LESSON 21

Principles of External and Internal Differential

Rewards and Incentives

Chapter 8: Introduction To Determinants Of Incentives

Learning Objective

• To know the Meaning of Rewards and Incentives

• To know the Features of the Incentive Plans

• To understand the Determinants of Incentives

Meaning of Rewards and Incentives:

An 'incentive' or 'reward' can be anything that attracts a employees' attention and

stimulates him to work. In the words of Burack and Smith, "An incentive scheme is a
plan or programme to motivate individual or group performance. An incentive
programme is most frequently built on monetary rewards {incentive pay or monetary
bonus}, but may also include a variety of non-monetary rewards or prizes."

On the other hand, French says, the term "incentive system has a limited meaning that
excludes many kinds of inducements offered to people to perform work, or to work up to
or beyond acceptable standards.

It does not include:

(i) wage and salary payments and merit pay;

(ii) over-time payments, pay for holiday work or differential according to shifts, i.e., all
payments which could be considered incentives to perform work at undesirable times;
and

(iii) premium pay for performing danger tasks. It is related with wage payment plans
which tie wages directly or indirectly to standards of productivity or to the profitability of
the organization or to both criteria."

The use of incentives assumes that people's actions are related to their skills and ability to
achieve important longer-run goals. Even though many organizations, by choice, or
tradition or contract, allocate rewards on non-performance criteria, rewards should be
regarded as a "payoff' for performance.
An Incentive Plan has the following important features:

1. An incentive plan may consist of both 'monetary' and 'non-monetary' elements.

Mixed elements can provide the diversity needed to match the needs of individual
employees.

2. The timing, accuracy and frequency of incentives are the very basis of a successful
incentive plans.

3. The plan requires that it should be properly communicated to the employees

to encourage individual performance, provide feedback and encourage redirection.

Determinants of Incentives

These features are contingencies, which affect the suitability and design of incentives to
varying degrees. The effective use of incentives depends on three variables - the
individual, work situation, and incentive plan.

(i and iii) The Individual and the Incentives:

Different people value things differently. Enlightened managers realize that all people do
not attach the same value to monetary incentives, bonuses, prizes or trips. Employees
view these things differently because of age, marital status, economic need and future
objectives.

However, even though employee reaction to incentives varies greatly, incentives must
have some redeeming merits. For example, there might be a number of monetary and
non-monetary incentive programmes to motivate employees. Money, gift certificates,
praises, or merit pay are of the continuous parade of promotions.

(ii) The Work Situation:

This is made up of four important elements:

(a) Technology, machine or work system, if speed of equipment operation can be

varied, it can establish range of the incentive.

(b) Satisfying job assignments, a workers' job may incorporate a number of activities
that he finds satisfying. Incentives may take the form of earned time-off, greater
flexibility in hours worked, extended vacation time and other privileges that an
individual values.

(c) Feedback, a worker needs to be able to see the connection between his work and
rewards. These responses provide important reinforcement.
 (d) Equity, worker considers fairness or reasonableness as part of the exchange for
his work. ,

Incentives, in general, are important motivators. Their effectiveness depends upon three
factors: drives, preference value, and, satisfying value of the goal objects. Misra says:
"Beyond subistence level, becoming needs (self-actualization needs) possess greater
preference value and are more satisfying than deficiency needs (which are necessary for
survival).

Below the subsistence level, however, the reverse holds true." He makes the following
generalizations:

(i) Incentives, whether they are monetary or non-monetary, tend to increase the
level of motivation in a person.

(ii) Financial incentives relate more effectively with basic motivation or deficiency
needs.

(iii) Non-financial incentives are linked more closely with higher motivation, or
becoming needs.

(iv) The higher the position of a person in an organization’s hierarchy, the greater
is his vulnerability to non-financial incentives.

"While budgetary restrictions and temporary improvements in performance place a limit

on the potency of money as a motivator, non-financial incentives involve only human
ingenuity as investment and also insure a relatively stable acceleration in output.

Monetary incentive imply external motivation, non-monetary incentives involve internal

motivation. Both are important. It is a judicious mix-up of the two that tends to cement
incentives with motivation."

Tutorial Activity 1.1

This Article below is to understand that aside from the external determinants of
productivity -- the market, raw materials, and ... could not control, the employer's
reaction to MBO/Rewards would become ...

Objectives, Expectations, Rewards

By E. A. Winning

Management and Employee

Relations Consultant,
E. A. Winning Associates, Inc.
 An Article Reprinted with permission from E.A. Winning Associates, Inc

"Motivation comes from within: the only thing that a manager or management can
do is to provide an atmosphere in which the individual can be motivated."
Since 1968 I have used a modified Management by Objectives (MBO) process, as
opposed to a program, to generate the communications necessary in achieving results
desired and stated by various structured and healthy companies.

MBO has primarily been used as a tool for individuals to make the process successful,
and these employees want to know what good it's going to do for them by following what
could become an unwieldy procedure. As I asked in a 1974 article about MBO, "what's in
it for the individual?"

Many organizations that have implemented management by objectives have assumed that
achievement of objectives is motivating for the employee, but this assumption has been
the downfall of many MBO programs.

An awkward number of individuals still ask, "What's in this for me?" For that reason, I
believe that management by objectives is not a motivator unless it is linked to a reward
system. This will appear contrary to many managers to whom I've told over the years that
you cannot motivate an employee.

Motivation comes from within: the only thing that a manager or management can do is to
provide an atmosphere in which the individual can be motivated, hence, the rewards
which I'll address in this chapter.

The rationale of organizations adopting MBO is this: Achievement is a motivator;

meeting objectives is achievement; therefore, meeting objectives is a motivator --
something satisfying to a person. The problem lies with defining achievement and
motivation. In their dictionary of psychological and psychoanalytical terms (no longer in
print), English and English defined achievement as "success in bringing and effort to a
desired end."

In this case, just who is stating what the desired end is? Usually, it is the organization, the
company, the manager; even when the individual has a say in the definition of the goal, it
is external to that person. And achievement has quite a different base from motivation,
which English and English describe as "the general name for the fact that an organism's
acts are partly determined in direction and strength by its own nature...and/or internal
state."

What is motivating to an individual is, then, determined by the individual. What is

achievement to an individual is shaped by external forces -- the supervisor, the company,
for example. And how does the individual know he has achieved? He may have a sense
of achievement, but it is the external reward for attaining the desired end that overtly tells
him that others recognize his achievement -- an essential condition to his internal
motivation.
In other words, objectives setting without tangible rewards is MBO in a vacuum.
Rewards are tangible things by which the employee can measure whether or not, and how
much, he has achieved, "grown," and been recognized. Motivation depends on how well
an individual's needs are met.

If achievement is one of those needs, the employee may be motivated by his own sense of
achievement, but if his sense of achievement depends on confirmation by the rewards he
receives for meeting objectives, then he will need the rewards, both as a confirmation and
as a device to measure how well he has achieved.

To put it a little more simply, if an individual has the need to achieve something and he
accomplishes that something, he will be motivated. However, if he is told to do
something, set dates for reaching objectives, and he does what he was "supposed to do"
in a timely fashion, then unless he is rewarded, there is no inherent motivation in
reaching the goal.

In other words, even with mutually agreed upon goals, the employee must receive a raise,
a private office, a company car, a bonus (ugh...but that's later), or a pat on the back, the
latter probably the only "true" motivator.

What is needed is a greater incentive for the individual to set and meet objectives, to be
fully involved in MBO as a process. MBO is usually thought of as a program, and a
program has a beginning and an end. The fact that most MBO programs do have an end --
die a natural death -- may point to the underlying flaw in hypotheses companies have
about management by objectives and what the employee will attain from them.

The incentive should meet the individual's needs, the driving forces that propel (motivate)
an employee toward a goal that is most often self-centered, rather than company-oriented.
Because motivation is internal, it is difficult to ascertain, but achievement is external to
the individual, and achievement can be measured.

Although I don't believe that a primary goal of MBO was to measure achievement, it can
certainly be used to do so. By itself, it may satisfy only the company's needs. It aids in
planning and control.

It helps in assessing productivity, costs, overhead, and so on. If it doesn't satisfy the
individual's needs, however, in the long run MBO won't work for the organization either.
MBO with a reward system is a viable approach to meeting corporate and individual
needs, to meeting terms of the employer-employee "psychological contract."

In An MBO/Rewards System, What Rewards?

There are, of course, a number of incentive or reward plans, the success of which is
dependent on the type of organization involved. One of these incentive systems,
piecework or commission, predates MBO in its present form by a century. Another, the
bonus, goes back at least as far as Bob Cratchit's Christmas turkey.

Last, we have a percentage system; it may be a percentage of salary increase based on

merit (i.e., productivity), or a percentage based on sales, or profits.

The idea behind piecework was to get the employee to produce more by paying him in
terms of the number of items he produced. It is still a common practice, especially in
textile, electronics, and other assembly line industries. The commission, one step above
piecework, is usually paid in sales areas, the sales person reaping a percentage of the
sales he has generated. One step further is, of course, salary-plus-commission. These
three (two-and-one-half?) systems have one common underpinning: the individual is
rewarded, or paid, according to his own productivity.

Is the piecework or commission system a good one? To the extent that both have at times
excluded other motivational factors, no. To the extent that both place the responsibility
for productivity on the individual, yes. The individual sets his own pace and in doing so
has set certain objectives within corporate standards to be met.

Both systems are MBO approaches without being labeled as such. Further, piecework and
commissions standards are relatively contractual in favor of the employer, thereby
making it easier to either reward the employee or dismissing him fairly.

The bonus is probably the oldest form of incentive system and has been popular at upper-
management levels for the past 20 years. The bonus is usually based on the individual's
present salary, his status in the organization, his productivity, and/or the company's profit
picture.

It is an incentive, but it loses much of its motivational impact because it is too far
separated in time from performance, or it may be given across-the-board without regard
for individual productivity. Moreover, its impact is limited; it does not reach far enough
down into the company to affect the middle- or lower-level employee.

The lower-level employee who gets no bonus feels that he is doing the "real" work, while
upper-management reaps a percentage of the profits the employee has been instrumental
in attaining. If such is the case, why should the lower-level employee write objectives and
try to meet them? He may do it because he has been told to, but he will really want to
write and meet objectives only if there is something in it for him, a tangible reward when
the goal has been reached.

If the bonus is given once a year, then how does one sustain the momentum to reach the
desired goal? Perhaps the bonus will have to be a large one, or perhaps it should be given
out several times a year -- for instance, at the end of every objectives-review period. If a
bonus system is used, it should be related to objectives and based upon productivity. For
that matter, all incentives should be based on productivity, or value to the company.
If bonuses are handed out across-the-board, they will satisfy only a few, and may actually
de-motivate those who feel that they have been more productive than others who are
receiving the same reward.

Some of the defects of a bonus system may be avoided in a percentage system, which, all
in all, is probably the most palatable and most productive when combined with MBO.
The percentage of salary would be entirely an individual matter. The employee's
performance, and only his performance, would be the basis for such a reward. His
performance would be measured by how well he met the objectives he was committed to
and had "contracted" for with his supervisor.

Since objectives can be set for anyone at any level in the company, all employees could
benefit from such a program. Moreover, since a manager is supposed to be in control of
his organization and his subordinates' reaching or not reaching their objectives will
reflect on his abilities, it is a fair system to use in both the evaluation of the manager's
performance and his reward.

A percentage increase of salary can be seen as a type of bonus, but it is more specific and
does not have some of the drawbacks of other bonus systems. It is related only to the
individual's performance and on what he has agreed to attain, and the distance-in-time
objection can be eliminated if it is tied to fairly short-term objectives, if, for example,
objectives are set on a quarterly basis, and percentage increases are given (or not given)
at those intervals.

The Problems of an MBO/Rewards System:

There is no question that there are negative aspects in all incentive systems, and they are
complicated by problems inherent in MBO (which, I hope I made clear is not a panacea
for all rewards and motivational problems).

The first question that comes up is that of the negative incentive, the reduction in salary
or the loss of a bonus because the employee hasn't met objectives. In theory, if an
employee is to be rewarded for meeting objectives, then there should be a reduction or
withdrawal of the reward for not meeting them.

Years ago, I felt that the system should bend to some extent so that effort toward meeting
objectives should be rewarded, at least minimally. In keeping with the loftier principle of
never confusing effort with results, I must retrench.

If the employee's performance is based solely on meeting or not meeting objectives, then
effort would mean nothing. However, employees are evaluated on a number of criteria,
and therefore effort is only one of the factors involved.

There are still some who would go so far as to give an individual a decrease in salary
depending on the degree to which objectives were missed, and in an "entrepreneurial"
context, this might be acceptable: If the individual has total control over his environment,
the staffing, the budget, and the way the organization operated, like the self-employed
business person, he should expect to reap the profits, but he should also expect to take
any loss too.

Setting objectives is a tricky business, however. Control of conditions is difficult enough

at upper levels and sometimes nonexistent at lower ones. Aside from the external
determinants of productivity -- the market, raw materials, and the like -- much of an
individual's achievement may be contingent on that of others inside his company.

If a reduction in salary were to be imposed, in part because of factors he could not

control, the employer's reaction to MBO/Rewards would become evident in a number of
ways: He would set easily attainable goals; he would argue that no objective can be
counted on as being attainable in present-day circumstances; he would set objectives
having due dates months past the times when they can be achieved; he might reduce the
number of objectives; or he might just plain balk.

Overcoming the Drawbacks in an MBO/Rewards System: Assuming that an

MBO/Rewards system is decided on (and certainly not as the sole evaluation/rewards
system), how can these problems be solved? First, as is customary in MBO, objectives
are set by the supervisor and employee together to reflect the unit or corporate objectives.

Ultimately, it's the boss' responsibility to see that objectives are reasonable and feasible,
with dates that are neither too far off or too close, and that the number of objectives is
realistic.

Second, the number of objectives, their timing, and their rationale should be open to later
negotiation and adjustment. Since it is difficult to fix objectives because of the control
factor, the objectives should be flexible; the MBO process should allow for the changing
of objectives that are "too easy," but he should not agree to too-difficult objectives, either.

To sum up, the points made here are these: MBO without an incentive program is a
system without sound foundation. The individual is self-centered and needs a reward in
order to meet management's expectations of him. There are three types of incentive
systems that may work along with MBO and make MBO a stronger tool. The positive
aspects of MBO/Rewards outweigh the negative. The negative aspects can be handled.

A crucial step in the MBO process is the discussion between supervisor and subordinate
in setting objectives, a discussion that should include both the definition of
responsibilities and a definition of expectations. Expectations are more than objectives.
They are statements of desired behavior of both supervisor and subordinate.

While the supervisor has expectations of the employee in terms of productivity and
performance, the employee has expectations of the supervisor in terms of direction,
support, training, and so on. If he is to achieve objectives that are aligned with corporate
or department goals, then he must be given the opportunity to explain what he needs from
his supervisor in order to meet those goals.
And the expectation of the company that he will meet those goals will be considerably
more realistic if the employee himself has the expectation of a tangible reward if he does
meet them. "What's there in it for me?" is a very human question.

Tutorial Activity 1.2

A Case Study on TERI Rewards Corporate Efforts

The annual awards recognise the efforts of corporates in environmental

management and sustainable initiatives

In order to encourage environmental management and protection in the corporate sector,

TERI instituted the Corporate Environmental Awards last year. Encouraged by the
response and interest shown by corporates, TERI has decided to confer the awards
annually.

The objective of the awards is to recognise the leadership efforts of corporates in

environmental management and sustainable initiatives, recognise innovative practices
that promote sustainable development and further encourage and provide momentum to
environmental initiatives.

The awards are divided into three categories: Category 1: companies with a turnover of
less than or equal to Rs 100 crore per annum; Category II: companies with a turnover of
between Rs 100 crore and Rs 500 crore per annum; and Category III: companies with a
turnover above or equal to Rs 500 crore per annum. The application fee for category I is
Rs 500 per application; category II, Rs 2,000, and category III, Rs 5,000.

Says R K Pachauri, director general, TERI, “The TERI Corporate Environmental Awards
help corporates and Indian society in general in two major ways. Firstly, the awards
recognise good practices and excellence in protecting the environment on the part of
deserving corporate organisations. Secondly, the awards help to focus on the
responsibility of business in protecting the environment and conserving our natural
resources.

Even those organisations that do not participate in the process will get to know about
these awards and feel motivated to do their bit in the same cause. Overall, these awards
will help to prepare businesses for the coming era when the corporate sector will have to
face very stringent environmental standards to be imposed by the public at large and
governments in particular. The bottomline of a company that prepares effectively for
such a future will be healthier than that of one that does not.”

Out of 110 applications received by TERI this year, 18 companies were shortlisted and
the final awards will be given on June 17. The selection of the awards are based on a
questionnaire filled by the company and a case study on the environmental initiative
undertaken. After shortlisting the companies, experts from TERI visit the site to check on
the authenticity of the environmental initiative.

The case studies were evaluated on the basis of a few pre-set parameters, like pollution
prevention—proactive practices, process improvements and modifications undertaken
resulting in environmental improvement, waste reduction and energy or resource
conservation.

Scientific research and technological innovation—research or technological innovations

that have been implemented or demonstrated for addressing environmental issues.
Environmental benefits—success and effectiveness of the programme, both in terms of
environmental and economic benefits. Potential model for business commitment—the
replicability or transferability of the practices, outcomes or experience of the project.

The jury members for selecting the awards are Justice J S Verma, former-chairperson,
National Human Rights Commission and former chief justice of India; Vishwanath
Anand, vice-chairperson, National Environment Appellate Authority; Suman K Bery,
director-general, National Council of Applied Economic Research; Sanjaya Baru, chief
editor, The Financial Express; and R K Pachauri, director general, TERI.

In Category I, five companies were shortlisted: M K Electric; Chemfab Alakalis Ltd;

Shriram Alkali and Chemicals; The Orchid—An Ecotel Hotel and Hitech Arai.

In Category II, five companies were shortlisted: Andhra Paper Mills Ltd; Sanghi Spinners
India Ltd; Shree Cements Ltd; Star Paper Mills Ltd and Samcor Glass Ltd.

In Category III, eight cases were shortlisted: Orient Paper Mills; Grasim Industries Ltd;
Bharat Petroleum Corp. Ltd; Hindustan Lever Ltd; Chennai Petroleum Corp. Ltd; Harihar
Polyfibres; Hindalco Industries Ltd and Hero Honda Motors Ltd.

How are the TERI Corporate Environmental Awards different from other similar awards?
Mr Pachauri explains, “I am not aware of any other award dealing with environmental
performance where such rigorous evaluation and objective scrutiny is carried out in
determining the winner.

Not only is the technical and economic evaluation of each entry carried out by a team of
researchers from TERI, but the final decision is taken by a very eminent panel of judges
chaired by a former chief justice of India. It is the result of the objectivity and rigour of
the process that has given these awards the prominence they have attained in a short
period of time.

Another feature of the award, which is worth mentioning, is the subdivision of companies
on the basis of turnover. Hence, the performance of a small unit is not evaluated against
that of a large enterprise, which may have very different managerial and technological
capabilities. The awards are differentiated on the basis of size of the enterprise.”
Last year, TERI received some 89 entries; this year, it is 110. Mr Pachauri does not think
the numbers are low. “Firstly, a jump of over 25 per cent in the entries received in merely
a year is a very encouraging development, but the figure of 110 entries consists of very
serious contenders. We accept entries only with a modest processing fee. This eliminates
those who may not be serious and those who have only trivial achievements to claim.

Besides, the process is made known to all potential contenders, who would be persuaded
that this is a high calibre process of selection signified by the very choice of the judges
who form the selection panel. Also, the companies are aware that any claims that they
make in their entries will be carefully investigated by TERI researchers by site visits and
on-the-spot evaluation for all shortlisted candidates. This helps further to eliminate
doubtful claims and trivial entries.”

Last year, the Phulpur plant of Indian Farmers Fertiliser Co-operative Ltd (IFFCO) won
the first award in category III of TERI Corporate Environmental Awards for setting up
effluent projects for not only recycling, but also for zero liquid discharge. Says C P
Srivastava, joint general manager, Projects, IFFCO, “We feel proud to be awarded as it
recognises our efforts to keep the environment clean.”

Please answer the questions below based on the case study above:

1. What is the objective of the case?

2. Discuss the objective of rewards.
3. Discuss the 3 categories of awards mentioned in the case.
4. What is the another important feature of the award apart leadership from efforts
mentioned in the case?