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Rewards, Incentives, Sanctions, and Surveillance Published: Sunday, October 4, 1998 By: Dr. Manuel Angel Morales

There are a number of fundamental issues in the research on rewards and incentives:

  • What determines the incentive structure organizations actually employ with different groups of people? For instance, why is there pay for performance on an individual basis in some organizations but pay for seniority in others? Within a given organization, why are some jobs paid more on the basis of individual performance than others?
  • What are the effects of various amounts, forms, and distributions of incentives on individual and organizational behavior and performance?
  • To administer contingent rewards, there most be some degree of monitoring or surveillance of either behavior or results. What are the effects of this surveillance?
  • In addition to the use of incentives and rewards, there is also the possibility of controlling behavior through sanctions. What determines when these are used and what are their effects?

There are several facts one needs to keep in mind in thinking about these challenging issues. First, the bases of rewards are changing. One basic dimension of the change is the growing emphasis on variable pay - pay that changes depending on the performance (or skill) of the individual, his or her group, or organization, and a corresponding deemphasis on paying simply for time worked or seniority. The change can be seen most dramatically in the pay of senior managers. A recent study of the compensation of seven top executives from forty-five large companies over the period of 1988-1998, reported that the proportion of managers` total compensation that was variable increase from 37 to 61 percent. Between 1988 and 1998 the proportion of companies using individual incentives for at least 20% of their work force increase from 10 to 26%.

This movement is quite consistent with operant conditioning principles which emphasize the connection between actions and consequences. There changes are congruent with the economic model of behavior, with its emphasis on incentives, particularly those externally controlled and administered, as being important. However, one of the important challenges to the economic model has been the historically relatively small relationship between pay and performance, even for senior-level executives. Evidence shows that actual compensation contracts look very different from those predicted by the economic theory. The failure of conventional thinking to predict actual compensation arrangements suggest that such paradigm is wrong!

Reward practices vary dramatically across organizations and even more dramatically across cultures. There are large, well-known and effective companies (Mars Candy, Southwest Airlines) that use virtually no merit pay. There are others, such as Hewlett-Packard, that does use individual merit pay. There are countries, withJapanandKoreabeing notable cases, in which pay is based primarily on seniority, to a lesser extent on position, and virtually not at all on individual differences in merit or performance, although there practices may be changing.

The substantial variation in pay practices is interesting and important for two reasons. First, if some pay practices were invariably more effective than others regardless of the context, one would expect to see more uniform adoption of these more effective practices as a response to competitive pressure. Second, because of the strong ideological component of pay-practices are frequently based more on beliefs about behavior than on hard evidence. This is a topic in which there is much more good theory than field-based empirical results that inform the theory…


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