managing follower motivation and performance. Research has shown that the relationship between leader and follower (i.e., leader–member exchange [LMX]) is an important factor in the performance appraisal process. A study found that perceptions of performance management process fairness matter to individuals, and high-LMX employees tend to see the process as being fairer than low-LMX employees.74 Leaders need to pay close attention to the extent to which followers perceive that the performance appraisal process is procedurally fair. The authors conclude that “all employees need to feel cared for and supported.”75 Leaders should ask their followers how they feel about the organization’s performance appraisal procedures and practices on an informal basis. Suggestions for improving the process should be taken seriously. Good supervisor–subordinate relationships create a social context that substantially influences the performance management discussion and how followers respond to their feedback.76 A longitudinal study77 found that employee voice during the performance management session (procedural justice) influenced the reactions to receiving negative feedback. In this study, the relationship with the supervisor was more important than the differences in performance ratings. What this study suggests is that followers will accept feedback when they are rated lower than their peers if they have a trusting and high-quality relationship with their boss, and they have a voice during the process. A case study of a performance appraisal process supported this finding. Followers who trusted their leaders were more satisfied with the performance appraisal process in their organization.78

An example of how the leader plays an important role is shown in a study of performance management conducted at Deloitte Consulting by a team of consultants.79 To see performance at the individual level, consultants asked team leaders not about the skills of each team member but about their own future actions with respect to that person. At the end of every project (or once every quarter for long-term projects), they asked team leaders to respond to four future-focused statements about each team member. These questions were designed to clearly highlight differences among individuals and reliably measure performance. Here are the four questions:

Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus (measures overall performance and unique value to the organization on a 5-point scale from “strongly agree” to “strongly disagree”).

Given what I know of this person’s performance, I would always want them on my team (measures ability to work well with others on the same 5-point scale).

This person is at risk for low performance (identifies problems that might harm the customer or the team on a yes-or-no basis).

This person is ready for promotion today (measures potential on a yes-or-no basis).

In effect, team leaders were asked what they would do with each team member rather than what they think of that individual. Completing these assessments after each project produces a rich stream of information for leaders’ discussions of what they, in turn, plan for each follower in terms of their growth and development as well as promotions. This process shifts the role of the leader from evaluator to coach and provides followers with feedback on a more frequent basis (after each project or quarterly) rather than once per year.

This chapter has shown that research supports how leaders can motivate followers using rewards. Knowing reinforcement and social learning basics is essential to understanding how reward systems operate in organizations. Based on the self-determination theory, it is important for leaders to recognize that follower needs for autonomy and competence play an important role in intrinsic motivation and well-being. It is also important to become thoroughly familiar with the performance management in your organization so that it can be used effectively to provide the necessary feedback to motivate employees to high levels of performance. Research has shown that the process must be perceived as fair, and employees need to be able to voice their concerns during the process. People are more likely to accept feedback, even if it is negative, if they trust their leader. Feedback-seeking research has demonstrated that employees need feedback far more often than yearly performance management reviews. Leaders should encourage their followers to seek feedback so they can stay on track toward reaching their goals. A number of organizations, including GE, Microsoft, Netflix, and Google, have redesigned their performance management systems to provide fluid and frequent feedback that emphasizes the role of the leader as coach.80 Some organizations are even experimenting with apps that provide real-time feedback to employees.81 The process of motivating employees is evolving, but current trends indicate that the leader will play an even more central role in the performance management process in the future.