This paper examines pay as an extrinsic reward in organizational management, drawing on reinforcement theory, equity theory, and expectancy theory. It analyzes merit pay (pay-for-performance) systems, which are used by over 80% of organizations, and discusses their dual nature: they can motivate high performers and promote healthy competition, but poorly designed systems risk undermining product quality, reducing motivation in lower performers, and creating workplace conflict. The paper concludes by offering practical recommendations for managers to maximize the effectiveness of merit pay systems, including clear performance criteria, continuous feedback, and consideration of alternative compensation approaches.
Reinforcement theory states that pay is an extrinsic reward that managers can use as a positive reinforcer to influence employees' performance (Wood, Zeffane, Fromholtz, Wiesner, Morrison, & Seet, 2012). Pay can help attract and retain highly capable employees and serve as a motivational tool to develop employee work effort. At the same time, if employees are not satisfied with their pay, it can lead to poor morale or even poor physical and mental health, which will do more harm than good for the organization. Therefore, to use pay effectively as a reward, managers need to understand why pay is important to employees and the implications it carries.
Various organizational behavior theories define pay differently. J. Stacy Adams's equity theory views pay as an object for comparison, and as a result of that comparison, employees' work effort may increase or decrease accordingly. Victor Vroom's expectancy theory views pay as one of the valued outcomes in a workplace (Robbins, Judge, Millett, & Boyle, 2014). The general principle derived from these various definitions is that, for pay to be effective as a reward, it must be given equitably and dependent on specific and desirable work performance (Robbins, Judge, Millett, & Boyle, 2014).
The most commonly used form of pay practice that aligns with these theories is merit pay, also known as pay-for-performance (Robbins, Judge, Millett, & Boyle, 2014).
Merit pay is a reward system that relates an employee's salary or increment based on the measure of the employee's performance in a specified period of time (Robbins, Judge, Millett, & Boyle, 2014). Results from WorldatWork's 2014–2015 Salary Budget Survey showed that more than 80 percent of organizations grant merit pay increments to their employees. Over the past decade, this ratio remained substantially unchanged, proving that merit pay is the most commonly used pay practice for organizations. However, managers must consider the potential positive and negative effects before implementing this type of reward system in the organization.
One of the positive effects of merit pay is that it helps to promote healthy competition among employees by motivating them to work hard to achieve the desired reward (Heneman & Werner, 2005). Additionally, the merit pay system allows managers to give recognition to high performers and reward them accordingly, making it possible for organizations to retain their high-achieving employees.
While merit pay can be viewed as a motivational tool for some employees, if poorly designed, this system can be exploited. Suppose, for example, that in a manufacturing department, factory workers are given a $500 bonus if they exceed the monthly production quota. This incentive may motivate the factory workers to work hard to receive the additional monthly bonus, resulting in increased output production per employee, which is beneficial for the company in economic terms. However, employees who are only interested in increasing their monthly output may jeopardize the overall quality of the product. Ultimately, if defective products reach end consumers, the company's reputation will be destroyed.
It is also possible that merit pay can decrease instead of increase employees' motivation. For example, in a retail setting, shop assistants who perceive that they are unable to secure a performance bonus will become demoralized and may not provide good customer service to shoppers. These employees may also resent high performers, resulting in increased workplace conflict and eventually leading to the disintegration of the overall team's unity.
"Clear criteria, feedback, employee involvement, alternatives"
You’re 76% through this paper. Sign up to read the remaining 1 section.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.