We discuss this subject separately, since there is an indication from various surveys (see previous section) that the blue-collar and white-collar workers do not attach the same importance to financial incentives. This is probably more due to differing value system of the two, rather than the importance each attaches to the money per se.
Properly used, money can be a motivating factor, but little money may have no effect (Crystal (1970)). To achieve motivation of executives, therefore:
- reward should be meaningful; and
- reward should vary with performance.
The concept is simple, but its implementation is not easy. However, the job is well worth trying. To be effective, the reward should be 'tailored' to each individual, but only as part of the total compensation concept. It is essential (Moore (1968)) to develop an overall program within which each compensation package must be individualized.
Executive compensation elements
There is also need for constant search of new ideas in this respect. The essentials of an effective company-wide executive compensation scheme are: sound salary-base structure, several fundamental compensation devices and considerable flexibility in its application.
The five basic elements (Ellig (1982)) of executive compensation are:
- short-term incentives,
- long-term incentives,
- employee benefits and
Any plan for executives should take into account the following factors:
- Executives perceive others as working less and paid more.
- Appearance of a reward as important a factor as the reward itself.
- Flexibility, but not at the expense of discretion.
- Performance rating should support the pay action.
- Correcting one inequity may lead to yet another.
- A decision once announced is difficult to modify.
- An arithmetic increase in the number of people involved results in a geometric increase in the time required to reach agreement.
Motivating for high performance can cost a lot of money. Not everyone can be motivated by money alone, however much. Incentive pay plans should be designed (Ivancevich (1983)) not only to reward good performance but also to minimize the negative side-effects, such as conflict and grievance. At times it is difficult to develop a valid, equitable and acceptable means of performance. Many pay plans fail because of either not being suited to the particular situation or because of poor implementation. It is essential to consider the following aspects before designing a pay plan to motivate performance:
- preference of individual employees;
- size of pay rewards for high performance;
- method of motivating individual job performance;
We have pointed out earlier that for effective and sustained motivation, the reward must be prompt and immediate. The example of Foxboro has been quoted. In its early days, the company's very survival depended on technical innovation. Late one evening (Peters & Waterman (1982)) a scientist walked into the president's office with a working prototype. The president was dumbfounded by the elegance of the solution and sought to reward him immediately and on the spot. Rummaging through the drawers of his desk, all he could find was a banana and this had to suffice. This was the forerunner of the 'gold banana' concept, a very apt and fitting reward. Likewise, Thomas Watson Snr. had made a practice of writing out a check on the spot for any unusual achievement that he observed.
Executive pay - a caution
However, we must introduce a note of caution. There is a connection (White (1973)) between executive pay and company size, in terms of turnover or number of employees, but no connection between executive pay and improvement in profitability - the bigger the company, the higher the pay, but efficiency is not necessarily higher. The higher salary is probably because of a larger number of levels in big companies. Of course, with the large number of variables involved, it is difficult to correlate any two isolated factors, such as executive pay and overall company efficiency.
There should be a direct correlation, but perhaps the yardsticks available for this purpose are inadequate to establish it. Let us, however, reiterate that individual executives have different senses of values, of which money is one, and an important one at that. No reward other than money is so flexible, so measurable or so controllable. But in using financial motivation, the companies must be clear on what they wish to achieve, then define what managers are expected to contribute towards the objectives and finally ensure that financial reward is linked to managerial performance.
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