Module 6 - Driving Behaviour With Reward and Compensation Systems

Question 1

Describe the key types of problems that can result from an organization’s reward and compensation systems.

Answer 1

While a multitude of problems can be triggered by an organization’s reward and compensation systems, they can be grouped into three basic types:

(1) Failure to produce the desired behaviour
(2) Production of the desired behaviour but with undesirable consequences
(3) Production of reward dissatisfaction.

Question 2

Explain the implications of reward dissatisfaction for an organization.

Answer 2

When employees believe the rewards they receive are not consistent with the contributions they are making to the organization or when they believe the compensation system is unfair, they may experience reward dissatisfaction. Reward dissatisfaction can have negative consequences, such as poor work performance, high turnover, delivery of poor customer service and employee dishonesty.

Question 3

Explain the concepts of membership behaviour, task behaviour and organizational citizenship behaviour.

Answer 3

Membership behaviour, task behaviour and organizational citizenship behaviour are the three general sets of behaviours most organizations find desirable. Membership behaviour occurs when an individual decides to join and remain with an organization. Task behaviour occurs when employees perform the specific tasks that have been assigned to them by an organization. Organizational citizenship behaviour occurs when employees voluntarily undertake special behaviours that are beneficial to an organization. These behaviours go beyond membership and task behaviour and include extra effort, high cooperation with others, high initiative, high innovativeness and a general willingness to make sacrifices for the good of an organization.

Question 4

Explain why an understanding of job satisfaction, work motivation and organizational identification is key to designing reward and compensation systems.

Answer 4

Reward and compensation systems do not affect employee behaviour directly. They first affect employee perceptions and attitudes, which then drive behaviour. The key employee attitudes that need to be created in order to generate desired behaviour are:

Job satisfaction

Work motivation

Organizational identification: This attitude has three interrelated elements—a sense of shared goals and values with the organization, a sense of membership or belongingness and an intention to remain a member of an organization.

Each of these attitudes can lead to behaviour that is beneficial to an organization. Job satisfaction leads to membership behaviour, work motivation leads to task behaviour and organizational identification leads to citizenship behaviour. Organizational identification also contributes to the two other behaviours.

Question 5

Identify consequences of job satisfaction, work motivation and organizational identification.

Answer 5

Job satisfaction decreases work stress, grievances, absenteeism and turnover. It also leads to positive group norms. Organizational identification decrease grievances, absenteeism and turnover. It also leads to positive group norms, increased job effort, and cooperative and innovative behaviour. Motivation increases job effort, which should in turn lead to task performance.

Question 6

Explain why the importance of creating job satisfaction, work motivation and organizational identification attitudes through the compensation system varies depending on the managerial strategy used in an organization.

Answer 6

Clearly, all three attitudes are desirable regardless of managerial strategy, but the importance of creating each in compensation systems can vary considerably. A classical managerial strategy requires only sufficient rewards to create some degree of membership behaviour. It doesn’t focus on job satisfaction because very little membership behaviour is needed. Motivation for task behaviour can be achieved through rewards tied directly to the needed behaviours, or through control systems, with the underlying threat of dismissal providing the basic motivation.

In contrast, a human relations strategy relies on job satisfaction and positive work norms. An equitable compensation system that generates job satisfaction and a substantial degree of commitment must be provided. The success of this strategy depends on high membership behaviour and adequate task behaviour. Organizational identification, while desirable, is not essential, since a high degree of organization citizenship behaviour is not required.

A high-involvement managerial strategy typically requires the most complex employee behaviour and highest level of employee performance, and it generally requires the most complex compensation system. The compensation system needs to generate all three key job attitudes and behaviours, the most important being organizational identification. Organizational identification generates the organizational citizenship behaviour that plays a major role in generating membership and task behaviour. Work motivation needs to be high. Job satisfaction must be high enough to help generate high membership behaviour.

Question 7

Describe a psychological contract, and identify how it may be violated.

Answer 7

When individuals join an organization, they have expectations about the rewards they will receive and the contributions they will make to the organization. This is known as their “psychological contract.” Similarly, an organization hires individuals based on the expectation they will make contributions to the organization, in return for certain rewards. In some cases, these psychological contracts include legally enforceable contracts that define the rewards that will be provided and the contributions the individuals will be required to make.

When an individual accepts an offer and joins an organization, problems with the psychological contract can arise for two main reasons. The first is when there has been inaccurate communication about the rewards the employee will actually be provided and/or when the contributions that are required are different from what the employee expects. A violation can also occur when an employer unilaterally changes the contract in a way an employee perceives as detrimental. Possible consequences of violating a psychological contract include decreased job satisfaction, reduced citizenship behaviour and decreased work performance, which in turn can lead to increased turnover, theft or even sabotage.

Question 8

Explain how individuals use an internal calculus screen and equity theory to determine whether the rewards/contributions offered by an organization are fair.

Answer 8

When applying the internal calculus screen, the individual is using his or her own valuations of the rewards received and the contributions made. If applying the equity theory, the individual is comparing his or her rewards received/contributions made ratio with the rewards/contributions ratio of relevant others (i.e., others perceived as being similar).

Question 9

Identify conditions that create employee dissatisfaction with pay level.

Answer 9

Conditions that create pay dissatisfaction:

(a) There is a discrepancy between the outcome employees want and what they actually receive.
(b) Employees see that a comparison “other” receives more than they do.
(c) Past experience has led employees to expect more than they now receive.
(d) Expectations for achieving better outcomes are low.
(e) Employees feel entitled to more pay.
(f) Employees absolve themselves of personal responsibility for the lack of better outcomes.

Question 10

Differentiate between “distributive” and “procedural” justice.

Answer 10

The concept of organizational justice is useful for understanding how employees judge the fairness of their rewards. It has two main components—distributive justice and procedural justice. “Distributive justice” is the perception that overall reward outcomes are fair. “Procedural justice” is the perception that the process through which rewards are determined is fair. Unless employees perceive both outcomes and process as fair, they will not perceive the reward system as fair.

Question 11

Identify conditions that a pay level must have to achieve procedural justice.

Answer 11

Consistent: Procedures are applied uniformly to different jobs and time periods.

Free of bias: Personal interests do not enter into the process.

Flexible: There must be procedures for employees to appeal pay system decisions.

Accurate: Application of the procedures must be based on factual information.

Ethical: Accepted moral principles must guide the application of the procedures.

Representative: All affected employees must have an opportunity to express their concerns.

Question 12

Describe the approaches employees can use to improve reward dissatisfaction.

Answer 12

Employees can attempt to increase their rewards by:

(a) Leaving the organization for a more rewarding job
(b) Demanding higher extrinsic rewards, either individually (i.e., asking for a raise) or collectively through a union (i.e., by demanding wage increases during collective bargaining)
(c) Acquiring illicit rewards (e.g., adding to expense accounts, theft)
(d) Increasing effort/performance (e.g., if increased effort/performance would lead to a promotion)
(e) Asking for improved job duties (which could lead to increased intrinsic rewards if the job is more satisfying).

Another approach is to attempt to reduce contributions by:

(a) Reducing job duties. Employees may formally request that their job duties be reduced.
(b) Reducing effort/performance
(c) Increasing their absenteeism
(d) Looking for a less demanding job.

Question 13

Identify the factors that influence why an employee stays with an organization.

Answer 13

Many factors influence whether an employee stays with an organization, but two job attitudes are pivotal—job satisfaction and organizational identification. In general, job satisfaction develops when the job satisfies an employee’s important needs. One well-known model suggests job satisfaction has five main facets—satisfaction with pay, satisfaction with promotion, satisfaction with supervisors, satisfaction with coworkers and satisfaction with the job itself. Other important factors are job security, work motivation and organizational commitment.

Question 14

Explain how the reward and compensation systems can help generate organizational commitment.

Answer 14

The key issue in generating organizational commitment is the relationship between employees and an organization. Psychological contracts, trust and procedural justice play major roles in building organizational commitment. There is a strong relationship between procedural justice and affective commitment. Individuals remain with an organization out of a sense of belonging and loyalty and because they identify with the organization’s goals. Organizations that are concerned about employees’ welfare have higher affective commitment than other organizations. Rewards geared to organizational performance, such as profit-sharing and employee share plans, help create a feeling of shared goals, which leads to organizational identification and affective commitment.

Seniority-based rewards are a cornerstone for generating continuance commitment. These include seniority increases in pay as well as benefit packages that increase with continued employment. Individuals stay with the organization because they would lose too much by quitting. Paying better than competitor organizations reduces employee turnover, which in turn increases continuance commitment. It is possible for an individual to have a high continuance commitment but an extremely low level of job satisfaction and affective commitment.

Question 15

Explain the basic premise of content theories of motivation and process theories of motivation. Provide examples of each.

Answer 15

Content theories of motivation focus on identifying and understanding underlying needs that drive behaviour and that can be used to motivate employees. They are based on the common-sense notion that people behave in ways they think will help them satisfy their key needs. Content theories include Maslow’s hierarchy of needs, Herzberg’s two-factor theory and Hackman/Oldham’s job characteristics theory.

Process theories focus on understanding motivation by determining the processes individuals use to make choices about the specific actions they will take to satisfy a need. Process theories include reinforcement theory, expectancy theory, attribution theory and economic theory of motivation.

Question 16

Describe Maslow’s hierarchy of needs theory of motivation.

Answer 16

In the Maslow model, human needs are grouped into five main levels—survival/ psychological needs, safety/security needs, social needs, ego/esteem needs and selfactualization. Individuals must satisfy the lowest order needs before higher order needs come into play. Once a need is satisfied, it no longer motivates behaviour. Once an individual’s immediate survival/psychological needs for food and shelter are satisfied, that individual becomes concerned with satisfying the next level, safety/ security. Once safety/security needs are met, individuals become concerned with satisfying their social needs (i.e., sense of belonging) and then their ego/esteem needs (i.e., accomplishment, achievement, competency). If these needs are satisfied, the final set of needs is activated—self-actualization. This is the need to maximize an individual’s potential, the need for continuing learning, growth and development. Maslow contends that self-actualization is the ultimate motivator because, unlike other needs, it can never be satisfied.

Question 17

Describe Herzberg’s two-factor theory of motivation.

Answer 17

The “two-factor theory” states that there are certain factors in the workplace that cause job satisfaction, while a separate set of factors cause dissatisfaction. The two-factor theory distinguishes between:

(a) Motivators (e.g., challenging work, recognition for one’s achievement, responsibility, opportunity to do something meaningful, involvement in decision making, sense of importance to an organization) that give positive satisfaction, arising from intrinsic conditions of the job itself, such as recognition, achievement or personal growth
(b) Hygiene factors (e.g. status, job security, salary, benefits, working conditions, vacations) that do not give positive satisfaction or lead to higher motivation, though dissatisfaction results from their absence. The term “hygiene” is used in the sense that these are maintenance factors. These are extrinsic to the work itself and include aspects such as company policies, supervisory practices or wages/salary.

Hygiene factors must be eliminated to remove dissatisfaction in a work environment. Eliminating dissatisfaction is only one-half of the task of the two-factor theory. The other half is to increase satisfaction in the workplace by improving motivating factors to motivate an employee to higher performance.

Herzberg’s theory fits well with Maslow’s, since hygienes correspond to lower order needs and motivators to higher order needs.

Question 18

Describe Hackman/Oldham’s job characteristics theory of motivation (5)

Answer 18

Hackman/Oldham extended Herzberg’s work by identifying specific job characteristics that cause intrinsic motivation and by developing five core dimensions for calculating the amount of intrinsic motivation in a particular job.

(1) Task identify: Extent to which an employee performs a complete set of activities, rather than only one small part of the job cycle

(2) Task significance: Perceived importance or social value of a given task in the general scheme of things

(3) Skill variety: The number of skills required for task completion

(4) Job autonomy: Degree of freedom that employees have to decide how to perform their jobs

(5) Job feedback: Level of feedback on work quantity and quality that an employee receives from the job itself.

Question 19

Explain how the content theories of motivation relate to the classical, human relations and high-involvement managerial strategies.

Answer 19

(a) Classical managerial strategy aligns with the lower order survival/physiological needs and safety/security needs of Maslow’s hierarchy of needs, the hygienes in Herzberg’s two-factor theory and the extrinsic characteristics of Hackman/ Oldham’s job characteristics theory.
(b) The human relations managerial strategy aligns best with the social needs in Maslow’s hierarchy of needs.
(c) The high-involvement managerial strategy aligns with the ego/esteem needs and self-actualization needs of Maslow’s hierarchy of needs, motivators in Herzberg’s two-factor theory and the intrinsic characteristics of Hackman/Oldham’s job characteristics theory.

Question 20

Describe the reinforcement theory of motivation.

Answer 20

The premise of the reinforcement theory is that a behaviour will be repeated if valued outcomes flow from that behaviour or if performing that behaviour reduces undesirable outcomes. For reinforcement theory to be successful, an employee must perceive a link between the behaviour and the consequence.

There are two types of reinforcers—positive and negative. With positive reinforcement, a reward follows a valued behaviour; with negative reinforcement, an undesirable consequence results whenever the valued behaviour does not occur. The undesirable consequence can be removal of something valued (e.g., losing a day’s pay for an unauthorized absence) or the imposition of something not wanted (e.g., assigning an employee to a job he or she doesn’t want to do).

The desired behaviours for each employee need to be clearly specified. Behaviour must be followed by a reward of significant value to the employee. The closer in time the reward is to the behaviour, the more likely that behaviour will be repeated. Reinforcement theory tends to work best for simple behaviours and for short-term behaviour change.

Question 21

Describe the expectancy theory of motivation.

Answer 21

Expectancy theory helps to understand the thought process that takes place when individuals choose to perform one particular behaviour from virtually infinite possibilities. It is based on the premise that employees are more likely to exert effort to perform a particular behaviour if they believe that behaviour will lead to valued consequences and if they expect they can perform the behaviour. The likelihood of performing a behaviour depends on:

Valence: The net value of the consequences of that behaviour (i.e., whether the reward exceeds the cost)

Instrumentality: The perceived likelihood that the behaviour will lead to a valued consequence

Expectancy: The perceived likelihood of being able to accomplish that behaviour.

All three must be positive before a person exerts the effort to perform a given behaviour. Where there are various competing behaviours (with satisfactory valence and instrumentality) to choose from, an employee will choose the behaviour with the highest net valence.

Question 22

Describe the attribution theory of motivation.

Answer 22

The premise of the attribution theory is that extrinsic rewards may cancel out or destroy intrinsic rewards. Human beings are active creatures who continually engage in a variety of activities without necessarily having a conscious understanding of their motives before performing them. After performing an activity, people often try to understand their behaviour—They try to attribute some motive to that activity. If there is an obvious reason for so doing, they attribute their activity to that motive.

Question 23

Describe the agency theory of motivation and explain its impact on designing compensation systems.

Answer 23

The agency theory is one of the most prominent economic theories. Economic theory represents a simplified view of employee behaviour, assuming people are fixated at the lowest level of Maslow’s hierarchy and that personal values such as honesty and strong work ethic do not exist and that intrinsic awards have little or no relevance to behaviour. Agency theory makes a key distinction between principals (those who own an organization) and agents (those who work for them). Agency theory assumes that agents (employees) will pursue their own self-interests rather than the interests of their principals (employers), unless they are closely monitored or their interests are aligned with the interests of their principals. However, monitoring is expensive. Principals tend to favour compensation systems that closely tie individual rewards to specific behaviours desired by the principals, in particular, individual performance-based pay. In general, economic theories, like agency theory, are only a useful model of behaviour for designing compensation systems if employees of the organization actually match these assumptions.

Question 24

Identify five dimensions of organizational citizenship behaviour.

Answer 24

Organizational citizenship describes the voluntary or discretionary behaviours that go beyond task and membership behaviour. At a broad level, it is willingness to cooperate in the pursuit of organizational goals. It includes five dimensions:

(1) Altruism: Willingness to offer help to coworkers, supervisors or clients without any expectation of personal reward for doing so and without any repercussions if help is withheld

(2) General compliance: Extent to which conscientiousness, in terms of attendance, use of work time and adherence to policies, goes beyond the necessary minimum

(3) Courtesy: Practice of checking in with other employees before taking actions that could affect their work

(4) Sportsmanship: Ability to tolerate, with good grace, minor nuisances and impositions that are part of normal work life

(5) Civic virtue: Extent to which employees take an interest and participate in the broader governance and operation of an organization.

Question 25

Identify components of organizational identification.

Answer 25

The principal source of citizenship behaviour is organizational identification. Two causes of organizational identification are:

(1) Shared organizational goals: There are two ways shared goals may affect organizational identification. First is organizational integration, where the employee’s and the organization’s goals are congruent. The second is when the organizational goals match important values of an employee.

(2) Feelings of membership or belonging: Employees who feel respected and valued in an organization are more likely to engage in citizenship behaviour. Their citizenship behaviour is also connected to perceptions of justice, fair treatment and reciprocity.

Question 26

Outline conditions that must be present to generate organizational citizenship behaviour. Provide examples of the role of the compensation system in achieving these conditions.

Answer 26

Job security

Trust between employees and management

Sense of distributive and procedural justice: The organization is seen to be providing a fair psychological contract and reward structure.

Compensation system where both the employee and the organization benefit when organizational goals are met

Participation in decision making, especially in goal setting

Question 27

Outline the key considerations in designing a compensation system that will support the employee behaviours desired by the organization.

Answer 27

Considerations in designing a compensation system that will support the employee behaviours desired by the organization include:

(a) The necessary employee behaviour. Classical managerial strategies require task behaviour, human relations strategies require task and membership behaviour and high-involvement strategies require task, membership and organizational citizenship behaviour.
(b) The employee attributes and qualifications necessary to perform the needed behaviour. Examine personal characteristics in relation to the organization’s behavioural expectations. Personal characteristics are competencies (i.e., physical, verbal and mental skills), personal values (i.e., core beliefs about appropriate and inappropriate behaviour) and personality (i.e., behavioural and emotional tendencies).
(c) The needs employees with these qualifications are likely to find salient. One way of identifying the salient needs is to analyze employees’ personal values, demographic characteristics and personal circumstances.
(d) A positive valence for needed behaviour. This can be achieved by providing rewards that address salient needs and by reducing the costs to the employee of performing the behaviour. Compensation systems that produce the highest net valence are more likely to lead employees to attempt to perform the desired behaviour.
(e) A high likelihood that performance of the behaviour will lead to the promised rewards
(f) Conditions that will make it likely that employee effort will lead to the desired behaviour.

Question 28

Explain how an employer can create a positive expectancy that employee effort will lead to successful performance of a behaviour.

Answer 28

Positive expectancy among employees can be created by:

(a) Ensuring that the desired behavioural outcome is realistic
(b) Providing organizational context that supports achievement of the desired behavioural outcome. Employees must perceive there is enough organizational support to make successful performance of the behaviour likely. Organizational support consists of resources, training and tools needed for successful job performance to occur.
(c) Ensuring employees believe they have the necessary personal competencies and abilities to achieve the desired performance and that their effort will lead to performance. Along with the development of the actual skills and competencies, the training process plays an important part in creating this expectancy.