Bonus Linked with Motivation

11:15 PM Amer Bekic 0 Comments

As a means of increasing motivation, bonuses play a significant role in industry. Bonuses are essentially payments that vary with the performance of an individual or group and can be applied in many different ways to produce various responses and outcomes for both the employer and employee. In this essay, we will look at the theories behind Pay for Performance (PFP), the magnitude of payments (Reactive and Proactive), the delivery of payments (Merit Pay vs Bonus pay) and also the timing of payments (upfront or post performance). After reviewing the literature we will then look at how this can be applied specifically to the dental practice in order to shape the best possible outcome for the business.

Pay for Performance (PFP)

PFP is where payment varies with some measure of individual or group performance and as discussed later, can be in the form of either merit pay or bonus pay. According to Nyberg et al, 2013, PFP can lead to higher effort levels by workers than would be the case under non-contingent reward systems (Kahn & Sherer, 1990). According to Lawler, 1973 contingent pay systems can lead workers to anticipate that hard work done today will be rewarded later, making future expectations influence the present-day behaviour of workers. Business professor Victor H. Vroom 1964 recognised this influence, which led to the theory of expectancy of motivation. In order to perform motivation the expectancy theory suggests the function of three factors (Park & Sturman 2009).

1) Instrumentality: ‘the perceived likelihood that the desired performance will be rewarded’.
 2) Expectancy: ‘ the perceived probability of an action or effort will result in the desired performance’.
 3) Valence: ‘ the perceived value of reward’.

Vroom 1964, argued that employees will act on their belief that performance will be rewarded by providing high levels of effort. However, where merit pay or bonus pay, is not commensurate with performance, instrumentality suffers and future employee’s effort will be lower (Kahn & Sherer, 1990). As a result, the magnitude of such payments and how they are derived, either proactively or reactively, must now be considered.

Reactive vs. Proactive Bonus

Reactive bonus is where performance is not recognized on the basis of particular metrics, but rather at the discretion of the manager (Wang, 2004). Seen as a traditional form of bonus, the manager will usually decide on an individual’s bonus based on a pool of money the owner has deemed available for distribution at the end of the year, after all the work is done.

Proactive bonuses alternatively, establish goals and outline a level of reward for a corresponding level of performance, making the employee fully aware of what he must do to obtain the specified incentive.

According to Wang, 2004, a reactive bonus system is not as effective compared with proactive bonus schemes. Proactive bonuses can increase accountability, establish clear expectations and act as an incentive plan to reinforce job functions of the firm, which all correspond to employee’s performance (Wang, 2004). To be implemented effectively however, the bonus system must be easily understood and transparent enough so employees can calculate their own bonus payment. If the information about the bonus is unavailable to staff, this might lead employees to believe that bonuses are capricious and based on something other than their performance (Wong 2004)

Also argued by Locke et al 1981 is the idea that feedback is an essential element of goal process, which is additionally supported by Nisar (2006), stating it is necessary to share information between different layers of hierarchy in order to obtain the desired outcome.

Conversely, disadvantages highlighted by Nisar (2006) for proactive bonuses warned unlike reactive bonuses, if employees are purely target driven, for example with only production output, they might be tempted to manipulate the system or increase their production rate at the expense of quality or customer satisfaction. Helping to avoid this however, by applying multifaceted bonus schemes incorporating measures of other vital elements such as human resources measures of attendance, customer service, quality safety and teamwork can induce employees to exert effort in the many other areas important for production (Nisar, 2006).

Unlike reactive bonuses, Kahn & Sherer, 1990 also outlined the disadvantage that employees can see the proactive bonus as pay rather than an actual bonus, thus reducing its effect.

In a changing market, proactive schemes can also cause problems when ensuring business flexibility and upholding promises. As reported by Wang 2004, if the bonus is eliminated or continually changed due to inequities or unexpected results, employees may become disgruntled and resign. Helping to protect the employer however, proactive bonuses during downturns in the market or production will understandably result in smaller bonuses having to be paid out.