ORGANISATION BEHAVIOUR – MODULE-5, 6, 7…………

Prepared by Dr. Pradip Kumar Das

Introduction to Sensation and Perception

 Although intimately related, sensation and perception play two complimentary but different roles in how we interpret our world.  Sensation refers to the process of sensing our environment through touch, taste, sight, sound, and smell.  This information is sent to our brains in raw form where perception comes into play.  Perception is the way we interpret these sensations and therefore make sense of everything around us.  

Sensation

 Sensation is the process by which our senses gather information and send it to the brain.  A large amount of information is being sensed at any one time such as room temperature, brightness of the lights, someone talking, a distant train, or the smell of perfume.  With all this information coming into our senses, the majority of our world never gets recognized.  We don't notice radio waves, x-rays, or the microscopic parasites crawling on our skin.  We don't sense all the odors around us or taste every individual spice in our gourmet dinner.  We only sense those things we are able too since we don't have the sense of smell like a bloodhound or the sense of sight like a hawk; our thresholds are different from these animals and often even from each other. 

 Absolute Threshold

 The absolute threshold is the point where something becomes noticeable to our senses.  It is the softest sound we can hear or the slightest touch we can feel.  Anything less than this goes unnoticed.  The absolute threshold is therefore the point at which a stimuli goes from undetectable to detectable to our senses.

 Difference Threshold

 Once a stimulus becomes detectable to us, how do we recognize if this stimulus changes.  When we notice the sound of the radio in the other room, how do we notice when it becomes louder.  It's conceivable that someone could be turning it up so slightly that the difference is undetectable.  The difference threshold is the amount of change needed for us to recognize that a change has occurred.  This change is referred to as the Just Noticeable Difference.  

 This difference is not absolute, however.  Imagine holding a five pound weight and one pound was added.  Most of us would notice this difference.  But what if we were holding a fifty pound weight?  Would we notice if another pound were added?  The reason many of us would not is because the change required to detect a difference has to represent a percentage.  In the first scenario, one pound would increase the weight by 20%, in the second, that same weight would add only an additional 2%.  This theory, named after its original observer, is referred to as Weber's Law.

 Signal Detection Theory

 Have you ever been in a crowded room with lots of people talking?  Situations like that can make it difficult to focus on any particular stimulus, like the conversation we are having with a friend.  We are

often faced with the daunting task of focusing our attention on certain things while at the same time attempting to ignore the flood of information entering our senses.  When we do this, we are making a determination as to what is important to sense and what is background noise.  This concept is referred to as signal detection because we attempt detect what we want to focus on and ignore or minimize everything else.

 Sensory Adaptation

 The last concept refers to stimuli which has become redundant or remains unchanged for an extended period of time.  Ever wonder why we notice certain smells or sounds right away and then after a while they fade into the background?  Once we adapt to the perfume or the ticking of the clock, we stop recognizing it.  This process of becoming less sensitive to unchanging stimulus is referred to as sensory adaptation, after all, if it doesn't change, why do we need to constantly sense it?  

Perception

 As mentioned in the introduction, perception refers to interpretation of what we take in through our senses.  The way we perceive our environment is what makes us different from other animals and different from each other.  In this section, we will discuss the various theories on how our sensation are organized and interpreted, and therefore, how we make sense of what we see, hear, taste, touch, and smell.

 Gestalt Principles of Grouping

 The German word "Gestalt" roughly translates to "whole" or "form," and the Gestalt psychologist's sincerely believed that the whole is greater than the sum of its parts.  In order to interpret what we receive through our senses, they theorized that we attempt to organize this information into certain groups.  This allows us to interpret the information completely without unneeded repetition.  For example, when you see one dot, you perceive it as such, but when you see five dots together, you group them together by saying a "row of dots."  Without this tendency to group our perceptions, that same row would be seen as "dot, dot, dot, dot, dot," taking both longer to process and reducing our perceptive ability.  The Gestalt principles of grouping include four types: similarity, proximity, continuity, and closure.

 

 Similarity refers to our tendency to group things together based upon how similar to each other they are.  In the first figure above, we tend to see two rows of red dots and two rows of black dots.  The dots are grouped according to similar color.  In the next figure, we tend to perceive three columns of two lines each rather than six different lines.  The lines are grouped together because of how close they are to each other, or their proximity to one another.  Continuity refers to our tendency to see patterns and therefore perceive things as belonging together if they form some type of continuous pattern.  In the third figure, although merely a series of dots, it begins to look like an "X" as we perceive the upper left side as continuing all the way to the lower right and the lower left all the way to the upper right.  Finally, in the

fourth figure, we demonstrate closure, or our tendency to complete familiar objects that have gaps in them.  Even at first glance, we perceive a circle and a square.

 Maintaining Perceptual Constancy

 Imagine if every time an object changed we had to completely reprocess it.  The next time you walk toward a building, you would have to re-evaluate the size of the building with each step, because we all know as we get closer, everything gets bigger.  The building which once stood only several inches is now somehow more than 50 feet tall.  

 Luckily, this doesn't happen.  Due to our ability to maintain constancy in our perceptions, we see that building as the same height no matter what distance it is.  Perceptual constancy refers to our ability to see things differently without having to reinterpret the object's properties.  There are typically three constancies discussed, including size, shape, brightness.

 Size constancy refers to our ability to see objects as maintaining the same size even when our distance from them makes things appear larger or smaller.  This holds true for all of our senses.  As we walk away from our radio, the song appears to get softer.  We understand, and perceive it as being just as loud as before.  The difference being our distance from what we are sensing.

 Everybody has seen a plate shaped in the form of a circle.  When we see that same plate from an angle, however, it looks more like an ellipse.  Shape constancy allows us to perceive that plate as still being a circle even though the angle from which we view it appears to distort the shape.

 Brightness constancy refers to our ability to recognize that color remains the same regardless of how it looks under different levels of light.  That deep blue shirt you wore to the beach suddenly looks black when you walk indoors.  Without color constancy, we would be constantly re-interpreting color and would be amazed at the miraculous conversion our clothes undertake.

 Perceiving Distance

 We determine distance using two different cues: monocular and binocular.  Monocular cues are those cues which can be seen using only one eye.  They include size; texture, overlap, shading, height, and clarity.  

 Size refers to the fact that larger images are perceived as closer to us, especially if the two images are of the same object.   The texture of objects tend to become smoother as the object gets farther away, suggesting that more detailed textured objects are closer.  Due to overlap, those objects covering part of another object is perceived as closer.  The shading or shadows of objects can give a clue to their distance, allowing closer objects to cast longer shadows which will overlap objects which are farther away.  Objects which are closer to the bottom of our visual field are seen as closer to us due to our perception of the horizon, where higher (height) means farther away.  Similar to texture, objects tend to get blurry as they get farther away, therefore, clearer or more crisp images tend to be perceived as closer (clarity).  

Binocular cues refer to those depth cues in which both eyes are needed to perceive.  There are two important binocular cues; convergence and retinal disparity.  Convergence refers to the fact that the closer an object, the more inward our eyes need to turn in order to focus.  The farther our eyes converge, the closer an object appears to be.  Since our eyes see two images which are then sent to our brains for interpretation, the distance between these two images, or their retinal disparity, provides another cue regarding the distance of the object. 

Sensations and Perceptions

Sensations can be defined as the passive process of bringing information from the outside world into the body and to the brain. The process is passive in the sense that we do not have to be consciously engaging in a "sensing" process.Perception can be defined as the active process of selecting, organizing, and interpreting the information brought to the brain by the senses.A) HOW THEY WORK TOGETHER:

1) Sensation occurs:

a) sensory organs absorb energy from a physical stimulus in the environment.

b) sensory receptors convert this energy into neural impulses and send them to the brain.

2) Perception follows:

a) the brain organizes the information and translates it into something meaningful.

B) But what does "meaningful" mean? How do we know what information is important and should be focused on?

1) Selective Attention - process of discriminating between what is important & is irrelevant (Seems redundant: selective-attention?), and is influenced by motivation.

For example - students in class should focus on what the teachers are saying and the overheads being presented. Students walking by the classroom may focus on people in the room, who is the teacher, etc., and not the same thing the students in the class.

2) Perceptual Expectancy - how we perceive the world is a function of our past experiences, culture, and biological makeup.For example, as an American, when I look at a highway, I expect to see cars, trucks, etc, NOT airplanes. But someone from a different country with different experiences and history may not have any idea what to expect and thus be surprised when they see cars go driving by.

Another example - you may look at a painting and not really understand the message the artist is trying to convey. But, if someone tells you about it, you might begin to see things in the painting that you were unable to see before.

 I.                     The Nature of Perception

A.                 Perception is a subjective, active, and creative process

B.                 A mental process through which we interpret what we sense

1.                  The process of assigning meaning to sensory information

2.                  The process by which we understand ourselves and others

C.                Perceptions of others affect ways we communicate with them

1.                  “I understand your feelings” is based on perception

2.                  There is no way we can actually feel what another feels

3.                  So to understand, we select, organize, and interpret cues

II.                   How does perception influence how we relate to others?

A.                 Interpersonal perception involves sensing, organizing, & interpreting information about people & their messages

B.                 Instantaneous evaluations create automatic judgments that predisposes positive or negative reactions toward others

1.                  Automatic judgments occur outside of awareness

2.                  We trust them the way we trust our senses not realizing they are already biased

C.                Messages we send can shape others’ self-concept & behavior

D.                Differing perceptions cause challenges for communication

 

III.                  Three Stages of Perception

A.                 Selection

1.                  To experience a stimulus through the senses & attend to it

a)                 Stimulus: anything prompting action, feeling, thought

b)                 Senses

(i)                             sight

(ii)                           sound

(iii)                         smell

(iv)                          taste

(v)                            touch

2.                  Selective Perception

a)                 Actively select some stimuli & ignore (filter) others

(i)                             We don’t perceive everything

(ii)                           10,000 bits of sensory information available/sec

b)                 Physiological & psychological states influence what the senses pick up and the meaning you give it

c)                  Factors that Affect Perceptions

(i)                             Physiology

Height, weight, hearing, vision, physical well-being, mood

(ii)                           Age

Experience teaches lessons; wealth of experience vs. naiveté

(iii)                         Culture as a filter

Conditions us to perceive in similar ways

Develop shared attitudes, beliefs, values, etc.

Standpoint theory explains our perceptions are influenced by the subgroups or subcultures to which we belong, such as age, gender, sexual preference, ethnicity, religion, marital status, occupation, etc.

(iv)                          Social Roles

How would a physician’s training vs. a lawyer’s training cause them to notice different things at the scene of an automobile accident?

(v)                            Ourselves

Implicit Personality Theory: Unspoken, unconscious assumptions about how various qualities fit together in human personalities (outgoing = friendly, confident, and fun

Attachment Styles: We perceive & approach relationships differently b/c of how we were parented

 

B.                Organization

1.                  To sort stimuli into groups and categories

2.                  Constructivism theory states we organize and interpret experience by applying cognitive structures

3.                  Schemata (organizational structures to make sense of what we have noticed)

a)                 Prototypes: knowledge structures that define the clearest or most representative examples of some category

U.S. prototype of romantic relationships emphasizes trust, caring, honesty, friendship, and respect.  Passion is less central to prototype than companionship and caring. (p. 76)

b)                 Personal constructs: bipolar mental yardsticks that allow us to measure people and situations along specific dimensions of judgment (physical characs, mental qualities, psychological features, interpersonal/social qualities)Dilbert Cartoon: smart & beautiful; smart & ugly; stupid & beautiful; stupid & ugly

c)                  Scripts: define expected or appropriate sequences of action in particular settings; guides to actionGreeting acquaintances; dating, managing conflict, talking with professors, dealing with clerks, etc.

d)                 Stereotypes: predictive generalizations about people and situations

(i)           categorize others on basis of easily recognized characteristics (race, blondes, frat/sorority, jocks, ethnicity)

(ii)         Base judgments about people on categories they fit instead of on individuality

(iii)       Prevent us from seeing individual as unique

(iv)        "Them": prejudiced, biased, discriminatory word

(v)          Stereotypes of groups we don't belong to are more negative & inaccurate than of own groups

 

C.                Interpretation

1.                  Subjective process of explaining our perceptions in ways that make sense to us: Construct an explanation

2.                  Factors that cause us to interpret differently

a)    Degree of involvement with other

b)    Relational satisfaction

c)    Past experiences

d)    Assumptions about human behavior

e)     Expectations

f)     Knowledge of others

g)    Personal moods

h)    Gender

i)     Occupation

j)     Culture  (Standpoint theory explains our perceptions are influenced by the subgroups or subcultures to which we belong, such as age, gender, sexual preference, ethnicity, religion, marital status, occupation, etc.)

k)       Self-concept

3.                  Attribution

a)                 Causal accounts that explain why things happen and people act the way they do

b)                 Attributions are based on Dimensions of Interpersonal Attributions

i)  Locus of control: Internal vs external

ii)  Stability: Stable vs unstable

iii) Scope: Global vs specific

iv) Responsibility: Within personal personal control vs beyond personal control

c)                  Attribution Errors occur when we attach distorted meanings to what happens around us

i)           Self-serving bias: Take credit for positive outcomes, deny responsibility & control over negative outcomes; attribute negative behaviors to uncontrollable factors (test was hard); attribute positive behaviors to controllable factors, your strength, intelligence, or personality (got an A b/c I worked hard or I’m smart).  Why?  B/c we KNOW the situation surrounding our behaviors we naturally focus on the influence of these factors.

ii)          Fundamental Attribution Error: Occurs when we assume other people’s behavior is due more to internal characteristics such as their personality, whereas we view our own behavior as more a result of external factors, e.g. context or situation: Overestimating the internal causes of others behavior and underestimating the external causes

DEFINITIONS

According to NORMAN MUNN,

“Learning can be defined as the process of being modified more or less permanently by what happens in the world around us, by what we do or what we observe”.

According to FRED LUTHANS “Learning can be defined as relatively permanent change in behaviour that occurs as a result of experience or reinforced practice.”

PRICIPLES OF LEARNING

Principles of learning are very useful in order to impart maximum knowledge and skills.

Each principle should be interpreted and applied carefully in full consideration of the particular task being learned and the context in which the learning takes place.

All human beings can learn.

An individual must be motivated to learn.

Learning is active but not passive.

Learners need reinforcement of correct behaviour.

Time must be provided to practice learning.

Learning is closely related to attention and concentration.

Standards of performance should be set for the learner.

Learners may acquire knowledge more rapidly with guidance.

Feedback ensures improvement in speed and accuracy of learning

Accuracy deserves generally more emphasis than speed.

Learning is a cumulative process.

Learning is an adjustment on the part of an individual.

Learning should be relatively based and.

Learning should be a goal oriented.

Learning Theory is rooted in the work of Ivan Pavlov, the famous scientist who discovered and documented the principles governing how animals (humans included) learn. Two basic kinds of learning or conditioning occur:

Classical and Operant Conditioning

Classical Conditioning. One important type of learning, Classical Conditioning, was actually discovered accidentally by Ivan Pavlov (1849-1936). Pavlov was a Russian physiologist who discovered this phenomenon while doing research on digestion. His research was aimed at better understanding the digestive patterns in dogs.

During his experiments, he would put meat powder in the mouths of dogs who had tubes inserted into various organs to measure bodily responses. What he discovered was that the dogs began to salivate before the meat powder was presented to them. Then, the dogs began to salivate as soon as the person feeding them would enter the room. He soon began to gain interest in this phenomenon and abandoned his digestion research in favor of his now famous Classical Conditioning study.

Basically, the findings support the idea that we develop responses to certain stimuli that are not naturally occurring. When we touch a hot stove, our reflex pulls our hand back. It does this instinctually, no learning involved. It is merely a survival instinct. But why now do some people, after getting burned, pull their hands back even when the stove is not turned on? Pavlov discovered that we make associations which cause us to generalize our response to one stimuli onto a neutral stimuli it is paired with. In other words, hot burner = ouch, stove = burner, therefore, stove = ouch.

Pavlov began pairing a bell sound with the meat powder and found that even when the meat powder was not presented, the dog would eventually begin to salivate after hearing the bell. Since the meat powder naturally results in salivation, these two variables are called the unconditioned stimulus (UCS) and the unconditioned response (UCR), respectively. The bell and salivation are not naturally occurring; the dog was conditioned to respond to the bell. Therefore, the bell is considered the conditioned stimulus (CS), and the salivation to the bell, the conditioned response (CR).

Many of our behaviors today are shaped by the pairing of stimuli. Have you ever noticed that certain stimuli, such as the smell of a cologne or perfume, a certain song, a specific day of the year, results in fairly intense emotions? It's not that the smell or the song are the cause of the emotion, but rather what that smell or song has been paired with...perhaps an ex-boyfriend or ex-girlfriend, the death of a loved one, or maybe the day you met you current husband or wife. We make these associations all the time and often don’t realize the power that these connections or pairings have on us. But, in fact, we have been classically conditioned.  Operant Conditioning. Another type of learning, very similar to that discussed above, is called Operant Conditioning. The term "Operant" refers to how an organism operates on the environment, and hence, operant conditioning comes from how we respond to what is presented to us in our environment. It can be thought of as learning due to the natural consequences of our actions.

Let's explain that a little further. The classic study of Operant Conditioning involved a cat who was placed in a box with only one way out; a specific area of the box had to be pressed in order for the door to open. The cat initially tries to get out of the box because freedom is reinforcing. In its attempt to escape, the area of the box is triggered and the door opens. The cat is now free. Once placed in the box again, the cat will naturally try to remember what it did to escape the previous time and will once again find the area to press. The more the cat is placed back in the box, the quicker it will press that area for its freedom. It has learned, through natural consequences, how to gain the reinforcing freedom.

We learn this way every day in our lives. Imagine the last time you made a mistake; you most likely remember that mistake and do things differently when the situation comes up again. In that sense, you’ve

learned to act differently based on the natural consequences of your previous actions. The same holds true for positive actions. If something you did results in a positive outcome, you are likely to do that same activity again.Reinforcement

The term reinforce means to strengthen, and is used in psychology to refer to anything stimulus which strengthens or increases the probability of a specific response. For example, if you want your dog to sit on command, you may give him a treat every time he sits for you. The dog will eventually come to understand that sitting when told to will result in a treat. This treat is reinforcing because he likes it and will result in him sitting when instructed to do so.

This is a simple description of a reinforcer (Skinner, 1938), the treat, which increases the response, sitting.  We all apply reinforcers everyday, most of the time without even realizing we are doing it. You may tell your child "good job" after he or she cleans their room; perhaps you tell your partner how good he or she look when they dress up; or maybe you got a raise at work after doing a great job on a project. All of these things increase the probability that the same response will be repeated.

There are four types of reinforcement: positive, negative, punishment, and extinction. We’ll discuss each of these and give examples.

Positive Reinforcement. The examples above describe what is referred to as positive reinforcement. Think of it as adding something in order to increase a response. For example, adding a treat will increase the response of sitting; adding praise will increase the chances of your child cleaning his or her room. The most common types of positive reinforcement or praise and rewards, and most of us have experienced this as both the giver and receiver.

Negative Reinforcement. Think of negative reinforcement as taking something negative away in order to increase a response.  Imagine a teenager who is nagged by his mother to take out the garbage week after week.  After complaining to his friends about the nagging, he finally one day performs the task and to his amazement, the nagging stops.  The elimination of this negative stimulus is reinforcing and will likely increase the chances that he will take out the garbage next week.

Punishment. Punishment refers to adding something aversive in order to decrease a behavior. The most common example of this is disciplining (e.g. spanking) a child for misbehaving. The reason we do this is because the child begins to associate being punished with the negative behavior. The punishment is not liked and therefore to avoid it, he or she will stop behaving in that manner.

Extinction. When you remove something in order to decrease a behavior, this is called extinction. You are taking something away so that a response is decreased.

Research has found positive reinforcement is the most powerful of any of these. Adding a positive to increase a response not only works better, but allows both parties to focus on the positive aspects of the situation. Punishment, when applied immediately following the negative behavior can be effective, but results in extinction when it is not applied consistently. Punishment can also invoke other negative responses such as anger and resentment.

Reinforcement Schedules

Know that we understand the four types of reinforcement, we need to understand how and when these are applied (Ferster & Skinner, 1957). For example, do we apply the positive reinforcement every time a child does something positive? Do we punish a child every time he does something negative? To answer these questions, you need to understand the schedules of reinforcement.

Applying one of the four types of reinforcement every time the behavior occurs (getting a raise after every successful project or getting spanked after every negative behavior) is called a Continuous Schedule. Its continuous because the application occurs after every project, behavior, etc. This is the best approach when using punishment. Inconsistencies in the punishment of children often results in confusion and resentment. A problem with this schedule is that we are not always present when a behavior occurs or may not be able to apply the punishment.

There are two types of continuous schedules:

Fixed Ratio. A fixed ratio schedule refers to applying the reinforcement after a specific number of behaviors. Spanking a child if you have to ask him three times to clean his room is an example. The problem is that the child (or anyone for that matter) will begin to realize that he can get away with two requests before he has to act. Therefore, the behavior does not tend to change until right before the preset number.

Fixed Interval. Applying the reinforcer after a specific amount of time is referred to as a fixed interval schedule. An example might be getting a raise every year and not in between. A major problem with this schedule is that people tend to improve their performance right before the time period expires so as to "look good" when the review comes around.

When reinforcement is applied on an irregular basis, they are called variable schedules.

Variable Ratio. This refers to applying a reinforcer after a variable number of responses. Variable ratio schedules have been found to work best under many circumstances and knowing an example will explain why. Imagine walking into a casino and heading for the slot machines. After the third coin you put in, you get two back. Two more and you get three back. Another five coins and you receive two more back. How difficult is it to stop playing?

Variable Interval. Reinforcing someone after a variable amount of time is the final schedule. If you have a boss who checks your work periodically, you understand the power of this schedule. Because you don’t know when the next ‘check-up’ might come, you have to be working hard at all times in order to be ready.

In this sense, the variable schedules are more powerful and result in more consistent behaviors. This may not be as true for punishment since consistency in the application is so important, but for all other types of reinforcement they tend to result in stronger responses.

Reward system and Organisation

The design and management of reward systems present the general manager with one of the most difficult HRM tasks. This HRM policy area contains the greatest contradictions between the promise of theory and the reality of implementation. Consequently, organizations sometimes go through cycles of innovation

and hope as reward systems are developed, followed by disillusionment as these reward systems fail to deliver.

Rewards and employee satisfaction

Gaining an employee’s satisfaction with the rewards given is not a simple matter. Rather, it is a function of several factors that organizations must learn to manage:

1. The individual’s satisfaction with rewards is, in part, related to what is expected and how much is received. Feelings of satisfaction or dissatisfaction arise when individuals compare their input - job skills, education, effort, and performance - to output - the mix of extrinsic and intrinsic rewards they receive.

2. Employee satisfaction is also affected by comparisons with other people in similar jobs and organizations. In effect, employees compare their own input/output ratio with that of others. People vary considerably in how they weigh various inputs in that comparison. They tend to weigh their strong points more heavily, such as certain skills or a recent incident of effective performance. Individuals also tend to overrate their own performance compared with the rating they receive from their supervisors. The problem of unrealistic self-rating exists partly because supervisors in most organizations do not communicate a candid evaluation of their subordinates’ performance to them. Such candid communication to subordinates, unless done skillfully, seriously risks damaging their self-esteem. The bigger dilemma, however, is that failure by managers to communicate a candid appraisal of performance makes it difficult for employees to develop a realistic view of their own performance, thus increasing the possibility of dissatisfaction with the pay they are receiving.

3. Employees often misperceive the rewards of others; their misperception can cause the employees to become dissatisfied. Evidence shows that individuals tend to overestimate the pay of fellow workers doing similar jobs and to underestimate their performance (a defense of self-esteem-building mechanism). Misperceptions of the performance and rewards of others also occur because organizations do not generally make available accurate information about the salary or performance of others.

4. Finally, overall satisfaction results from a mix of rewards rather than from any single reward. The evidence suggests that intrinsic rewards and extrinsic rewards are both important and that they cannot be directly substituted for each other. Employees who are paid well for repetitious, boring work will be dissatisfied with the lack of intrinsic rewards, just as employees paid poorly for interesting, challenging work may be dissatisfied with extrinsic rewards.

Rewards and motivation

From the organization’s point of view, rewards are intended to motivate certain behaviors. But under what conditions will rewards actually motivate employees? To be useful, rewards must be seen as timely and tied to effective performance.

One theory suggests that the following conditions are necessary for employee motivation.

1. Employees must believe effective performance (or certain specified behavior) will lead to certain rewards. For example, attaining certain results will lead to a bonus or approval from others.

2. Employees must feel that the rewards offered are attractive. Some employees may desire promotions because they seek power, but others may want a fringe benefit, such as a pension, because they are older and want retirement security.

3. Employees must believe a certain level of individual effort will lead to achieving the corporation’s standards of performance.

As indicated, motivation to exert effort is triggered by the prospect of desired rewards: money, recognition, promotion, and so forth. If effort leads to performance and performance leads to desired rewards, the employee is satisfied and motivated to perform again.

As mentioned above, rewards fall into two categories: extrinsic and intrinsic. Extrinsic rewards come from the organization as money, perquisites, or promotions or from supervisors and coworkers as recognition. Intrinsic rewards accrue from performing the task itself, and may include the satisfaction of accomplishment or a sense of influence. The process of work and the individual’s response to it provide the intrinsic rewards. But the organization seeking to increase intrinsic rewards must provide a work environment that allows these satisfactions to occur; therefore, more organizations are redesigning work and delegating responsibility to enhance employee involvement.

Equity and participation

The ability of a reward system both to motivate and to satisfy depends on who influences and/or controls the system’s design and implementation. Even though considerable evidence suggests that participation in decision making can lead to greater acceptance of decisions, participation in the design and administration of reward systems is rare. Such participation is time-consuming.

Perhaps, a greater roadblock is that pay has been of the last strongholds of managerial prerogatives. Concerned about employee self-interest and compensation costs, corporations do not typically allow employees to participate in pay-system design or decisions. Thus, it is not possible to test thoroughly the effects of widespread participation on acceptance of and trust in reward system.

Compensation systems: the dilemmas of practice

A body of experience, research and theory has been developed about how money satisfies and motivates employees. Virtually every study on the importance of pay compared with other potential rewards has shown that pay is important. It consistently ranks among the top five rewards. The importance of pay and other rewards, however, is affected by many factors. Money, for example, is likely to be viewed differently at various points in one’s career, because the need for money versus other rewards (status, growth, security, and so forth) changes at each stage. National culture is another important factor. American managers and employees apparently emphasize pay for individual performance more than do their European or Japanese counterparts. European and Japanese companies, however, rely more on slow promotions and seniority as well as some degree of employment security. Even within a single culture, shifting national forces may alter people’s needs for money versus other rewards.

Companies have developed various compensation systems and practices to achieve pay satisfaction and motivation. In manufacturing firms, payroll costs can run as high as 40% of sales revenues, whereas in

service organizations payroll costs can top 70%. General managers, therefore, take an understandable interest in payroll costs and how this money is spent.

The traditional view of managers and compensation specialists is that if the right system can be developed, it will solve most problems. This is not a plausible assumption, because, there is no one right answer or objective solution to what or how someone should be paid. What people will accept, be motivated by, or perceive as fair is highly subjective. Pay is a matter of perceptions and values that often generate conflict.

Management’s influence on attitudes toward money

Many organizations are caught up in a vicious cycle that they partly create. Firms often emphasize compensation levels and a belief in individual pay for performance in their recruitment and internal communications. This is likely to attract people with high needs for money as well as to heighten that need in those already employed. Thus, the meaning employees attach to money is partly shaped by management’s views. If merit increases, bonuses, stock options, and perquisites are held out as valued symbols of recognition and success, employees will come to see them in this light even more than they might have perceived them at first. Having heightened money’s importance as a reward, management must then respond to employees who may demand more money or better pay-for-performance systems.

Firms must establish a philosophy about rewards and the role of pay in the mix of rewards. Without such a philosophy, the compensation practices that happen to be in place, for the reasons already stated, will continue to shape employees’ satisfactions, and those expectations will sustain the existing practices. If money has been emphasized as an important symbol of success, that emphasis will continue even though a compensation system with a slightly different emphasis might have equal motivational value with fewer administrative problems and perhaps even lower cost. Money is important, but its degree of importance is influenced by the type of compensation system and philosophy that management adopts.

Pay for performance

Some reasons why organizations pay their employees for performance are as follows:

Under the right conditions, a pay-for-performance system can motivate desired behavior.

a pay-for-performance system can help attract and keep achievement-oriented individuals.

a pay-for-performance system can help to retain good performers while discouraging the poor performers.

In the US, at least, many employees, both managers and workers, prefer a pay-for-performance system, although white-collar workers are significantly more supportive of the notion than blue-collar workers.

But there is a gap, and the evidence indicates a wide gap, between the desire to devise a pay-for-performance system and the ability to make such a system work.

The most important distinction among various pay-for-performance systems is the level of aggregation at which performance is defined - individual, group, and organizationwide. Several pay-for-performance systems are summarized in the exhibit that follows.

Historically, pay for performance has meant pay for individual performance. Piece-rate incentive systems for production employees and merit salary increases or bonus plans for salaried employees have been the dominant means of paying for performance. In the last decade, piece-rate incentive systems have dramatically declined because managers have discovered that such systems result in dysfunctional behavior, such as low cooperation, artificial limits on production and resistance to changing standards. Similarly, more questions are being asked about individual bonus plans for executives as top managers discovered their negative effects.

Meanwhile, organizationwide incentive systems are becoming more popular, particularly because managers are finding that they foster cooperation, which leads to productivity and innovation. To succeed, however, these plans require certain conditions. A review of the key considerations for designing a pay-for-performance plan and a discussion of the problems that arise when these considerations are not observed follow.

Individual pay for performance. The design of an individual pay-for performance system requires an analysis of the task. Does the individual have control over the performance (result) that is to be measured? Is there a significant effort-to-performance relationship? For motivational reasons already discussed such a relationship must exist. Unfortunately, many individual bonus, commission, or piece-rate incentive plans fall short in meeting this requirement. An individual may not have control over a performance result, such as sales or profit, because that result is affected by economic cycles or competitive forces beyond his or her control. Indeed, there are few outcomes in complex organizations that are not dependent on other functions or individuals, fewer still that are not subject to external factors.

Choosing an appropriate measure of performance on which to base pay is a related problem incurred by individual bonus plans. For reasons discussed earlier, effectiveness on a job can include many facets not captured by cost, units produced, or sales revenues. Failure to include all activities that are important for effectiveness can lead to negative consequences. For example, sales personnel who receive a bonus for sales volume may push unneeded products, thus damaging long-term customer relations, or they may push an unprofitable mix of products just to increase volume. These same salespeople may also take orders and make commitments that cannot be met by manufacturing. Instead, why not hold salespeople responsible for profits, a more inclusive measure of performance? The obvious problem with this measure is that sales personnel do not have control over profits.

These dilemmas constantly encountered and have led to the use of more subjective but inclusive behavioral measures of performance. Why not observe if the salesperson or executive is performing all aspects of the job well? More merit salary increases are based on subjective judgments and so are some individual bonus plans. Subjective evaluation systems though they can be all-inclusive if based on a thorough analysis of the job, require deep trust in management, good manager-subordinate relations, and effective interpersonal skills. Unfortunately, these conditions are not fully met in many situations, though they can be developed if judged to be sufficiently important.

Group and organizationwide pay plans. Organizational effectiveness depends on employee cooperation in most instances. An organization may elect to tie pay, or at least some portion of pay, indirectly to individual performance. Seeking to foster team-work, a company may tie an incentive to some measure of group performance, or it may offer some type of profits or productivity-sharing plan for the whole plant or company.

Gains-sharing plans have been used for years in many varieties. The real power of a gains-sharing plan comes when it is supported by a climate of participation. Various structures, systems, and processes involve employees in decisions that improve the organization’s performance and result in a bonus throughout the organization.

MOTIVATION and its importance:

Motivation is an important function of personnel management because management of personnel means getting the work done by the people to achieve the organisational objectives.

Motivation is one of the method to induce the man on the job to get the work done effectively to have the best results towards the common objectives. Motivation is necessary for the better performance. The expected results from motivation are:-

1. Best utilisation of Resources: All other resources (except human resource) an produce no results uncles the men try to put them into action, Men should be motivated to carry out the plans, policies and programmes laid down by the organisation by utilizing the other resources to the bet of their efforts. In other words, utilisation of resources is not possible to their fullest extent unless the man n induced to contribute their efforts towards attaining the organisational goals.

2. Will to Contribute:- A distinction should be made between 'Capacity to work' and willingness to work. A man can be physically, mentally and technically fit to work but the may not be willing to work motivation concerns to create a need and desire on the part of he workman to present his better performance.

3. Reduction if labour problems: All the members try to concentrate their efforts to achieve the objectives of the organisation and carry out the plans in accordance with the policies and programmes laid down by the organizations is the management introduces motivational plans. It reduces the labour problems like labour turnover, absenteeism, indiscipline, grievances etc. because their real wages increase by the motivational plans.

4. Sizable Increase in Production and Productivity: Motivation induces the men to work hence it results in increased production. And productivity because men try to put their efforts to produce more and more and thus their efficiency increases. They (motivated employees) use the methods, systems and technology effectively in the best interest of the organizations.

5. Basis of Co-operation: In a zeal to produce more the members work as a team to pull the weight effectively, to gt their loyalty to the group and the organisation, to carry out properly the activities allocated and generally to play an efficient part in achieving the purposes which the organisation has undertaken. Thus motivation is a basis of cooperation to get the best results out of the efforts of the men on the job.

6. Improvement upon Skill and knowledge: All the members will try to be as efficient as possible and will try to improve upon their skill and knowledge so that they may be able to contribute to the progress of the

organisation as much as possible because they know that they, in turn, will get what have been promised and ultimately they will be able to satisfy their needs- personal and social both.

In the nut shell, to achieve the organisational and individual goals in an economical and efficient manuer, motivation is an important toll in the hands of management to direct the behaviour of subordinates in the desired and appropriate direction and thus minimise the wastage of human and other resources.

Theories on Motivation-

Maslow

Abraham Maslow (1908 – 1970) along with Frederick Herzberg (1923-) introduced the Neo-Human Relations School in the 1950’s, which focused on the psychological needs of employees. Maslow put forward a theory that there are five levels of human needs which employees need to have fulfilled at work.

All of the needs are structured into a hierarchy (see below) and only once a lower level of need has been fully met, would a worker be motivated by the opportunity of having the next need up in the hierarchy satisfied. For example a person who is dying of hunger will be motivated to achieve a basic wage in order to buy food before worrying about having a secure job contract or the respect of others.

A business should therefore offer different incentives to workers in order to help them fulfill each need in turn and progress up the hierarchy (see below). Managers should also recognise that workers are not all motivated in the same way and do not all move up the hierarchy at the same pace. They may therefore have to offer a slightly different set of incentives from worker to worker.

Herzberg

Frederick Herzberg (1923-) had close links with Maslow and believed in a two-factor theory of motivation. He argued that there were certain factors that a business could introduce that would directly motivate employees to work harder (Motivators). However there were also factors that would de-motivate an employee if not present but would not in themselves actually motivate employees to work harder (Hygienefactors)

Motivators are more concerned with the actual job itself. For instance how interesting the work is and how much opportunity it gives for extra responsibility, recognition and promotion. Hygiene factors are

factors which ‘surround the job’ rather than the job itself. For example a worker will only turn up to work if a business has provided a reasonable level of pay and safe working conditions but these factors will not make him work harder at his job once he is there. Importantly Herzberg viewed pay as a hygiene factor which is in direct contrast to Taylor who viewed pay, and piece-rate in particular

Herzberg believed that businesses should motivate employees by adopting a democratic approach to management and by improving the nature and content of the actual job through certain methods. Some of the methods managers could use to achieve this are:

Job enlargement – workers being given a greater variety of tasks to perform (not necessarily more challenging) which should make the work more interesting.

Job enrichment - involves workers being given a wider range of more complex, interesting and challenging tasks surrounding a complete unit of work. This should give a greater sense of achievement.

Empowerment means delegating more power to employees to make their own decisions over areas of their working life.

1) Contribution of Robert Owen :

Though Owen is considered to be paternalistic in his view, his contribution is of a considerable significance in the theories of Motivation. During the early years of the nineteenth century, Owen’s textile mill at New Lanark in Scotland was the scene of some novel ways of treating people. His view was that people were similar to machines. A machine that is looked after properly, cared for and maintained well, performs efficiently, reliably and lastingly, similarly people are likely to be more efficient if they are taken care of. Robert Owen practiced what he preached and introduced such things as employee housing and company shop. His ideas on this and other matters were considered to be too revolutionary for that time.

2) Jeremy Bentham’s “The Carrot and the Stick Approach” :

Possibly the essence of the traditional view of people at work can be best appreciated by a brief look at the work of this English philosopher, whose ideas were also developed in the early years of the Industrial Revolution, around 1800. Bentham’s view was that all people are self-interested and are motivated by the desire to avoid pain and find pleasure. Any worker will work only if the reward is big enough, or the punishment sufficiently unpleasant. This view - the ‘carrot and stick’ approach - was built into the philosophies of the age and is still to be found, especially in the older, more traditional sectors of industry.

The various leading theories of motivation and motivators seldom make reference to the carrot and the stick. This metaphor relates, of course, to the use of rewards and penalties in order to induce desired behavior. It comes from the old story that to make a donkey move, one must put a carrot in front of him or dab him with a stick from behind. Despite all the research on the theories of motivation, reward and punishment are still considered strong motivators. For centuries, however, they were too often thought of as the only forces that could motivate people.

At the same time, in all theories of motivation, the inducements of some kind of ‘carrot’ are recognized. Often this is money in the form of pay or bonuses. Even though money is not the only motivating force, it

has been and will continue to be an important one. The trouble with the money ‘carrot’ approach is that too often everyone gets a carrot, regardless of performance through such practices as salary increase and promotion by seniority, automatic ‘merit’ increases, and executive bonuses not based on individual manager performance. It is as simple as this : If a person put a donkey in a pen full of carrots and then stood outside with a carrot, would the donkey be encouraged to come out of the pen ?

The ‘stick’, in the form of fear–fear of loss of job, loss of income, reduction of bonus, demotion, or some other penalty–has been and continues to be a strong motivator. Yet it is admittedly not the best kind. It often gives rise to defensive or retaliatory behavior, such as union organization, poor-quality work, executive indifference, failure of a manager to take any risks in decision making or even dishonesty. But fear of penalty cannot be overlooked. Whether managers are first-level supervisors or chief executives, the power of their position to give or with hold rewards or impose penalties of various kinds gives them an ability to control, to a very great extent, the economic and social well-being of their subordinates.

3) Abraham Maslow’s “Need Hierarchy Theory” :

One of the most widely mentioned theories of motivation is the hierarchy of needs theory put forth by psychologist Abraham Maslow. Maslow saw human needs in the form of a hierarchy, ascending from the lowest to the highest, and he concluded that when one set of needs is satisfied, this kind of need ceases to be a motivator.

As per his theory these needs are:

(i) Physiological needs:

These are important needs for sustaining the human life. Food, water, warmth, shelter, sleep, medicine and education are the basic physiological needs which fall in the primary list of need satisfaction. Maslow was of an opinion that until these needs were satisfied to a degree to maintain life, no other motivating factors can work.

(ii) Security or Safety needs :

These are the needs to be free of physical danger and of the fear of losing a job, property, food or shelter. It also includes protection against any emotional harm.

(iii) Social needs :

Since people are social beings, they need to belong and be accepted by others. People try to satisfy their need for affection, acceptance and friendship.

(iv) Esteem needs :

According to Maslow, once people begin to satisfy their need to belong, they tend to want to be held in esteem both by themselves and by others. This kind of need produces such satisfaction as power, prestige status and self-confidence. It includes both internal esteem factors like self-respect, autonomy and achievements and external esteem factors such as states, recognition and attention.

(v) Need for self-actualization :

Maslow regards this as the highest need in his hierarchy. It is the drive to become what one is capable of becoming, it includes growth, achieving one’s potential and self-fulfillment. It is to maximize one’s potential and to accomplish something.

As each of these needs are substantially satisfied, the next need becomes dominant. From the standpoint of motivation, the theory would say that although no need is ever fully gratified, a substantially satisfied need no longer motivates. So if you want to motivate someone, you need to understand what level of the hierarchy that person is on and focus on satisfying those needs or needs above that level.

Maslow’s need theory has received wide recognition, particularly among practicing managers. This can be attributed to the theory’s intuitive logic and ease of understanding. However, research does not validate these theory. Maslow provided no empirical evidence and other several studies that sought to validate the theory found no support for it.

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4) “Theory X and Theory Y” of Douglas McGregor :

McGregor, in his book “The Human side of Enterprise” states that people inside the organization can be managed in two ways. The first is basically negative, which falls under the category X and the other is basically positive, which falls under the category Y. After viewing the way in which the manager dealt with employees, McGregor concluded that a manager’s view of the nature of human beings is based on a certain grouping of assumptions and that he or she tends to mold his or her behavior towards subordinates according to these assumptions.

Under the assumptions of theory X :

Employees inherently do not like work and whenever possible, will attempt to avoid it.

Because employees dislike work, they have to be forced, coerced or threatened with punishment to achieve goals.

Employees avoid responsibilities and do not work fill formal directions are issued.

Most workers place a greater importance on security over all other factors and display little ambition.

In contrast under the assumptions of theory Y :

Physical and mental effort at work is as natural as rest or play.

People do exercise self-control and self-direction and if they are committed to those goals.

Average human beings are willing to take responsibility and exercise imagination, ingenuity and creativity in solving the problems of the organization.

That the way the things are organized, the average human being’s brainpower is only partly used.

On analysis of the assumptions it can be detected that theory X assumes that lower-order needs dominate individuals and theory Y assumes that higher-order needs dominate individuals. An organization that is run on Theory X lines tends to be authoritarian in nature, the word “authoritarian” suggests such ideas as the “power to enforce obedience” and the “right to command.” In contrast Theory Y organizations can be described as “participative”, where the aims of the organization and of the individuals in it are integrated; individuals can achieve their own goals best by directing their efforts towards the success of the organization.

However, this theory has been criticized widely for generalization of work and human behavior.

5) Contribution of Rensis Likert :

Likert developed a refined classification, breaking down organizations into four management systems.

1st System – Primitive authoritarian2nd System – Benevolent authoritarian3rd System – Consultative 4th System – Participative

As per the opinion of Likert, the 4th system is the best, not only for profit organizations, but also for non-profit firms.

6) Frederick Herzberg’s motivation-hygiene theory :

Frederick has tried to modify Maslow’s need Hierarchy theory. His theory is also known as two-factor theory or Hygiene theory. He stated that there are certain satisfiers and dissatisfiers for employees at work. In- trinsic factors are related to job satisfaction, while extrinsic factors are associated with dissatisfaction. He devised his theory on the question : “What do people want from their jobs ?” He asked people to describe in detail, such situations when they felt exceptionally good or exceptionally bad. From the responses that he received, he concluded that opposite of satisfaction is not dissatisfaction. Removing dissatisfying characteristics from a job does not necessarily make the job satisfying. He states that presence of certain factors in the organization is natural and the presence of the same does not lead to motivation. However, their nonpresence leads to demotivation. In similar manner there are certain factors, the absence of which causes no dissatisfaction, but their presence has motivational impact.

Examples of Hygiene factors are :

Security, status, relationship with subordinates, personal life, salary, work conditions, relationship with supervisor and company policy and administration.

Examples of Motivational factors are :

Growth prospectus job advancement, responsibility, challenges, recognition and achievements.

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7) Contributions of Elton Mayo :

The work of Elton Mayo is famously known as “Hawthorne Experiments.” He conducted behavioral experiments at the Hawthorne Works of the American Western Electric Company in Chicago. He made some illumination experiments, introduced breaks in between the work performance and also introduced refreshments during the pause’s. On the basis of this he drew the conclusions that motivation was a very complex subject. It was not only about pay, work condition and morale but also included psychological and social factors. Although this research has been criticized from many angles, the central conclusions drawn were :

People are motivated by more than pay and conditions.

The need for recognition and a sense of belonging are very important.

Attitudes towards work are strongly influenced by the group.

8) Vroom’s Valence x Expectancy theory :

The most widely accepted explanations of motivation has been propounded by Victor Vroom. His theory is commonly known as expectancy theory. The theory argues that the strength of a tendency to act in a

specific way depends on the strength of an expectation that the act will be followed by a given outcome and on the attractiveness of that outcome to the individual to make this simple, expectancy theory says that an employee can be motivated to perform better when their is a belief that the better performance will lead to good performance appraisal and that this shall result into realization of personal goal in form of some reward. Therefore an employee is :

Motivation = Valence x Expectancy.

The theory focuses on three things :

Efforts and performance relationship

Performance and reward relationship

Rewards and personal goal relationship

This leads us to a conclusion that :

9) The Porter and Lawler Model :

Lyman W. Porter and Edward E. Lawler developed a more complete version of motivation depending upon expectancy theory.

Actual performance in a job is primarily determined by the effort spent. But it is also affected by the person’s ability to do the job and also by individual’s perception of what the required task is. So performance is the responsible factor that leads to intrinsic as well as extrinsic rewards. These rewards, along with the equity of individual leads to satisfaction. Hence, satisfaction of the individual depends upon the fairness of the reward.

10) Clayton Alderfer’s ERG Theory :

Alderfer has tried to rebuild the hierarchy of needs of Maslow into another model named ERG i.e. Existence – Relatedness – Growth. According to him there are 3 groups of core needs as mentioned above. The existence group is concerned mainly with providing basic material existence. The second group is the individuals need to maintain interpersonal relationship with other members in the group. The final group is the intrinsic desire to grow and develop personally. The major conclusions of this theory are :

1. In an individual, more than one need may be operative at the same time.

2. If a higher need goes unsatisfied than the desire to satisfy a lower need intensifies.

3. It also contains the frustration-regression dimension.

11) McClelland’s Theory of Needs :

David McClelland has developed a theory on three types of motivating needs :

1. Need for Power

2. Need for Affiliation

3. Need for Achievement

Basically people for high need for power are inclined towards influence and control. They like to be at the center and are good orators. They are demanding in nature, forceful in manners and ambitious in life. They can be motivated to perform if they are given key positions or power positions.

In the second category are the people who are social in nature. They try to affiliate themselves with individuals and groups. They are driven by love and faith. They like to build a friendly environment around themselves. Social recognition and affiliation with others provides them motivation.

People in the third area are driven by the challenge of success and the fear of failure. Their need for achievement is moderate and they set for themselves moderately difficult tasks. They are analytical in nature and take calculated risks. Such people are motivated to perform when they see atleast some chances of success.

McClelland observed that with the advancement in hierarchy the need for power and achievement increased rather than Affiliation. He also observed that people who were at the top, later ceased to be motivated by this drives.

12 ) Equity Theory : 

As per the equity theory of J. Stacey Adams, people are motivated by their beliefs about the reward structure as being fair or unfair, relative to the inputs. People have a tendency to use subjective judgment to balance the outcomes and inputs in the relationship for comparisons between different individuals. Accordingly :

If people feel that they are not equally rewarded they either reduce the quantity or quality of work or migrate to some other organization. However, if people perceive that they are rewarded higher, they may be motivated to work harder.

13) Reinforcement Theory :

B.F. Skinner, who propounded the reinforcement theory, holds that by designing the environment properly, individuals can be motivated. Instead of considering internal factors like impressions, feelings, attitudes and other cognitive behavior, individuals are directed by what happens in the environment external to them. Skinner states that work environment should be made suitable to the individuals and that punishments actually leads to frustration and de-motivation. Hence, the only way to motivate is to keep on making positive changes in the external environment of the organization.

14) Goal Setting Theory of Edwin Locke :

Instead of giving vague tasks to people, specific and pronounced objectives, help in achieving them faster. As the clearity is high, a goal orientation also avoids any misunderstandings in the work of the employees. The goal setting theory states that when the goals to be achieved are set at a higher standard than in that case employees are motivated to perform better and put in maximum effort. It revolves around the concept of “Self-efficacy” i.e. individual’s belief that he or she is capable of performing a hard task.

15) Cognitive Evaluation Theory :  

As per these theory a shift from external rewards to internal rewards results into motivation. It believes that even after the stoppage of external stimulus, internal stimulus survives. It relates to the pay structure in the organization. Instead of treating external factors like pay, incentives, promotion etc and internal factors like interests, drives, responsibility etc, separately, they should be treated as contemporary to each

other. The cognition is to be such that even when external motivators are not there the internal motivation continues. However, practically extrinsic rewards are given much more weightage.

Applications of Motivation in organisation:

At lower levels of Maslow's hierarchy of needs, such as physiological needs, money is a motivator, however it tends to have a motivating effect on staff that lasts only for a short period (in accordance with Herzberg's two-factor model of motivation). At higher levels of the hierarchy, praise, respect, recognition, empowerment and a sense of belonging are far more powerful motivators than money, as both Abraham Maslow's theory of motivation and Douglas McGregor's theory X and theory Y (pertaining to the theory of leadership) demonstrate.

Maslow has money at the lowest level of the hierarchy and shows other needs are better motivators to staff. McGregor places money in his Theory X category and feels it is a poor motivator. Praise and recognition are placed in the Theory Y category and are considered stronger motivators than money.

Motivated employees always look for better ways to do a job.

Motivated employees are more quality oriented.

Motivated workers are more productive.

The average workplace is about midway between the extremes of high threat and high opportunity. Motivation by threat is a dead-end strategy, and naturally staff are more attracted to the opportunity side of the motivation curve than the threat side. Motivation is a powerful tool in the work environment that can lead to employees working at their most efficient levels of production.

Nonetheless, Steinmetz also discusses three common character types of subordinates: ascendant, indifferent, and ambivalent who all react and interact uniquely, and must be treated, managed, and motivated accordingly. An effective leader must understand how to manage all characters, and more importantly the manager must utilize avenues that allow room for employees to work, grow, and find answers independently.

The assumptions of Maslow and Herzberg were challenged by a classic study at Vauxhall Motors' UK manufacturing plant. This introduced the concept of orientation to work and distinguished three main orientations: instrumental (where work is a means to an end), bureaucratic (where work is a source of status, security and immediate reward) and solidaristic (which prioritises group loyalty).

Other theories which expanded and extended those of Maslow and Herzberg included Kurt Lewin's Force Field Theory, Edwin Locke's Goal Theory and Victor Vroom's Expectancy theory. These tend to stress cultural differences and the fact that individuals tend to be motivated by different factors at different times.[28]

According to the system of scientific management developed by Frederick Winslow Taylor, a worker's motivation is solely determined by pay, and therefore management need not consider psychological or social aspects of work. In essence, scientific management bases human motivation wholly on extrinsic rewards and discards the idea of intrinsic rewards.

In contrast, David McClelland believed that workers could not be motivated by the mere need for money—in fact, extrinsic motivation (e.g., money) could extinguish intrinsic motivation such as achievement motivation, though money could be used as an indicator of success for various motives, e.g., keeping score. In keeping with this view, his consulting firm, McBer & Company, had as its first motto "To make everyone productive, happy, and free." For McClelland, satisfaction lay in aligning a person's life with their fundamental motivations.

Elton Mayo found that the social contacts a worker has at the workplace are very important and that boredom and repetitiveness of tasks lead to reduced motivation. Mayo believed that workers could be motivated by acknowledging their social needs and making them feel important. As a result, employees were given freedom to make decisions on the job and greater attention was paid to informal work groups. Mayo named the model the Hawthorne effect. His model has been judged as placing undue reliance on social contacts at work situations for motivating employees.[29]

In Essentials of Organizational Behavior, Robbins and Judge examine recognition programs as motivators, and identify five principles that contribute to the success of an employee incentive program:[30]

Recognition of employees' individual differences, and clear identification of behavior deemed worthy of recognition

Allowing employees to participate

Linking rewards to performance

Rewarding of nominators

Visibility of the recognition process.

The concept of MBO:

The Concept Of Management By Objectives (MBO)

The concept of MBO is closely connected with the concept of planning. The process of planning implies the existence of objectives and is used as a tool/technique for achieving the objectives. Modern managements are rightly described as 'Management by Objectives' (MBO). This MBO concept was popularized by Peter Drucker. It suggests that objectives should not be imposed on subordinates but should be decided collectively by a concerned with the management. This gives popular support to them and the achievement of such objectives becomes easy and quick.

Management by Objectives (MBO) is the most widely accepted philosophy of management today. It is a demanding and rewarding style of management. It concentrates attention on the accomplishment of objectives through participation of all concerned persons, i.e., through team spirit. MBO is based on the assumption that people perform better when they know what is expected of them and can relate their personal goals to organizational objectives. Superior subordinate participation, joint goal setting and support and encouragement from superior to subordinates are the basic features of MBO. It is a result-oriented philosophy and offers many advantages such as employee motivation, high morale, effective and purposeful leadership and clear objectives before all concerned per-sons.

MBO is a participative and democratic style of management. Here, ample a scope is given to subordinates and is given higher status and positive/participative role. In short, MBO is both a philosophy and approach to management. MBO concept is different from MBC (Management by Control) and is also superior in many respects. According to the classical theory of management, top management is concerned with objectives setting, directing and coordinating the efforts of middle level managers and lower level staff. However, achievement of organizational objectives is possible not by giving orders and instructions but by securing cooperation and participation of all persons. For this, they should be associated with the management process. This is possible in the case of MBO and hence MBO is different from MBC and also superior to MBC.

MBO is an approach (to planning) that helps to overcome these barriers. MBO involves the establishment of goals by managers and their subordinates acting together, specifying responsibilities and assigning authority for achieving the goals and finally constant monitoring of performance. The genesis of MBO is attributed to Peter Drucker who has explained it in his book 'The Practice of Management'.

Definitions Of Management By Objectives MBO :-

1. According to George Odiome, MBO is "a process whereby superior and subordinate managers of an Organisation jointly define its common goals, define each individual's major areas of responsibility in terms Of results expected of him and use these measures as guides for operating the unit and assessing the contribution of each of its members."

2. According to John Humble, MBO is "a dynamic system which seeks to integrate the company's needs to clarify and achieve its profits and growth goals with the manager's need to contribute and develop himself. It is a demanding and rewarding style of managing a business."

Features Of Management By Objectives MBO :-

1. Superior-subordinate participation: MBO requires the superior and the subordinate to recognize that the development of objectives is a joint project/activity. They must be jointly agree and write out their duties and areas of responsibility in their respective jobs.

2. Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and measurable. The subordinate in consultation with his superior sets his own short-term goals. However, it is examined both by the superior and the subordinate that goals are realistic and attainable. In brief, the goals are to be decided jointly through the participation of all.

3. Joint decision on methodology: MBO focuses special attention on what must be accomplished (goals) rather than how it is to be accomplished (methods). The superior and the subordinate mutually devise methodology to be followed in the attainment of objectives. They also mutually set standards and establish norms for evaluating performance.

4. Makes way to attain maximum result: MBO is a systematic and rational technique that allows management to attain maximum results from available resources by focussing on attainable goals. It permits lot of freedom to subordinate to make creative decisions on his own. This motivates subordinates and ensures good performance from them.

5. Support from superior: When the subordinate makes efforts to achieve his goals, superior's helping hand is always available. The superior acts as a coach and provides his valuable advice and guidance to the subordinate. This is how MBO facilitates effective communication between superior and subordinates for achieving the objectives/targets set.

Steps In Management By Objectives Planning :-

1. Goal setting: The first phase in the MBO process is to define the organizational objectives. These are determined by the top management and usually in consultation with other managers. Once these goals are established, they should be made known to all the members. In setting objectives, it is necessary to identify "Key-Result Areas' (KRA).

2. Manager-Subordinate involvement: After the organizational goals are defined, the subordinates work with the managers to determine their individual goals. In this way, everyone gets involved in the goal setting.

3. Matching goals and resources: Management must ensure that the subordinates are provided with necessary tools and materials to achieve these goals. Allocation of resources should also be done in consultation with the subordinates.

4. Implementation of plan: After objectives are established and resources are allocated, the subordinates can implement the plan. If any guidance or clarification is required, they can contact their superiors.

5. Review and appraisal of performance: This step involves periodic review of progress between manager and the subordinates. Such reviews would determine if the progress is satisfactory or the subordinate is facing some problems. Performance appraisal at these reviews should be conducted, based on fair and measurable standards.

Advantages of Management By Objectives MBO :-

1. Develops result-oriented philosophy: MBO is a result-oriented philosophy. It does not favor management by crisis. Managers are expected to develop specific individual and group goals, develop appropriate action plans, properly allocate resources and establish control standards. It provides opportunities and motivation to staff to develop and make positive contribution in achieving the goals of an Organisation.

2. Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces goals that identify desired/expected results. Goals are made verifiable and measurable which encourage high level of performance. They highlight problem areas and are limited in number. The meeting is of minds between the superior and the subordinates. Participation encourages commitment. This facilitates rapid progress of an Organisation. In brief, formulation of realistic objectives is me benefit of M[BO.

3. Facilitates objective appraisal: NIBO provides a basis for evaluating a person's performance since goals are jointly set by superior and subordinates. The individual is given adequate freedom to appraise his own activities. Individuals are trained to exercise discipline and self control. Management by self-control replaces management by domination in the MBO process. Appraisal becomes more objective and impartial.

4. Raises employee morale: Participative decision-making and two-way communication encourage the subordinate to communicate freely and honestly. Participation, clearer goals and improved communication will go a long way in improving morale of employees.

5. Facilitates effective planning: MBO programmes sharpen the planning process in an Organisation. It compels managers to think of planning by results. Developing action plans, providing resources for goal attainment and discussing and removing obstacles demand careful planning. In brief, MBO provides better management and better results.

6. Acts as motivational force: MBO gives an individual or group, opportunity to use imagination and creativity to accomplish the mission. Managers devote time for planning results. Both appraiser and appraise are committed to the same objective. Since MBO aims at providing clear targets and their order of priority, employees are motivated.

7. Facilitates effective control: Continuous monitoring is an essential feature of MBO. This is useful for achieving better results. Actual performance can be measured against the standards laid down for measurement of performance and deviations are corrected in time. A clear set of verifiable goals provides an outstanding guarantee for exercising better control.

8. Facilitates personal leadership: MBO helps individual manager to develop personal leadership and skills useful for efficient management of activities of a business unit. Such a manager enjoys better chances to climb promotional ladder than a non-MBO type.

Limitations of Management By Objectives MBO :-

1. Time-consuming: MBO is time-consuming process. Objectives, at all levels of the Organisation, are set carefully after considering pros and cons which consumes lot of time. The superiors are required to hold frequent meetings in order to acquaint subordinates with the new system. The formal, periodic progress and final review sessions also consume time.

2. Reward-punishment approach: MBO is pressure-oriented programme. It is based on reward-punishment psychology. It tries to indiscriminately force improvement on all employees. At times, it may penalize the people whose performance remains below the goal. This puts mental pressure on staff. Reward is provided only for superior performance.

3. Increases paper-work: MBO programmes introduce ocean of paper-work such as training manuals, newsletters, instruction booklets, questionnaires, performance data and report into the Organisation. Managers need information feedback, in order to know what is exactly going on in the Organisation. The employees are expected to fill in a number of forms thus increasing paper-work. In the words of Howell, "MBO effectiveness is inversely related to the number of MBO forms.

4. Creates organizational problems: MBO is far from a panacea for all organizational problems. Often MBO creates more problems than it can solve. An incident of tug-of-war is not uncommon. The subordinates try to set the lowest possible targets and superior the highest. When objectives cannot be restricted in number, it leads to obscure priorities and creates a sense of fear among subordinates. Added to this, the programme is used as a 'whip' to control employee performance.

5. Develops conflicting objectives: Sometimes, an individual's goal may come in conflict with those of another e.g., marketing manager's goal for high sales turnover may find no support from the production manager's goal for production with least cost. Under such circumstances, individuals follow paths that are best in their own interest but which are detrimental to the company.

6. Problem of co-ordination: Considerable difficulties may be encountered while coordinating objectives of the Organisation with those of the individual and the department. Managers may face problems of measuring objectives when the objectives are not clear and realistic.

7. Lacks durability: The first few go-around of MBO are motivating. Later it tends to become old hat. The marginal benefits often decrease with each cycle. Moreover, the programme is deceptively simple. New opportunities are lost because individuals adhere too rigidly to established goals.

8. Problems related to goal-setting: MBO can function successfully provided measurable objectives are jointly set and it is agreed upon by all. Problems arise when: (a) verifiable goals are difficult to set (b) goals are inflexible and rigid (c) goals tend to take precedence over the people who use it (d) greater emphasis on quantifiable and easily measurable results instead of important results and (e) over-emphasis on short-term goals at the cost of long-term goals.

9. Lack of appreciation: Lack of appreciation of MBO is observed at different levels of the Organisation. This may be due to the failure of the top management to communicate the philosophy of MBO to entire staff and all departments. Similarly, managers may not delegate adequately to their subordinates or managers may not motivate their subordinates properly. This creates new difficulties in the execution of MBO programme.

Essential Conditions for Successful Execution / Implementation of MBO Or...

Q.How To Make MBO Effective?

1. Support from all: In order that MBO succeeds, it should get support and co-operation from the management. MBO must be tailored to the executive's style of managing. No MBO programme can succeed unless it is fully accepted by the managers. The subordinates should also clearly understand that MBO is the policy of the Organisation and they have to offer cooperation to make it successful. It should be a programme of all and not a programme imposed on them.

2. Acceptance of MBO programme by managers: In order to make MBO programme successful, it is fundamentally important that the managers themselves must mentally accept it as a good or promising programme. Such acceptances will bring about deep involvement of managers. If manages are forced to accept NIBO programme, their involvement will remain superfluous at every stage. The employees will be at the receiving-end. They would mostly accept the lines of action initiated by the managers.

3. Training of managers: Before the introduction of MBO programme, the managers should be given adequate training in MBO philosophy. They must be in a position to integrate the technique with the basic philosophy of the company. It is but important to arrange practice sessions where performance objectives are evaluated and deviations are checked. The managers and subordinates are taught to set realistic goals, because they are going to be held responsible for the results.

4. Organizational commitment: MBO should not be used as a decorative piece. It should be based on active support, involvement and commitment of managers. MBO presents a challenging task to managers. They must shift their capabilities from planning for work to planning for accomplishment of specific goals. Koontz rightly observes, "An effective programme of managing by objective must be woven into an entire pattern and style of managing. It cannot work as a separate technique standing alone."

5. Allocation of adequate time and resources: A well-conceived MBO programme requires three to five years of operation before it provides fruitful results. Managers and subordinates should be so oriented that they do not look forward to MBO for instant solutions. Proper time and resources should be allocated and persons are properly trained in the philosophy of MBO.

6. Provision of uninterrupted information feedback: Superiors and subordinates should have regular information available to them as to how well subordinate's goal performance is progressing. Over and above, regular performance appraisal sessions, counseling and encouragement to subordinates should be given. Superiors who compliment and encourage subordinates with pay rise and promotions provide enough motivation for peak performance.

Variable pay programme

A BRIEF ABOUT VARIABLE PAY

With the IT business environment becoming increasingly competitive, companies are aggressively aiming to derive the maximum from their employees. One of the widely deployed practices among corporates to pump up an employee’s performance is the adoption of the variable pay system. This system largely implies a pattern where the employer divides an employee’s salary into two parts—fixed and variable, whereby the fixed part of the salary is credited to an employee every month and the variable aspect follows as per the goals and targets achieved.

Variable pay is:

not a part of salary not guaranteed

based on individual, group, or organizational performance.

Common purposes of variable pay include:

rewarding individual performance, rewarding group performance (e.g., completing a project, meeting organizational objectives,

reducing costs),

encouraging employees to increase productivity, and

controlling payroll costs.

Common forms of variable pay include:

individual special recognition awards, team or group awards,

lump-sum bonuses,

on-the-spot awards,

group incentive plans, and

stock options or grants.

TYPES OF PLANS FOR VARIABLE PAY SCHEME

Individual-based plans are the most widely used pay-for-performance plans in industry. Of the individual-based plans commonly used, merit pay is by far the most popular; its use is almost universal. Merit pay consists of an increase in base pay, normally given once a year. Supervisors’ ratings of employee performance are typically used to determine the amount of merit pay granted. Once a merit pay

increase is given to an employee, it remains a part of that employee’s base salary for the rest of his or her tenure with the firm.

Team-based pay plans normally reward all team members equally based on group outcomes. These outcomes may be measured objectively or subjectively. The criteria for defining a desirable outcome may be broad or narrow. As is less commonly done in individual-based programs, payments to team members may be made in the form of a cash bonus or in the form of noncash awards such as trips, time off, or luxury items.

Plantwide or company-wide pay-for-performance plans reward all workers in a plant or business unit on the basis of the performance of the entire plant or business unit. Profit and stock prices are generally not meaningful performance measures for a plant or unit because they are the result of the entire corporation’s performance. Most corporations have multiple plants or units, a factor that makes it difficult to attribute financial gains or losses to any single segment of the business. Therefore, the performance indicator most frequently used to distribute rewards at the plant level is plant or business unit efficiency, which is normally measured in terms of labor or material cost savings compared to an earlier period or another plant or business unit.

The broadest type of variable-pay incentive programs—company-wide pay-for-performance plans—reward employees on the basis of the entire corporation’s performance. The most widely used program of this kind is profit sharing. Profit sharing is a company-wide pay-for-performance plan that uses a formula to allocate a portion of declared profits to employees. Typically, profit distributions under a profit-sharing plan are used to fund employee retirement plans.

INTRODUCTION

Skill-based pay (SBP) systems are like snowflakes -- they share some common characteristics, but each one is unique. We will explore the foundations which underlie skill-based pay and many of the options which are available.

Designing skill-based pay is not something which can be done by copying someone else's system. Every company has its own unique products, people, and work processes. What works in one organization may or may not work in another. Much can be learned by studying what has succeeded or failed with other companies, but a sound understanding of the many variables and principles involved in SBP is essential to an SBP design.

This book is the result of my experience with SBP design. It also includes information from researching the literature on skill-based pay. Companies are doing SBP and are talking about it. However, little has been committed to a practical written form which can guide would-be designers.

SBP, like many other workplace innovations, can be subject to the "let's-do-it-ourselves" approach. Organizations must do SBP themselves, but when they do it alone without knowledgeable assistance, they run the risk of repeating mistakes they could have avoided. Getting competent outside assistance is one protection from this problem.

I hope this book provides an inexpensive way to provide a starting point for organizations interested in SBP. It certainly is not sufficient to guide an entire design. There are simply too many variables to explore each one fully, or to identify all the possible combinations which could exist. This book can identify aspects of SBP to be considered in a design and suggest some possible approaches.

Skill-based pay has a purpose -- to promote learning. It is not the only way to compensate employees and it is not a system for all situations nor one which lasts forever. It is very useful in promoting new learning. This accounts for its popularity in start-up organizations and its association with organization redesigns. SBP systems mature as the majority of participants either reach the limits of the system or coast to a stop somewhere along its path. Paying for learning may eventually give way to requests to pay for performance based upon team or total organization results. If higher skills create higher performance, this is a foreseeable development.

Developing a skill-based pay system is not a linear process. The system requires that many items be balanced. Very often what looks promising as a way to handle one part of the system becomes impractical when meshed with other pieces. Original ideas need to be reworked again and again. Designers of SBP can expect to travel the same territory several times before a system takes final shape.

The best systems are deceptively simple. That simplicity is usually the result of untangling a great many hidden complexities. Like snowflakes, a good SBP system is a wonder to behold, but it's hard to tell what went into creating it. This book can help melt away some of that mystery.

Most skill-based pay systems have been instituted in manufacturing and processing plants. SBP is commonly found with team systems or other participative settings. More is known about these types of installations. For that reason, those environments will be the primary focus of examples and discussion in this guide. Many of the ideas and cautions for those systems can be extended into other work environments -- see the section on "SBP in the Office."

Skill-based pay is an incentive to learn for the benefit of the individual and the organization. For many people, learning brings an intrinsic satisfaction from mastering new skills. Rewarding learning monetarily can support that intrinsic motivation with extrinsic reinforcement. However, care should be taken that all learning is not equated with pay.

Employees should expect to learn as part of living. Administered incorrectly, SBP can encourage people to expect all learning will be compensated -- "You want me to learn it, pay me for it." There is a delicate balance between encouraging and recognizing learning with pay and creating a tit-for-tat mentality in an organization. Keeping learning broad and expectations high can help avoid the problem. Trying to assess minute skills and provide pay in small increments may contribute to the problem.

 

LEARNING THE LANGUAGE OF SBP

In view of the differing use of similar terms, the following definitions are ones we will adopt.

Skill A skill is the knowledge and ability required to competently perform a task. Tasks may require multiple skills. Reading, math computation, manual dexterity etc. are basic skills. Blueprint interpretation, electronic systems diagnosis are higher order skills.    

Task A task is a single activity performed as part of a larger job. Assembling one component on a product or lubricating one part of a piece of equipment would be a task. Tasks are

the basic building blocks of work.    

Skill Block Skill blocks consist of two basic types. Type I combines a set of tasks which will keep one person productively working for an entire shift (e.g., production line station). Type II groups together a body of knowledge (expertise) which represents a significant learning step (e.g., maintenance apprenticeship program steps).  

Progression A progression is a series of skill blocks which are related to each other to form a complete body of learning. A progression contains skills/tasks which the employee can learn, retain, and continue to perform proficiently.  

Rotation A rotation is the movement among skill blocks and within a progression. Rotations are part of cross-training typical for Type I skill blocks.  

Tier A tier contains a group of equivalent progressions with the same beginning and ending pay rates. Within a tier, progressions will usually have the same number of skill blocks and the same time required to complete the progression.  

Job Job is a general term used to describe what a person does during his time at work. A single task may be referred to as a job. While a person is performing in one skill block, that may be referred to as his job. When a person performs all blocks in his progression, the progression may also be referred to as his job.  

Skill-Based Pay SBP is receiving pay based upon acquired skills which have been competently demonstrated, and are consistently used at work. It is also referred to as "pay for skills" (PFS).  

Pay-for-Knowledge PFK is receiving pay based upon completion (and measurement) of required learning.

"Skill-based pay" and "pay-for-knowledge" are sometimes used as interchangeable terms.  

Job Based Pay Job based pay is receiving pay based upon the job (task) the person is presently performing. Each job has its own rate of pay.  

Seniority Based Pay Seniority based pay is receiving pay based upon time with the firm or in a position.    

Performance Pay Performance pay is receiving pay based upon an evaluation of Merit the of successful execution of job functions and/or results attained. Performance pay may be for individuals or groups and may be given as a permanent wage increase or as a one-time bonus.    

Job Evaluation Job evaluation determines the relative worth of a position as compared to other internal and external positions. Common jobs are matched to similar ones in other companies and labor market prices are used to set pay rates.

Many of these compensation devices can be combined with each other to pay a single person or to create interlocking compensation systems for different groups within a larger organization.

The major components of a skill-based pay structure include: skill blocks, progressions, and tiers. We'll examine each of these more closely before we proceed.

Skill blocks are the distinct, major units of learning for which an employee earns additional compensation. A block may contain a variety of individual skills within it. Each of these skills may be learned and evaluated separately, but pay is earned only when the total set of skills for the block is mastered.

ADVANTAGES

SBP is adopted because it provides advantages over other types of pay systems. Intended advantages are related both to business performance and employee morale.

Intended advantages include:

a) increased ability to focus personnel on problem areas and avoid idle time waiting for problems to be fixed by others;

b) flexibility in position coverage enabling work teams to cover for absent members for short periods of time;

c) faster adaptation to changes in technology and product mix due to greater skill base;

d) improved participation in problem solving and other participatory activities because of wider perspective on total work flow;

e) lower overall staffing levels caused by incorporation of specialized functions (e.g., maintenance, quality, supervision) into team skill requirements;

f) higher commitment to organizational goals due to broader perspective;

g) increased self-esteem from development of personal talents;

h) improved self-managing abilities;

i) higher minimum hiring qualifications since employees are required to progress through a multiskilled job;

j) overall increases in total productivity.

Organizations using skill-based pay report gains in flexibility and versatility along with enhanced employee motivation and team effectiveness. Accompanying this is an increased use of technology and increased output per hour. About two-thirds of firms in the ACA study reported moderate success in reducing overall compensation costs.

Systems which succeed have good local management support and often originate in the local operation as opposed to being mandated by the corporation. They place emphasis on employee growth and development and honor a commitment to thorough training.

DISADVANTAGES

Skill-based pay also brings with it other requirements sometimes perceived as disadvantages. As disadvantages they are unintended, but as requirements, some are unavoidable.

a) higher individual pay rates: higher skill levels may command higher marketplace wages, and certainly do in the minds of employees; these can be offset by lower total unit costs due to reduced staffing and/or higher total productivity;

b) training investment in both time and money for: learners, instructors, program design, materials, administration, foregone production, errors due to multiple learning curves;

c) skill assessment difficulties including time to conduct assessments, training and knowledge of assessors, poor assessment methods, inadequate peer input, speed of evaluation;

d) difficulty in identifying comparable jobs and wage rates with other employers;

e) administrative complexity and time requirements to track training and evaluation dates and completions;

f) managing rotations within work groups to provide cross-training and to keep skills refreshed;

g) training investment required in the form of overtime or additional employees to provide time for training and learning;

h) acquiring learning to increase pay without concern for true competency;

i) personal reluctance to learn;

j) replacing outdated skills with new ones once original learning progression has been fulfilled and pay earned;

k) "topping out" at the highest pay rate with no more increases;

l) employees' desire for sharing in rewards of high organizational performance created (in part) by increased employee skills.

WHY DO IT? WHY NOT?

Adoption of skill-based pay may be done for a variety of reasons. The system stands the greatest chance for success if it is founded on solid business needs. SBP should be designed and measured to demonstrate that it reduces total organizational costs. If it does not do this, then it will eventually be replaced by a system that is perceived to do so.

A caution is in order. Skill-based pay may likely result in individual pay rates that are higher than pay for similar positions in other firms not using SBP. Organizations using SBP have reported the following rates:

a) starting rates at the 63rd percentile compared to local rates,

b) average rates at the 75th percentile compared to local rates and at the 65th percentile for their industries,

c) top rates at the 90th percentile compared to local rates and at the 80th relative to their industries.

This can be deceptive. The cost of labor is a function of the wages paid, the level of staffing, and the productivity of the workforce. SBP can more than offset higher wage rates by higher productivity.

It has not been clearly demonstrated that overall staffing levels are always significantly changed (either up or down) by using SBP. It has been difficult to document productivity and staffing improvements because finding comparable SBP and non-SBP operations is difficult. Some organizations have measured reductions in staffing of 10% due to removal of backup "utility" workers. Others have measured 30% productivity gains and 30% cost reductions in work systems using SBP as a component.

The key relationship lies between SBP systems and total cost per unit, not just labor costs. Greater efficiencies, quicker problem solving, and less wasted time and material can create significant gains in other cost categories to offset higher labor rates. This is one intent of SBP, not a guarantee.

The intent of SBP is to provide an incentive for employees to learn and apply new skills to increase organizational productivity and profitability while fostering high commitment to organizational goals. With a good system, everybody wins!

Why not use skill-based pay?

Skill-based pay adopted because "everyone is doing it" has a marginal chance for survival. Since pay is an outlay of money by the company, this rationale will not support a system once competitive cost pressures arise.

SBP adopted because it is "good for the employees" or will cause "higher morale" is well intended. However, this logic will not sustain a system that does not demonstrate its business value. In addition, applying SBP to some groups and not others causes resentment by those not included

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