The future of employee reward? • Reward Value • Reward Strategy: getting started • Employee Reward: Why non-cash can beat cash • The New Reward Professional • Reward and organisational success • What is Reward Strategy? • Reward Management: Reward Strategy • Symbolic messages in Reward • But does it work in theory? • Seven themes for the future of reward • How to develop a Global Reward Strategy
But does it work in theory?
We need to make decisions based on evidence and relevant research. Whilst research may be of academic interest, in the world of work we need research that helps make the best decision and avoid the unintended consequences.
I have found that drawing on relevant models and research can help challenge the unsubstantiated but firmly held beliefs of many business leaders.
I have listed here 11 models and theories that are relevant to an understanding of different elements of reward and engagement and how reward fits into the totality of HR interventions. They come from an appendix in my latest book Reward Management.
For each theory presented I indicate the elements of reward, or reward related programmes to which I believe they are most relevant.
Whilst you can find more details on these models and theories from many sources Perkins S.J. and White G.W. (2008) Employee Reward covers many of them in some detail.
1. Endowment effect
Endowment effect, also known as ‘status quo bias’, is the phenomenon in which most people put a considerably higher price for a product that they own than they would be prepared to pay for it. People tend to try to avoid what they see as a loss. Thaler (1980)
Relevance – retention plans, incentive plans, reward communications
2. Equity theory
Equity theory assumes that employees seek to maintain an equitable ratio between the inputs they bring to the employee relationship and the outcomes they receive from it. So this is about an employee’s perception of what they receive as an employee for what they have to give. But it not just the employer employee relationship. Of critical importance is the way in which employees evaluate their own input/output ratios based on their comparison with the input/outcome ratios of other employees. In other words an individual may be demotivated if their perception is that they are paid less than someone else doing a similar role.
Inputs in this context include the employee’s time, expertise, qualifications, experience, intangible personal qualities such as drive and ambition, and interpersonal skills. Outcomes include reward and flexible work arrangements. Employees who perceive inequity or injustice will seek to reduce it, either by distorting inputs and/or outcomes in their own minds (‘cognitive distortion’), directly altering inputs and/or outcomes, or leaving the organization.
Relevance – pay structures, pay review mechanisms, performance related pay, engagement
3. Expectancy Theory
Vroom’s expectancy theory (1964) says that the strength of any motivation will vary according to:
- the desires for a particular outcome,
- the expectancy that action will lead to the outcome, and
- the likelihood that the goal can be achieved.
It is the consequences of attaining a goal that is significant rather than the intrinsic value of the goal itself. The theory is based on a rational cognitive approach, which assumes that a person will, in effect, weigh up the value to them of an outcome in terms of its consequences as well as the likelihood of it happening. So according to the theory people will pursue that level of performance that they believe will maximise their overall best interest. This would then predict that a reward given that was not contingent on behaviour, or was not expected to be contingent would have no effect on the choices that an individual makes.
Relevance – Incentive bonus plans
4. Hierarchy of needs
Maslow considers that there is a hierarchy of needs that is a fundamental part of motivation.
In Maslow’s model it is only when a lower order need (such as health, food, drink, shelter, warmth, sleep) has been satisfied that a need higher up the hierarchy (such as self-esteem and esteem from others) may become a cause of motivation. A criticism of this ‘ordered approach’ is that it implies that everyone requires a similar amount of the basic needs (Hertzberg, 1968).
In most western countries the basic needs are met to a great extent for most people in work; food, water, shelter, security, freedom from fear and anxiety and chaos are taken for granted. These needs may be perceived in terms of salary providing the income necessary to meet basic needs of food and shelter. Benefits such as pension, life assurance and medical insurance provide some part of the safety need. The contractual terms may provide security of tenure and belonging needs may be provided by group membership. The state is also likely to provide some form of welfare benefits if needed to meet at least the basic needs.
Relevance – recognition plans, benefits, engagement
5. Labour market theory
This ‘classical’ labour market theory considers the market for labour to be a rational market where the relationship between supply and demand will determine the price of labour. The underlying assumptions are that workers can chose between work and leisure and employers can choose to hire or not. The theory follows the same economic model of supply and demand where demand increases the price until supply increases to meet it at a point of equilibrium.
This overly pure model does not reflect the modern understanding of behaviours – as reflected now in behavioural economics, where a number of Nobel prize winners for economics have been psychologists. However, it is important in our understanding of market pressures on salary levels.
Relevance – pay market
6. Operant conditioning
Skinner developed the model of ‘Operant conditioning’ from work primarily on animals. This research found that an animal that responded voluntarily to a stimulus (for example a lever in the box) and was rewarded by food as a consequence of its voluntary action tended to repeat the behaviour. The voluntary behaviour was being reinforced by the food. This positive reinforcement was a core element of Skinner’s operant theory of motivation. ‘A positive reinforcer is a stimulus which, when added to a situation, strengthens the probability of an operant response.’ (Skinner, 1953)
The opposite of this positive reinforcement is ‘extinction’ where under repeated non-reinforcement the behaviour decreases and eventually disappears. In the context of pay this may suggest that the expectation and regular delivery of monthly or weekly pay means that it will have little or no motivation effect.
Skinner’s theory would argue that, ‘…the only tool needed for worker motivation is the presence or absence of positive reinforcement. In other words, managers do not, as a general rule, need to use punishment in order to control behaviour.’ (Steers and Porter, 1991 pp 73–74)
Relevance – recognition
7. Organizational citizenship
Organ (1988) defines organizational citizenship as, ‘individual behaviour that is discretionary, not directly or explicitly recognized by the formal reward system, and that in the aggregate promotes the effective functioning of the organization. Organ’s definition includes three critical elements of organizational citizenship behaviours (OCBs):
- OCBs are thought of as discretionary behaviours, which are not part of the job description, and are performed by the employee as a result of personal choice.
- OCBs go above and beyond that which is an enforceable requirement of the job description.
- OCBs contribute positively to overall organizational effectiveness.
A simple way of thinking about organizational citizenship is that it is the extent to which an employee’s voluntary support contributes to their employer’s success. If treated well by their employer, the employee wants to reciprocate by doing their best.
Relevance – engagement, recognition
8. Psychological contract
This is normally seen as the unwritten contract that exists between employer and employee. It has been defined as, ‘a set of beliefs about what each party is entitled to receive, and obligated to give in exchange for another party’s contributions.’ Perkins (2008). These will typically be values such as fairness and trust and to a large extent will reflect the culture within the organization.
Relevance – reward philosophy and strategy, communications, engagement
9. Theory X and Theory Y
McGregor’s theory X assumes that people are inherently lazy and therefore must be motivated by outside incentives. Their natural goals are counter-productive with those of the organization therefore they must be controlled by external forces to get them to work towards the goals of the organization; people are basically incapable of self-discipline and self-control. Theory Y assumes that human motives fall within a hierarchy, from the most basic through to self-actualisation (similar to Maslow’s theory). People are primarily self-motivated and self-controlled; there is no inherent conflict between the goals of the individual and more effective organizational performance; employees will integrate their own goals with those of the organization. (McGregor, 1960 quoted in Schein, 1980)
Theory X would take a rational-economic perspective and advocate the need for extrinsic reinforcement within an assumption that people are primarily motivated by economic incentives and will do whatever gives them the greatest economic gain. Theory Y would argue for the dominance of intrinsic reward.
Relevance – incentives, engagement
10. Two-factor theory
Hertzberg’s research of accountants and engineers in the 1950s asked the subjects to recall examples of situations where they had positive and negative feelings about the job. (Hertzberg, 1959) Based on the responses, Hertzberg’s theory is that there are factors which are satisfiers that can change behaviour positively as ‘motivators’ relating to job content – achievement, recognition, work itself, responsibility and advancement. There are also ‘hygiene factors‘, which act as dissatisfiers, relating to job context – company policy and administration, supervision, salary, interpersonal relations and working conditions. Although these are commonly the main source of dissatisfaction they do not become a source of motivation if ‘reversed.’
Hertzberg criticises Maslow’s hierarchy concept that suggests an order of need. (Hertzberg, 1959, p110) However, he describes a study undertaken by Fantz where Maslow’s three lower level needs were equated to the hygiene factors and the three higher needs represented the motivators. Hertzberg seems to accept this relationship between the two models of motivation. Hertzberg (1968)
Relevance – recognition, engagement
11. Utility theory
Primarily a theory in economics and investment that although it is impossible to measure the utility derived from a good or service, it is usually possible to rank the alternatives in their order of preference to the consumer. The principle of expected utility maximization states that a rational investor, when faced with a choice among a set of competing feasible investment alternatives, acts to select an investment which maximizes his expected utility of wealth.
In our terms Utility theory is interested in people’s preferences or values. The simple point of interest is that different people will have different preferences, getting greater utility from some parts of their reward and terms and conditions than others.