Employee Motivation, Incentives, Compensation Systems

Question 1

Why motivate staff?

Answer 1

• conflict between shareholder and employee interests
• improve satisfaction levels, importance of human capital
• enhance customer service
• increase turnover and profits (improves performance)

Question 2

Two major classes of motivational theory

Answer 2

• content theories

- process theories

Question 3

Considerations when motivating employees

Answer 3

• cultural and business environment factors
• money and fear are not good motivators in long run
• people are motivated in different ways

Question 4

Content theories vs process theories

Answer 4

Content: identify factors associated with motivation
Process: people are motivated in different ways
- more flexible than content theories

Question 5

Content theories:

Answer 5

• maslows hierarchy of needs
• herzbergs 2-factor theory
• mcGregor: theory x and theory y
• equity theory
• goal theory

Question 6

Process theories:

Answer 6

• activation = (uncertainty over outcome that employees try to achieve) x (importance of outcome) x (ability to influence outcome)
  • targets are challenging and visible
  • rewarding
  • their actions have impact on performance
• expectancy theory (Lawler): motivation is influenced by value attached to an outcome and likelihood that it will occur

Question 7

Hopewood (1974)

Answer 7

General framework for fostering motivation:

• companies have goals and employees have their own, which overlap with organizational goals to some extent
• companies should focus on overlap and make sure that employees achieve goals within that area

Question 8

Using rewards to motivate

Answer 8

• include a mix of financial and non-financial rewards
• can be positive or negative (penalize)
• reward performance as soon as seen

Question 9

Vancil (1979)

Answer 9

Identified 3 categories of rewards

1. Pleasure of managing an entity
2. Enjoy power and status
3. Earn monetary rewards

Question 10

Fixed vs performance-based monetary compensations

Answer 10

• fixed: salaries
• incentive compensation: payment depends on achievement of targets
• necessary to include fixed component: maslow’s security need

Question 11

non-financial vs financial rewards

Answer 11

• Financial: bonuses (short and long term), salary increase, share options, promotions
• non-financial: psychological rewards (praise, recognition)
  • more cost effective
  • difficult to identify individual preferences for every employee

Question 12

Compensation packages consist of 3 interrelated components:

Answer 12

1. Salary
2. Benefits
3. Incentive compensation

Question 13

Two key elements of incentive compensation plans (ICP)

Answer 13

• measure of performance

- method of compensation

Question 14

Correctly design ICP gives employees incentives to:

Answer 14

• invest wisely
• use assets efficiently
• develop and exploit new opportunities
• engage in common quest to improve performance

Question 15

Short term ICP

Answer 15

Linked to bonuses:

• Bonus pool: total amount of bonus for qualified employee group
• traditional bonus plans have cut-off levels

Question 16

Determining bonus pool

Answer 16

• % of firm profits
• % of firm profits relative to industry
• return on capital
• deferred compensation

Question 17

Long term incentive plans

Answer 17

Linked to firm’s stock:

• stock options
• phantom shares
• stock appreciation right
• performance shares
• performance units

Question 18

Long term vs short term ICPs

Answer 18

• if only short term, employees will only focus on short term targets
• long term makes sure that employees are more linked to firm interests
• long term increases overlap between employee and organizational goals

Question 19

How incentive plans fix Short-termism

Answer 19

• link part of manager’s bonus on multiyear performance

- long-term incentive plans (stock options, performance shares)

Question 20

Linking incentive plans to financial performance evaluation

Answer 20

• adjust numbers for factors that were outside manager’s control
• eliminate effects of losses caused by ‘acts of nature’