Reading for the Pay Moocs.

(Neil Conway and Andrew Eriksen-Brown 2016)

Pay.
Pay has an important symbolic and emotional role in work. We need pay to obtain the necessary
goods and services to survive, but we are also judged partly on our pay: it is a reasonably precise
measure, so comparison with others on the basis of pay appears relatively straightforward. In the
context of a market based economy pay is also a key basis for exchange. In the workplace there is a
widely held view amongst policy makers that the use of financial incentives is sensible; in other
words it is assumed that, for at least part of the working population, pay will be an effective
motivator of higher performance. We need to review the evidence for this assumption.

The aims of this reading are:

To explore the importance of pay in motivating employees.

To assess the how motivational theories such as Expectancy Theory and Goal Setting Theory help
us understand the role of pay in the workplace.

To review the evidence as to whether pay is a motivator.

A framework for the analysis of Pay

Expectancy Theory, which was first proposed by Vroom (1964) is a widely used framework for the
analysis of pay. Vroom suggested that people will decide to make an effort, that is will be motivated,
when they have an expectation that by exerting an effort he or she will be able to perform
successfully at a high level and that performing at that level will result in valued outcomes (eg higher
pay).

Lawler, subsequently refined the theory (1971, 1981, 1987) and the Lawler model will be used here.
His modifications involved three basic elements: firstly, he proposed that the perceived link between
effort and performance will be influenced by the individual’s level of self-esteem or self-efficacy,
because those with more confidence in their ability to perform successfully are more likely to
perceive a link between their effort and their performance. By implication, other things being equal,
they are therefore more likely to be motivated to make the required effort. Secondly he introduces
locus of control as a factor influencing perceptions of to what extent an outcome is perceived as
being the result of an individual’s efforts rather than the result of outside factors beyond his or her
control. Those with high internal locus of control, that is the belief that their own actions can control
events, will be more likely to make an effort as they believe their performance influences the
outcome. Thirdly, Lawler drew on Equity Theory (Adams 1963) to suggest how perceptions of
fairness can influence are rewards are viewed and valued. It is assumed that rewards that are
perceived as fair will be valued more highly than those that are not.

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The Importance of Pay.
So from an Expectancy Theory framework the first point to establish when assessing the impact of
pay on motivation is to determine whether pay is highly valued by employees. If it is not viewed as
an attractive reward, it will have no incentive value and therefore will not motivate performance.
Not all motivational theorists accept that pay is highly valued, Fredrick Herzberg (1959) famously
asserted that pay is not a motivator. He reached this conclusion using studies involving the so called
Critical Incident Technique which involved asking people when they felt good and when they felt bad
about their jobs. He claimed that pay was not associated with times when people felt good and may
have worked hard in their jobs. However examining his evidence in detail demonstrated that they
were far from clear cut particularly in relation to pay, and that furthermore his results may have
been distorted by the fact that his participants gave socially desirable responses, failing to admit
how important pay was to them.

In contrast to Herzberg, Goldthorpe and colleagues (Goldthorpe and Lockwood, et al 1968)

highlighted the existence of the ‘instrumental worker’ who saw work as a means to an end and who
accepted routine repetitive production line jobs to ensure high pay. This sociological perspective,
highlighting the importance of pay, was supported by earlier work on the restriction of output. A
series of studies brought together by Whyte (1955) had provided an important antidote to the
human relations movement by demonstrating that pay was an important influence on behaviour.
The studies extended the analysis of the famous Hawthorne studies to demonstrate the power of
the social group to shape performance. However the key issue of concern for the group was pay. In
one of the best-known studies Roy (1952) showed how people used the freedom of a piecework
scheme (pay for each piece of work done) to avoid over-performing on generously timed pieces of
work to ensure the management did not retime them, and to restrict output in other cases in an
attempt to convince the management that the current time allowance for some jobs was too
unrealistic and needed to be made more generous. So employees attempted to manipulate the
scheme to get the maximum possible reward for the minimum possible effort.

In a related, early study Dalton (1948) compared employees who were ‘restrictors’ and those who
were ‘rate busters’. Dalton traced this to their social background. The ‘restrictors’ were those who
restricted output and therefore helped to reinforce group norms, typically came from strongly
working class (blue collar) urban communities with a tradition of group solidarity and opposition to
authority. In contrast the ‘rate busters’ were likely to come from more individualistic suburban or
rural backgrounds and not to identify so strongly with the importance of group solidarity. They had
less need for group approval and were less susceptible to group influence. These tentative
conclusions stimulated a stream of research on urban and rural differences in attitudes to work,
though this research reached no clear cut conclusions.

Two important points for the role of pay emerge from these early studies. The first is that it may be
necessary to look beyond work and the type of scheme and the extent to which it is a sound scheme,
to understand responses to it. Secondly, one of the paradoxes of pay for performance schemes is
that they provided employees with a degree of control. Some of the employees in these studies

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restricted output just to demonstrate to management that a worker could be independent and was
not automatically responsive to management’s financial incentives. In effect, this exercise of control
was a more powerful reward, at least for some of the time, than the prospect of extra pay. For
management therefore there is a risk in such schemes and they need to have either tight controls in
place, which may in themselves be self-defeating, or be reasonably sure that pay is an effective
incentive.

The conventional way of determining whether pay is a potential motivator and therefor might be an
effective incentive, is to ask employees whether it is important. If we do this and compare the results
across a large number of studies, pay typically emerges anywhere for third to eighth in rank order of
importance. However such conclusions are extremely dangerous since any attempt to identify the
importance of pay in this way is riddled with problems. These problems are the following:

1/. Important for what? Different surveys ask about different things. We need to distinguish
between importance in motivating higher performance from importance in choosing a job, in
comparing jobs, in determining job satisfaction, in choosing an organization to work for, in accepting
redundancy, in deciding in whether to strike, and so on.

2/. The importance of pay can only be judged in relation to other variables. We know that the other
variables included in surveys of this kind can differ substantially, so the surveys are not always
directly comparable. It is possible to generate long lists of variables whose importance can be
compared with pay.

3/. The context and the timing of a survey on pay can have an important influence on the responses.
For example there is evidence that in periods of increased job insecurity, such as the late 1980s and
early 1990s. Job security was more highly rated.

4/.There may be a social desirability effect operating, which could potentially depress or elevate the
importance of pay, or indeed of other variables. It is useful to bear in mind that managers are
sometimes suspicious that employees deliberately collude when completing pay surveys to influence
managers, by for example reporting that pay is an important factor in deciding whether to quit a job.

5/. The term used in any survey to describe pay can vary. For example it might be ‘pay’ or ‘fair pay’
or ‘reasonable pay’ or ‘enough pay’ etc. etc. This could influence the response.

All these considerations should not rule out any study of the importance of variables such as pay.
However any study, and in particular any attempts to compare across studies, should carry a clear
health warning. It is always sensible to look carefully at the context including the internal context of
the questionnaire and the other questions. More generally, better evidence of the importance of pay
as a motivator may come from examining behaviour under conditions where a change in the levels
or role pay occurs. We will explore evidence of this sort in the next section. First, however it is
helpful to have a general idea about how pay is rated and how we can arrive at some understanding
of the way in which it might relate to the functions of work and to other potential rewards.

The Functions of Work.

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One way of setting pay in context is to explore the functions of work. A famous study by Jahoda
(1982) studied the functions of work in the Austrian town of Marienthal in the 1930s, a period of
high unemployment, and again in the UK in the 1980s, another period of unemployment. She
distinguishes between the manifest and latent functions of work. The manifest functions are to earn
money and provide goods and services. The latent functions are more complex. Within the role of a
job they include provision of the following:

 To impose a time structure.

 To provide social contact and shared experiences.
 To provide a link to external goals.
 To define aspects of status and personal identity.
 To provide security and a sense of future safety.
 To provide intrinsic and growth rewards.
 To provide a sense of control.

Broadly speaking these latent functions are concerned with intrinsic rewards of work as well as the
structure, self-esteem and possibly self-efficacy provided by having a job. More considered research
has not consistently revealed all these elements as important; however, the point to highlight here is
that the experience of the unemployed provides a vivid reminder that work is about more than just
pay.

The lottery question.

Another way of trying to get as the issue of pay as a factor in the workplace is through the lottery
question. This asks whether people would continue to work if they were to win a sufficient amount
of money not to need to work again. Once again this type of question has to be treated with caution,
as people might behave quite differently if they actually did win the money, nevertheless this type of
question does provide an indication of how people image an attractive future and whether it is a
future that includes work, thereby providing an indirect indication of the latent functions of work.
This question also allows us to make comparisons over time and between countries.

The lottery question. Percentage of people who claim they would continue working after a win, by
country:

Japan 93.4%

USA 88.1%

Israel 87.4%

Netherlands 86.3%

Belgium 84.1%

Germany 70.1%

Great Britain 68.8% (source MOW, 1987).

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The table suggests quite large variations in the work ethic, so that the results, which look quite
positive for Great Britain when we consider them in isolation, take on a different light in this
comparative analysis.

Surveys of the importance of pay.

General surveys of pay rarely place pay at the top of any ranking of the most important aspects of
work. But this does not necessarily mean that pay cannot be a motivator. Furthermore by combining
the responses of large numbers of people a survey may fail to identify individual or group differences
in attitudes to pay. And answers to a survey will not reveal for what reasons pay might or might not
be important to any individual. Thierry (1992, cited Conway 2007) suggested four types of reason
why pay can be significant to an employee:

1/. Salient motives: pay allows important individual motives to be satisfied and important goals to be
fulfilled. It is because of this that pay can be a powerful motivator.

2/. Relative position: Pay can be a source of feedback about progress either in a specific task or job
more generally. It provides information about how the employee is doing compared to other
individuals within and perhaps outside the organization.

3/. Control: Pay is a means of exercising and reflecting control. This may be control over the
performance and rewards of others or for yourself, by for example deciding whether or not to
maximise output when a pay for performance system is in place.

4/. Spending: Pay has a meaning because of what it permits an employee to buy, it has a function in
determining individual welfare.

These meanings of pay suggested by Thierry are rather obvious and there may be others. However
Thierry argued that when a payment system fits closely with the meanings that are most relevant to
those operating within the system, the employees, and then it will be effective. The implication of
this is that managers should attempt to understand the meaning of pay for specific groups of
employees.

Pay and Performance.

Most research in this area has concentrated on exploring the link between pay and performance
without seeking to either conduct a controlled study or to explicitly determine the role of motivation
as an intervening variable. Increases in performance are often attributed to an increase in
motivation which then leads to increased performance, but this is often very difficult to
demonstrate. Motivation is notoriously difficult to measure, while performance, which can be
measured in terms of outputs such as production, sales, market share and so on, is much easier to
assess. In addition, it is perfectly possible to increase the motivation of employees without
increasing their performance. If the motivated employee does not have the necessary skills, perhaps
because of a lack of training, or if what is really required on the job is not adequately explained, then
increased motivation may not lead to increased productivity. On the other hand, performance may
increase without an increase in motivation. As employees become more skilled and practised in their
work they are likely to work faster and more efficiently, but they does not necessarily mean they are
more motivated.

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Types of Financial Reward Systems.

We now must examines the main approaches to using pay as an incentive to increase motivation,
and thus, hopefully, performance.

1/. Piecework: The traditional way to use financial incentives with blue-collar workers is to operate
some sort of piecework scheme entailing payment per piece of work produced. A similar
arrangement might be used with sales staff who are paid according to the amount of insurance or
cosmetics they sell. This might take the form of simple piecework where all pay is linked to the
amount produced, or there may be an element of fixed pay with piecework only coming into play
above a certain level of production. There are many other possible variations linking the size of the
incentive to the level of output.

2/. Merit Pay: In situations where it is more difficult to judge output, merit pay may be used instead.
Since it is usually the output of managerial and professional staff that is more difficult to measure, it
is not surprising to fine merit pay more widely used with them. It may be tied to specific
performance targets over which the individual has. Ideally, some degree of control: or it may be
based on some appraisal of performance, with all the attendant problems of performance
appraisals.

3/. Profit Related Pay or Gainsharing: This approach mover from the individual to the collective,
typically offering a financial reward to all staff, linked to some increase in productivity or sometimes
profit. In the UK, Profit Sharing schemes have been quite widely adopted. In the USA, gainsharing
has often focused more on productivity since this is more attributed to collective worker
contribution and is typically associated with some form of worker participation.

4/. Employee Share Ownership Programmes (ESOPS): These provide another example of collective
rewards and may seek to increase both motivation to perform and commitment to the organization.
A variation of them which we will not consider here is the use of share options. These are usually
restricted to senior executives and offer options to buy shares at one point of time and sell them
later at a higher price, but without a commitment to exercise the option. It is, in effect, a risk free
gift. They may provide an incentive to stay with the company up to the point where the option can
be exercised.

Individual pay for reward systems and individual differences.

In her review of research on the impact of pay on work behaviour, Sarah Rynes and her colleagues
(2004) noted that certain groups of individuals react more positively to systems which reward each
individual according to their performance than others. The research indicated that high academic
achievers, high performing employees, individuals with high self-efficacy (belief in their ability to
successfully perform their tasks) and a those with a high need for achievement, will respond well to
individual based reward systems. Furthermore pay is more important for extraverts than introverts-
the former having a higher need for external stimulation. For those in high positions, the critical
issue is their pay relative to their peers.

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The extent to which schemes are in use.

There is surprisingly little recent data about the incidence of financial reward schemes (Rynes et al
2005). Surveys dating from the 1990s revealed changing patterns of adoption of the various types of
scheme. In the USA, surveys by Lawler, Mohrman et al (1992, cited Conway 2007) demonstrated that
Gainsharing and to a lesser extent, ESOPs, were quite common.

The UK evidence suggests that the use of financial incentives is not as widespread as we are
sometimes led to believe, probably because we pay too much attention to surveys of large
organizations and of certain high profile sectors, such as banking. Even within organizations
incentive schemes may not apply to all employees, and smaller organizations are much less likely to
use them. Overall the evidence suggests that some form of Pay for Performance is used in a majority
of organizations, but they do not cover a majority of employees in the total workforce.

Evidence about the impact of performance related pay.

The bulk of the research on this has been conducted in the USA, and we must always be cautious
about generalizing about an issue where cultural and institutional differences might be quite
important. A relatively early reviews of the research by Thierry (1987) from a European perspective
found that piecework appeared to work relatively well, but the approach which the evidence
suggested did least well was merit pay, though ironically this approach has become increasingly
popular in the UK and elsewhere, though its impact is rarely properly evaluated. Marsden and
Richardsons’ classic (1994) study of a merit pay system in the UK Inland Revenue used an expectancy
theory framework to explain why such a system can fail in its objectives. Employees did not trust
their supervisors to accurately assess their work (so low instrumentality) and furthermore
employees were aware that managers were restricted in terms of the size and number of bonuses
that could be paid out, (so low valence). Thus the scheme failed even though the majority of
employees at the Inland Revenue were in favour of the principle of Performance Related Pay.

Gainsharing emerges positively from the general reviews of the impact of PRP schemes ( eg Mitchell
and Lewin 1990). These reviews allow the conclusion that organizations which run such schemes are
more productive and profitable, but we must be cautious about rushing to any conclusions about
cause and effect. There is a possibility that more productive workers are attracted to organizations
which operate such schemes. If this is so then clearly the schemes work for the organization
concerned, but for the sector and the economy as a whole they will produce no overall gain, simply a
redistribution of workers. There is also a question of whether any gainsharing, through whatever
system PRP, pays for itself. If wages rise ten per cent but labour productivity rises only five per cent
as a result of such a scheme, then the organization will lose out. Using a large US data set Mitchell
and Lewin estimated that the productivity gain from this form of profit sharing averages eight per
cent Weitzman and Kruse (1990 cited Conway 2007) explored the profit sharing-productivity
relationship in more detail and concluded that the results were very positive in that sixty percent of
instances reported a positive increase in productivity and only six percent a negative result. However
the productivity increase was found to be four point four percent, raising doubts as to whether such
schemes are genuinely self-financing.

Both Mitchell, Lewin et al and Weitzman and Kruse suggested that case-study evidence
overwhelmingly supports the view that profit sharing should be associated with some form of

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worker participation. The economic theory is that it is costless for workers to monitor their own
performance and motivate themselves and fellow workers if this does not undermine efficiency. The
case-study evidence suggests this is worthwhile. Wietzman and Kruse also conclude that the best
scheme of payment is one that combines a basic wage with a profit share element. This overcomes
the risk to security which workers may dislike and which may limit their willingness to contribute
maximum performance.

Hammer (1988) noted that gainsharing in the USA invariably involves both a payment element and a
participation element and that therefore we must account for the potential impact of both. She
outlined four possible theories about why gainsharing might change individual behaviour. These are
intrinsic motivation, commitment, culture change and a renegotiated effort-reward bargain model.

Hammer dismisses intrinsic motivation that is motivation that is derived from the satisfaction of
doing a piece of work, as a reason for changed behaviour after the introduction of gainsharing, on
the grounds that the job itself remains the same, and thus so does the level on intrinsic motivation.
However her dismissal of intrinsic motivation may have been too hasty, because if the introduction
of gainsharing involves increased participation, access to information and an element of control, this
does change the experience of doing the job and the intrinsic motivation derived from doing it.
Hammer also dismisses commitment as a mechanism for changed behaviour because of a lack of
evidence that it does, the research suggests the link between organizational commitment and
performance is weak. She also rejects the culture change model because it operates at the
organizational level whereas we need explanations for changes in individual behaviour. This leaves
her own and preferred model based on a redefinition through a participative negotiated process of
the effort/reward relationship. By implication this establishes new norms of appropriate employee
and management behaviour.

Hammer’s analysis is useful in causing us to reflect on why such schemes can work, but she may
have dismissed too quickly the potential for increased intrinsic motivation derived from increased
participation, though an explanation based on intrinsic motivation downgrades the potential impact
of pay, an extrinsic motivator.

Edward Deci (1975) famously argued that pay can actually demotivate employees precisely because
it can crowd out intrinsic motivation. He argued that if people receive a reward for performing an
act-such as work behaviour-they will draw an inference from this that their behaviour is externally
manipulated and controlled by the person or organization or person providing the reward. The
consequence of this, Deci concluded, was that any previous intrinsic motivation derived from the
work itself was reduced once a person was paid directly for doing it. This line of reasoning has been
criticised on a number of grounds. Bandura (1977, cited Latham 2007) argued firstly that
determining the distinction between intrinsic and extrinsic motivation is problematic, any activity
that results in praise, social standing and so on, receives an element of extrinsic motivation.
Furthermore Bandura attacked the artificial nature of the laboratory experiments Deci had used and
upon which he built his theory. Deci had measured the amount of time his subjects had continued to
spend on a laboratory task after announcing that the experiment had concluded, measuring and
comparing the difference in the free time devoted to the task by those who had been paid to
undertake the experiment and those who had not. Those who had not been paid tended to persist in
the task longer, but Bandura argued that suddenly removing the reward of those in the ’paid’

8
condition, would actually feel like a punishment and that this scenario had little relevance to working
life. Furthermore the impact of rewarding someone for doing task can vary depending on how it is
‘framed’. Telling an employee that getting their pay depends on completing X is very different from
telling an employee that they are receiving Y dollars or pounds in recognition of their excellent work.
Bandura’s final argument was perhaps the most telling, he asked if concert pianists really lose
intrinsic interest in their music once they can command high fees?

Locke and Latham (1990a) have examined the impact of pay from the perspective of Goal Setting
Theory, which has become the dominant work motivation theory over the last several decades. The
theory proposes that higher motivation and performance can be achieved if goals are set which are
clear, difficult but accepted and employees receive feedback on their progress. The theory has been
widely researched in both laboratory and work setting and the support for the theory is impressive-
in many conditions it works, though problems are encountered with goals that are difficult to
measure, long terms goals and competing goals. Goal Setting Theory in its basic formulation has
nothing to say about pay but Locke and Latham (1990a) that pay can influence motivation and
performance if pay leads to the setting and acceptance of high, specific goals. This is logical and
indicates how managers can potentially utilize financial incentives to achieve high performance
through goal acceptance, though managers should be aware of the potential downside of goal
setting. Ordonez and her colleagues (2009) have argued that while goal setting clearly works, the
negative effects can include a narrowing of focus leading to the neglect of tasks not included in
specific goals, risky and even unethical behaviour as employers strive to complete goals at all costs,
and a corrosion of organizational culture.

Practical lessons to be drawn from research on pay.

Sarah Rynes and her colleagues (2005) have suggested a number of practical suggestions for
managers based on the available research on pay:

Firstly, take any evident discontent or complaints about pay seriously. The evidence that social
desirability effects lead people to downplay the importance of pay allows the conclusion that when
employees do complain it should not be ignored. It could be an indication of an intention to leave or
some other manifestation of discontent.

Secondly, do not pay substantially below the market level. Doing so will deter good candidates from
applying in the first place, and will be a cause of discontent for existing employees. However existing
employees will be motivated by other factors than pay and so will take these into account, provided
their pay level is satisfactory.

Thirdly, the evidence suggests that high achieving, well-educated employees respond positively to
individual PRP systems. Insofar as a business requires such individuals the pay for reward system
should recognize and implement suitable systems.

Fourthly, look closely at the pay performance relationship. Where merit pay systems have been
introduced the evidence indicates that in practice there are very limited differences between the pay
of exemplary and average employees. The differentials have to be large enough to have an effect on
work behaviours. Furthermore rewards should reflect the performance of the organization, when it
is doing well the employee should see this reflected in their pay.

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Fifthly, look at whether employee pay and executive pay remains proportionate. Recent decades
have seen the ratio of executive to non-executive pay move further and further apart, to the
detriment of the non-executive employees (Schulman 2003 cited in Rynes et al 2005). The
employees of an organization like Microsoft or Apple can accept the very pay of the CEO because the
entire workforce is rewarded for the success of the organization.

Conclusion

This reading for the Pay Motivation has looked at theory and evidence related to pay, motivation
and performance. It is a vast subject and has been and continues to be, exhaustively researched.
Those wishing to study this further are recommended the following books:

‘Work Motivation’, Latham, G. P. Sage Publications, 2007.

‘Work Motivation in Organization Behaviour’. Pinder, C. (2008). Routledge.

‘Work Motivation: Past, Present and Future.’ (2008) Routledge.

References:

Conway, N. (2007) ‘Subject Guide, Motivation and Performance, Chapter 7, Pay. Birkbeck, London
University.

Deci, E.L. (1975) Intrinsic Motivation. New York Plenum.

Latham, G. P. (2007) Work Motivation. Sage Publications.

Locke E.A. and Latham G.P. (1990a) Goal Setting: A motivational technique that works. Englewood
Cliffs. NJ: Prentice Hall.

Marsden, D and Richardson, R. Performing for Pay? The effects of Merit Pay on Motivation in a
Public Service. British Journal of Industrial Relations, vol 32, issue 2.

Ordonez, L. D, Schweitzer, M.E, Galinsky, A. D. and Bazerman, M. H. (2009) Goals Gone Wild: The
Systematic Side Effects of Overprescribing Goal Setting. Academy of Management Perspectives,
February,

Rynes, S.L, Gerhart, B., Parks, L. (2005) Personnel Psychology: Performance Evaluation and Pay for
Performance. Annual Review of Psychology, 56 (1), 571-600.

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