Management incentive plans from an Evidence-based Management point of view: Controversies and innovations
Increasingly, organizations are changing the ways in which they compensate and reward their employees. This is true for the relationship between the employer and management. A management incentive plan is a compensation or rewards agreement between an employer and management. The plan is designed to motivate managers and to align management performance with the strategic goals of the firm. This blog post describes the latest innovation in management incentives and discusses the linkages between incentives and individual and firm performance.
Management incentive plans serve many benefits and help organizational performance.
There are several organizational benefits for implementing a management incentive plan including the ability to retain and attract key talent, improvement in financial performance, an increase in business value and a better alignment of HRM practices with the strategic plan. Implementing an incentive plan makes it easier for organizations to reward result-focused behavior. Incentivisation is the policy of building incentives such as commission or additional extrinsic rewards into a formal system into order to engage employees to work harder. In many ways management incentive plans are a way for an organization to control the productivity levels of their employees. Establishing reward systems is a crucial role of the HR function. One key issue is whether incentive plans for management are worthwhile. Managers can play a critical role in establishing firm profitability and most firms engage in thorough decision-making with regard to management rewards. Many managers get short term and long term incentives in addition to salary. While attractive, there has been criticism of whether incentive plans are worthwhile for either managers or employees.
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Research is inconclusive as to whether incentives really do increase performance.
The psychologist Alfie Kohn has argued against incentive plans based on research demonstrating a lack of linkage between extrinsic rewards and motivation. In fact, Kohn has argued that reward tend to punish people because those who had hoped to receive them do not and this influences morale (Kohn, 1993). Generally, Kohn suggests that extrinsic motivators are poor substitutes for intrinsic rewards. He argues that organizations are best served through promoting interest in the actual work rather than a focus on incentives. Other management scholars have also been critical of management incentive schemes. Although generally, it is thought that monetary incentives will increase effort and performance, research has been inconclusive (Bonner & Sprinkle, 2002). In a review of the literature, Cameron and colleagues challenged Kohn’s assertion that extrinsic rewards are detrimental, “what is clear, at this time, is that rewards do not inevitably have pervasive negative effects on intrinsic motivation.” (Cameron, Banko & Pierce, 2001). The more important question is how monetary incentives influence effort and performance.
Context matters: Alignment between organizational mission and incentive plans is vital.
Following a review of the literature on incentives and performance, Bonner and Sprinkle present a model demonstrating that a variety of factors such as person, task, environmental and variables that characterize the incentive scheme are related to effort and performance (Bonner & Sprinkle, 2002). With regard to incentives schemes, Bonner and Sprinkle state that the timing of the incentive is important, what dimensions of performance the incentives reward, and the magnitude of the payoff. Organizations also need to focus on performance dimensions that the incentives rewards so that management can see a clear connection between their behavior and rewards (Bonner & Sprinkle, 2002). It is important that organizations align their incentives plans with the organization mission and ensure that the plan fits in well with the culture of the organization. For example, when considering on how to reward managers, organizations needs to decide whether managers will receive bonuses based on individual performance, corporate performance, or both. Organizations usually tie top level executive bonuses to corporate results but this makes less sense for a mid-level manager who is more interested in being rewarded for individual contribution.
There should be clear links between behavior and rewards, which must be embedded into the firm's mission.
Although the value of pay or incentives as a motivator of management performance has been questioned, there is value when organizations design effective reward systems that motivate employee behavior, which is valued by the firm (May, 1996). It is important that incentive schemes are an accurate gauge of performance dimensions and experts in HRM rewards can help structure those systems so that there are clear links between rewards and behavior. Management incentives schemes should clearly demonstrate how employees can be rewarded through a clear linkage to job activities and organizational results. Without these linkages, individual effort is not connected to the firm’s mission and this negates the value of a management incentive scheme (May, 1996).
Organizations can also use banding for management compensation. With banding, the creation of a band involves the measurement or assessment of the similarity of jobs given specific criteria (Caudron, 1993). Although banding might not be suitable for top executives, it is a useful tool to consider when focusing on lower-level management. When organizations create broad bands of jobs, this allows for greater discretion in increasing compensation for individual managers. For the success of management incentives programs, it is also important for organizations to ensure clear communication to management regarding desired outcomes that determines the variable component of their managerial pay (May,1996).
Management incentive plans best work with a balanced approach combining extrinsic and intrinsic motivators.
Despite the arguments that extrinsic rewards are deleterious for performance, there is a growing consensus that both extrinsic and intrinsic rewards are important for optimal performance. In a study of organizational rewards, Kanungo and Mendonca found that effective organizational rewards are contingent on performance, have value to the recipient, and are salient (Kanungo & Mendonca, 1988). In fact, management who received incentives did not distinguish between extrinsic and intrinsic rewards yet focused on those rewards that were salient to them (Kanungo & Mendonca, 1988). There are also incentive schemes that function as both extrinsic and intrinsic motivators. For example, gain sharing incentive plans are designed to foster collaboration and to create a collective company culture. Consequently, gain sharing is not just focused on the organization’s profits but is aligned in engaging management and staff with a positive attitude towards work and the company. In fact, organizations that employ gain-sharing plans demonstrate social concern as well as a focus on long-term revenue and strategic goals (Gerhardt, Rynes & Fulmer, 2009).
References and further reading
Bonner, S. E. and G. B. Sprinkle. (2002). The effects of monetary incentives on effort and task performance: Theories, evidence, and a framework for research. Accounting, Organizations and Society 27(4-5): 303-345.
Cameron, J., Bank, K. M., & Pierce, W. D. (2001). Pervasive negative effects of reward on intrinsic motivation: the myth continues. The Behavior Analyst, 24, 1, 1-44.
Gerhardt, B., Rynes, S. L., & Fulmer, I. S. (2009). Pay and Performance: Individuals, Groups, and executives. Academy of Management Annals, 3, 1, 207-271.
Kanungo, R. N., & Mendonca, M. (1988). Evaluating employee compensation. California Management Review, 31, 1, 23-39.
Kohn, A. 1993. Why incentive plans cannot work. Harvard Business Review (September- October): 54-63.
May, K.E. (1996). Work in the 21st century: Implications for job analysis. The Industrial- Organizational Psychologist, 33(4), 98-100.
Annette was born in England and now lives in the United States. She has a PhD in Industrial and Organizational Psychology and has taught at several institutions. Annette has published in several journals, including Journal of Applied Psychology, Personnel Psychology, Human Resource Development Quarterly, and Organizational Research Methods. She worked in the public and private sector for many years, primarily as a management trainer.