Understand motivation in incentive compensation plan design

by on June 25, 2009 · 0 Comment POSTED IN: HR Info Center

Employee motivation is the first step in effective incentive compensation plan design

The number one problem when designing an incentive compensation plan is people fail to understand what motivates employees. If you look really in terms of motivation, there’s two different kinds. There’s kind of extrinsic motivation and intrinsic motivation.

Extrinsic motivation and the incentive compensation plan
Many people approach an incentive compensation plan with a view that you really have to have an extrinsic motivation, a factor outside yourself, but the more common term for it, is the carrot and the stick. There’s something that’s outside you, that motivates you to move forward.

The view of you to the organization is as a machine, if you have the right incentives, the right measures in place, either the positive being the carrot or the punitive being the stick. You can motivate the organization to function much like a machine does.

The aim of this extrinsic motivation approach is really to get the right mix. If I just have the right targets, if I just have the right performance metrics, if I just pay the right mix for reaching those metrics, I can drive the organization where I want it to go.

Its focus is on controlling what people do. And literally, you can lead them to what’s out there. It puts measurement before management, often characterized by macho managers or demanding managers, who want to adhere the result.

Intrinsic motivation and incentive compensation plan design
The other view in the design of an incentive compensation plan is the intrinsic motivation. It looks at it in terms of the organization has a living system. A situation where cause and effect may not be known or many times, it behaves differently than we anticipate.

It’s more a theory defined as “Why do you have management, people are motivated internally, in terms of what’s out there.”

The aim on intrinsic motivation is really to create the right culture, that people are intrinsically motivated to do the right thing and if you don’t tamper with that, you can get the right results much more effectively.

It really motivates by using a guide, a local training to try to focus on the power of the frontline employees to do the right thing.

It focuses on management before measurement and it’s advocated mostly by social scientists.

Now, the carrot and the stick approach, it really more common to Chicago School of Economics who believe that this intrinsic motivation can be a performance driver in an incentive compensation plan

If you flip it around the other way, the intrinsic motivations are more the thoughts of Dr. Edwards Demming, who really focused on that people come to work, ready and happy to work, and oftentimes what management does is punish them and beat that out of them, so that they lose all their joy for work.
Edited remarks from the Rapid Learning Institute webinar: “How to Avoid Incentive Pay Plan Disasters” by Steve Player

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