The Effect of Incentive on the Employee Performance

 

In today’s world, the competition between the companies are highly competitive, not only the company should prepare the best market strategy to improve the company performance, but each company too has to come up with the way to keep their employee motivation on the highest level so that the company as a whole can perform well within the competition.

Upon all the options available to motivate the employee, one that we’re going to discuss within this essay is the financial incentive that has been widely used by all companies today. Financial Incentive is the form of incentive or award given to the employee that based on the employee performance, in which higher the performance of the employee will increase the incentive given to the employee, this was meant to keep the employee spirit and motivation up. In this essay, we try to see how this incentive can affect the performance of the company and whether this incentive is always effective on affecting the performance of the employee

Theoretical Framework

The logic behind the use of this financial incentive is the reinforcement theory, in which focused on the relationship between the target behavior (performance) and the motivational tool (pay for performance), that way, the higher the value of the motivational tool is expected to improve the target behavior too.[1] Reinforcement theory of motivation was introduced by BF Skinner. Skinner believes that individual’s behavior is a function of its consequences. It is based on “law of effect”, i.e., individual’s behavior with positive consequences tends to be repeated. This theory focuses totally on what happens to an individual when he takes some action. Thus, according to Skinner, the external environment of the organization must be designed effectively and positively so as to motivate the employee. [2]

The contemporary motivation theories also pointed out that employee must be motivated both by internal factors and external factors, it also pointed out that internal motivation that one received from a job well done, tend to have long lasting effect on employee motivation, and financial incentive is one of the externals factors. [3]  The primary objectives of the financial incentive according to Bay Jordan are: (1) to give the employee some control over their income as the employee’s income will be based on their performance, (2) to create a greater sense of responsibility of the job on the part of the employee, and (3) stimulating the employee to work harder than what he/she usually does. [4]

The Effect of Incentives on Performance

One of the researches made by Locke and Braver has been trying to see the effect of incentive on the employee psychology by having the employee to work on some task in which there is punishment and reward for it, and by checking their heart rate while doing it by using Behavioral Inhibition/Activation System (BIS/BAS). Their research concluded that, BAS assesses individual sensitivity to reward and was significantly positively correlated with maximum heart acceleration in response to high cash rewards and suggests that incentive can produce generalized performance benefit. [5]

Financial Incentive in some cases works on improving the employee performance by affecting the employee perspective on the job and achievement itself, in the case of PT.Telkom as one of the biggest telecommunication companies in Indonesia with more than one million customers in the country  for example, the financial incentive has been significantly changed the employee attitude toward the job itself, PT. Telkom has been using several types of incentives like: (1) Individual Incentive like employee premium, employee bonuses, best leader, best manager, best staff, best healthiest family, best innovators and (2) group incentive like excellent achievers, best cash collectors, most disciplined units, rocky of the year, best of the best, and the last best innovators. The incentive given by PT. Telkom to motivate their employee has been working successfully as it has positively affected the employee perspective toward the Job itself. The questionnaire on the employee perspective on several questions like; (1) whether the incentive motivates the employee, (2) and whether the incentive affect the employee discipline, and etc has shown that the incentive is indeed positively affecting the employee performance, 100% out of 30 the employee answered that the incentive is motivating them to work better, and all of them answered that the incentive has indeed push them to be more discipline on their work ethic. In the research made by Deadrick and Scott also shown that the Merit Pay Program has been effectively reducing absenteeism and tardiness of the employee by respectively 35%.[6] The researcher on the case of PT. Telkom concluded that incentive given to the employee has a positive correlation on the performance of the employee; this conclusion was based on the Rank Spearman analytical tools used by the researcher that shows that 40, 96% of improvement of the employee performance is affected by the incentive.

But there’s certain case in public sector in which the incentive needs certain requirement to be effectively working, and there’s some evidence that sometimes certain type of incentive doesn’t really fit in the public sector just yet. The Research done by Perry, Mesh, and Paarlberg has offered three propositions regarding the incentive on the public sector.[7] First, Financial incentives improve task performance moderately to significantly, but their  effectiveness is dependent on organizational conditions, in which that the incentive in the public sector can be effectively run only if they have the suitable organizational behavior. Second, Individual financial incentives are ineffective in traditional public sector settings, that individual incentive only give a little significant boost on employee performance, this was caused mainly because the lack of adequate funding for merit pay and an absence of the organizational and managerial characteristics that are necessary to make pay for performance work in traditional government settings. Third, Group incentive systems are consistently effective, but they are not well tested in public sector settings, where measures of organizational performance often are uncertain, this argument was backed up by the research done by Burgess and Propper, that in the group incentive type, team size needs to be small, and preferably not dispersed over many sites to make it effective. The connection between effort and output needs to be as clear and well-measured as possible. But to do that, there is price to pay, because precise measurement may be very expensive if conducted for many small teams.[8]

Palmer also mentioned in his article that in some cases incentive will not effectively working, Palmer mentioned several case in which the incentive will not work well, and they are; (1) the employee does not have the capacity to perform the desired objective , (2) the employee does not have the knowledge or skill to perform, (3) the employee does not have the needed materials, tools, or resources , (4) when the incentive scheme is so complicated that an employee cannot determine the link between their performance and obtainment of the reward.[9]

All the evidence shown above shows us that the incentives can affect and boost the employee performance and eventually the company performance, but there is also the evidence that the incentive can be proven less significant and even backfiring if it poorly designed. So that it is important for everybody to take attention toward the organizational behavior and the design of the incentive itself to make sure that the incentive positively affect the employee performance and therefore boost the company productivity.

Preferences;

Burgess, Simon, and Carol Propper. “Incentive in Public Sector: Evidence from a Government Agency.” Centre for Economic Policy Research, Mar. 2004. Web. 2 Jan. 2012. <http://www.cepr.org/meets/wkcn/3/3521/papers/burgess.pdf&gt;.

Deadrick, Diana L., and K. Dow Scott. “Employee Incentive In Public Sector: A National Survey of Urban Mass Transportation Authorities.” Performance Development International Inc. Web. 1 Jan. 2012. <http://www.pdii.net/docs/24_Employee_Incentives_In_Public_Sector_National_Survey_Urban_Mass_Transit_Authorities.pdf&gt;.

Jordan, Bay. “Employee Incentive Programs: How To Get Them Right.” Team Technology: Online Business Resources. Web. 30 Dec. 2011. <http://www.teamtechnology.co.uk/employee-incentive-programs.html&gt;.

Locke, Hannah S., and Todd S. Braver. “Effects on Incentive Type, Velance, and Intensity on Physicological and Performance.” Cognitive Control and Psychopathology (CCP) Laboratory. Washington University St. Louis, 08 May 2007. Web. 2 Jan. 2012. <http://ccpweb.wustl.edu/pdfs/Lockeabstract.pdf&gt;.

Palmer, W. “Incentives & Disincentives: Will They Affect Performance?” Retail Notes: Loss Prevention & Assets Protection. 7 Apr. 2007. Web. 2 Jan. 2012. <http://retailnotes.wordpress.com/2010/04/07/incentives-disincentives-will-they-affect-performance/&gt;.

Perry, James L., Debra Mesch, and Laurie Paarlberg. “Motivating Employee in New Governance Era: The Performance Paradigm Revisited.” Huazhong University of Science and Technology, Sept. 2009. Web. 30 Dec. 2011. <http://spa.hust.edu.cn/2008/uploadfile/2009-9/20090910193944679.pdf&gt;.

“Reinforcement Theory of Motivation.” Management Study Guide – Free Training Guide for Students and Entrepreneurs. Management Study Guide. Web. 1 Jan. 2012. <http://managementstudyguide.com/reinforcement-theory-motivation.htm&gt;.

Webster, Amanda. “Do Incentive Plans Improve Performance? | EHow.com.” EHow | How to Videos, Articles & More – Discover the Expert in You. | EHow.com. 11 Mar. 2011. Web. 04 Jan. 2012. <http://www.ehow.com/info_8050381_do-incentive-plans-improve-performance.html&gt;.


[1] James L. Perry, Debra Mesch, and Laurie Paarlberg, “Motivating Employee in New Governance Era: The Performance Paradigm Revisited”, accessed December 30, 2011, http://spa.hust.edu.cn/2008/uploadfile/2009-9/20090910193944679.pdf

[2] Management Study Guide, “Reinforcement Theory of Motivation” , accessed January 1, 2012, http://managementstudyguide.com/reinforcement-theory-motivation.htm

[3] Amanda Webster, “Do Incentive Plan Improve Performance”, accessed December 31, 2011,  http://www.ehow.com/info_8050381_do-incentive-plans-improve-performance.html

[4] Bay Jordan, “Improving Morale and Organisational Performance”, accessed December 30, 2011,  http://www.teamtechnology.co.uk/employee-incentive-programs.html

[5] Hannah S. Locke, and Todd S. Braver , “Effects on Incentive Type, Velance, and Intensity on Physicological and Performance” , accessed January 2, 2011, http://ccpweb.wustl.edu/pdfs/Lockeabstract.pdf

[6]Diana L. Deadrick, and K. Dow Scott, “Employee Incentive In Public Sector: A National Survey of Urban Mass Transportation Authorities” , accessed Janury 1, 2012,  http://www.pdii.net/docs/24_Employee_Incentives_In_Public_Sector_National_Survey_Urban_Mass_Transit_Authorities.pdf

[7] James L. Perry, Debra Mesch, and Laurie Paarlberg, “Motivating Employee in New Governance Era: The Performance Paradigm Revisited”, accessed December 30, 2011, http://spa.hust.edu.cn/2008/uploadfile/2009-9/20090910193944679.pdf

[8]Simon Burgess, and Carol Propper, “Incentive in Public Sector: Evidence from a Government Agency”, acessed Janury 2, 2011,  http://www.cepr.org/meets/wkcn/3/3521/papers/burgess.pdf

[9]W. Palmer, “Incentive and Disincentive: Will They Affect Performance?” , accessed January 2, 2012 http://retailnotes.wordpress.com/2010/04/07/incentives-disincentives-will-they-affect-performance/

 

Bara E. Brahmantika ‘Il Grande Statista”

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