Do You Believe That Incentive Pay Is Truly Effort-­‐inducing

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Do you believe that incentive pay is truly effort-­‐inducing; that is, drive employees  to  perform at their best? Discuss.

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What is Incentive Pay

Incentive pay is a type of results controls that provides employees with monetary rewards for meeting pre-­‐determined performance targets. Monetary rewards can be in the form of salary increment, short term incentives like bonuses or long term incentives like employee stock options. It is irrefutable that money is an important form of motivation. Thus incentive pay is a commonly used performance-­‐based incentive to steer employees’ behavior towards achieving the performance targets set by the organisation.

Incentive Pay Can be Effort Inducing

For incentive pay to be effort-­‐inducing, the organisation must know what results are desired, the employees must have significant influence on the results, and the   organisation

must be able to measure the results effectively (MCS). Steven Kerr, previously the chief learning officer of Goldman Sachs, puts it another way. He said that to have effective management, an organisation must set out clearly what needs to be done, then decide how performance should be measured, before it decides on the reward system.

Firstly, the organisation must clearly define the target outcomes (e.g. sales revenue of $1m per quarter, profit before tax of $500K per quarter, etc.) and communicate them to employees, ensuring that the employees fully understand them. Should the organisation adjust its target outcomes from time to time, it should also communicate the changes to the employees  as  frequently.    Secondly,  the  target  outcomes  must  be  outcomes  that    the

employees have control over, and also find attainable. For instance, the performance measurement for a car salesman who only has influence over the sales revenue should not be the bottom-­‐line profits as he does not have control over the costs. The sales revenue target should also not be set at a level that is impossible to achieve. Otherwise,  the salesman would not even try to work towards it since the possibility of obtaining the rewards is remote. Thirdly, the organisation must administer the performance measurements precisely (i.e. equally good performance should be rated equally), objectively (i.e. measurements should be unbiased), timely (i.e. measures and any rewards should not lag employees’ performance too much) and understandably (i.e. there should be clear communication to employees of the performance targets and even training where necessary) (MCS). If the measures and rewards are not sensitive to the effort  the  employees put in to achieve the targets, the employees will not believe in the system and incentive pay will lose its ability to motivate employees. Last but not least, incentives must be set at a level which employees find attractive enough. For instance, Kooistra Autogroep implemented the pay-­‐for-­‐performance system and one reason it did not work optimally was because some employees found the bonus level too low to motivate even in good years.