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Motivation: Reward system and the role of compensation


The design and management of reward systems present the general manager with one of the most difficult HRM tasks. This HRM policy area contains the greatest contradictions between the promise of theory and the reality of implementation. Consequently, organisations sometimes go through cycles of innovation and hope as reward systems are developed, followed by disillusionment as these reward systems fail to deliver.

Rewards and employee satisfaction

Gaining an employee #8217;s satisfaction with the rewards given is not a simple matter. Rather, it is a function of several factors that organisations must learn to manage: 1. The individual #8217;s satisfaction with rewards is, in part, related to what is expected and how much is received. Feelings of satisfaction or dissatisfaction arise when individuals compare their input – job skills, education, effort, and performance – to output – the mix of extrinsic and intrinsic rewards they receive.

2. Employee satisfaction is also affected by comparisons with other people in similar jobs and organisations. In effect, employees compare their own input/output ratio with that of others. People vary considerably in how they weigh various inputs in that comparison. They tend to weigh their strong points more heavily, such as certain skills or a recent incident of effective performance. Individuals also tend to overrate their own performance compared with the rating they receive from their supervisors. The problem of unrealistic self-rating exists partly because supervisors in most organisations do not communicate a candid evaluation of their subordinates #8217; performance to them. Such candid communication to subordinates, unless done skilfully, seriously risks damaging their self-esteem. The bigger dilemma, however, is that failure by managers to communicate a candid appraisal of performance makes it difficult for employees to develop a realistic view of their own performance, thus increasing the possibility of dissatisfaction with the pay they are receiving.

3. Employees often misperceive the rewards of others; their misperception can cause the employees to become dissatisfied. Evidence shows that individuals tend to overestimate the pay of fellow workers doing similar jobs and to underestimate their performance (a defence of self-esteem-building mechanism). Misperceptions of the performance and rewards of others also occur because organisations do not generally make available accurate information about the salary or performance of others.

4. Finally, overall satisfaction results from a mix of rewards rather than from any single reward. The evidence suggests that intrinsic rewards and extrinsic rewards are both important and that they cannot be directly substituted for each other. Employees who are paid well for repetitious, boring work will be dissatisfied with the lack of intrinsic rewards,

Just as employees paid poorly for interesting, challenging work may be dissatisfied with extrinsic rewards.

Rewards and motivation

From the organisation #8217;s point of view, rewards are intended to motivate certain behaviours. But under what conditions will rewards actually motivate employees? To be useful, rewards must be seen as timely and tied to effective performance.

One theory suggests that the following conditions are necessary for employee motivation.

1. Employees must believe effective performance (or certain specified behaviour) will lead to certain rewards. For example, attaining certain results will lead to a bonus or approval from others.

2. Employees must feel that the rewards offered are attractive. Some employees may desire promotions because they seek power, but others may want a fringe benefit, such as a pension, because they are older and want retirement security.

3. Employees must believe a certain level of individual effort will lead to achieving the corporation #8217;s standards of performance.

As indicated, motivation to exert effort is triggered by the prospect of desired rewards: money, recognition, promotion, and so forth. If effort leads to performance and performance leads to desired rewards, the employee is satisfied and motivated to perform again.

As mentioned above, rewards fall into two categories: extrinsic and intrinsic. Extrinsic rewards come from the organisation as money, perquisites, or promotions or from supervisors and co-workers as recognition. Intrinsic rewards accrue from performing the task itself, and may include the satisfaction of accomplishment or a sense of influence. The process of work and the individual #8217;s response to it provide the intrinsic rewards. But the organisation seeking to increase intrinsic rewards must provide a work environment that allows these satisfactions to occur; therefore, more organisations are redesigning work and delegating responsibility to enhance employee involvement.

Equity and participation

The ability of a reward system both to motivate and to satisfy depends on who influences and/or controls the system #8217;s design and implementation. Even though considerable evidence suggests that participation in decision making can lead to greater acceptance of decisions, participation in the design and administration of reward systems is rare. Such participation is time-consuming.

Perhaps, a greater roadblock is that pay has been of the last strongholds of managerial prerogatives. Concerned about employee self-interest and compensation costs, corporations do not typically allow employees to participate in pay-system design or decisions. Thus, it is not possible to test thoroughly the effects of widespread participation on acceptance of and trust in reward system.

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