Laura Heijnen – Organisational Psychology: Performance at Work
Problem 5. Money, money, money…
What is the meaning of good salary?
What factors influence the amount of salary?
What are economic explanations for the salary systems?
Does money result in better performance?
Which reward systems are there, and which is most effective?
What are theories on rewards?
ü Jenkins, Mitra, Gupta, & Shaw (1998) – Are financial incentives related to performance? A meta-analytic
review of empirical research
Introduction
- Financial incentives long thought to affect employee motivation + performance. BUT:
systematic examinations of relationship (because complex studies?). Estimate of
overall association of financial incentives + performance is necessarily affected by
multitude of factors + no baseline info.
- Aim study: develop baseline info, to ascertain whether + how strongly financial
incentives are related to performance quantity + quality. Meta-analysis/quantitative.
- Financial incentives improve performance: financial incentives are (most) potent
influences on employee performance + other desired behaviours.
o They’re not ineffective but too effective + express symbolic meaning (e.g.,
recognition, status) beyond monetary value: they meet humans needs + serve
functions.
o Employers find financial incentives useful in matching differences in
employees’ marginal products to differences in wage rates à reduces costs
associated with dysfunctional employee behaviour.
- Financial incentives doesn’t improve performance: detrimental effects of money on
intrinsic motivation à financial incentives control behaviour externally, reducing self-
determination + intrinsic motivation.
o Also jeopardise relationship between supervisors + subordinates, and reduce
risk-taking behaviours.
o Rewards encourage people to focus narrowly on task, to do it as quickly as
possible + to take few risk.
o Money is not motivator: may reduce job dissatisfaction, but don’t motivate.
- 5 primary theoretical frameworks addressing relationship money + performance:
o Expectancy theory: tying financial incentives to performance increases extrinsic
motivation to expend effort + consequently performance.
o Reinforcement theory: tying money to performance reinforces performance.
o Goal-setting theory: financial incentives increase acceptance of difficult
performance goals, enhancing performance.
o Cognitive evaluation theory: performance-contingent financial incentives erode
intrinsic motivation, thereby diminishing task performance (contrary to goal-
setting theory).
o Equity theory: people are motivated to reduce inequity, but no specific
predictions (although deviations from fairness may erode association of
financial incentives to performance).
à Both theory + practice highlight ambiguity in how financial incentives affect
performance. Spare empirical research to resolve issue.
1
, Laura Heijnen – Organisational Psychology: Performance at Work
- Research by Jenkins showed positive effects of financial incentives on performance
quantity, but no similar effect found for quantity. Other studies also support positive
relationship between financial incentives + task performance. BUT: all qualitative
studies à control for potential moderators: setting (laboratory or not), task type +
theoretical framework.
Method
- Finding empirical studies through computerised database services + manual searches
in few journals à 39 studies used.
- Inclusion criteria: 1960-1996, empirical, hard performance measures, focus on
individual, have control group, focus on monetary incentives + use adults.
- Extrinsic/boring/non-appealing + intrinsic/exciting/appealing = intertwined terms.
Results
- 30.3% of observed variance is explained by sampling + measurement error.
- Relationship of financial incentives + performance quality (.08) isn’t significant.
- Setting consistently moderated financial incentives-performance relationships.
o Laboratory experiment = .24.
o Experimental simulation = .56.
o Field experiment = .48.
- Task type doesn’t moderate relationship between financial incentives + performance,
because all 4 criteria were met marginally at best (.34 + .35).
- Theoretical framework:
o Goal setting = .23.
o Expectancy-reinforcement = .52.
o Cognitive evaluation = .22.
à Settings were likely to vary for expectancy-reinforcement subgroup but not for
other 2. Setting may have caused larger observed variance within subgroup (=
moderator). Relation reward + performance.
- Covariation financial incentives with performance quality not significantly different
from zero, but with performance quantity is (.34) à quality stays same, but more
quantity = positive effect.
Discussion
- Limitations:
o Stringent inclusion criteria used, which could limit representativeness of
results. BUT: also enhanced quality of interpretability of data.
o Dissertations + unpublished works not included à representative? BUT: had to
do it, because most financial incentive studies were embedded in different
contexts, making identification challenge. BUT: still valid sample.
o Reliability estimates not available most studies, BUT: measurement error
accounts for a small fraction of artefactual variance in meta-analytic research.
o Made subjective decisions, which is common in meta-analyses.
o Couldn’t explore moderating effects of incentive size: laboratory studies
usually use small incentives, while large incentives probably influence
performance more.
2
, Laura Heijnen – Organisational Psychology: Performance at Work
o Extent to which interdependences among employees may affect
performance/size of incentive also not explored; could change the
relationship.
o No unpublished articles included.
- Conclusions: financial incentives are related to performance also found in this study,
with effect size of .34 à better than other theoretical frameworks.
o Financial incentives may jeopardise intrinsic motivation, but correlation with
performance quantity is positive rather than negative.
o If money isn’t important, financial incentives should show no systematic
relationship with performance à not true, so money is important.
o Confirms that with respect to quantity of performance, positive incentive
effects on performance can be found in all settings. Effect sizes ranging from
.24 (laboratory experiments) to .56 (experimental simulations), significant for
all settings à experimental simulations combine realism of field settings with
controls of laboratory settings, offering ideal arena to investigate financial
incentives dynamic. Laboratories may provide lower bound estimates of
relevant effects, because it’s virtually impossible to replicate complex field
phenomena (different meaning money in different environments).
à More extrinsic motivation, intrinsic stayed same à positive effect.
o Theoretical framework affected strength of observed relationships between
financial incentives + performance à guides design of research, affecting
salience of different variables for subjects-respondents (e.g., expectancy +
reinforcement theories tie between performance + rewards; goal-setting +
cognitive evaluation theories don’t focus so much on performance-reward
connected, but rather on goals/tasks à further research: if theoretical
framework moderates effect size for financial incentives, it might also
moderate effect size for other predictors.
à Paradigm affects relationship à negative effect.
o Task type didn’t moderate strength relationship between financial incentives +
performance quantity: if financial incentives erode intrinsic motivation (IM),
then effects of financial incentives should have been stronger for extrinsic than
for intrinsic tasks à perhaps valid IM scale should’ve been used + approaches
used in earlier research might have biased results in one direction.
- Results offer indirect support for conclusions regarding rewards + intrinsic motivation.
Empirical evidence on relationship between different types of rewards + different
operationalisations of intrinsic motivation.
- Rewards erode intrinsic motivation under extremely circumscribed conditions à may
explain why task type didn’t emerge as moderator in analysis.
- Study dispels together with previous research the myth that financial incentives erode
intrinsic motivations.
à Study underscores generalizable positive relationship between financial incentives +
performance. Emphasises wisdom of designing incentive systems carefully + utility of
including financial incentives as integral components in theoretical frameworks of
organisational behaviour and management of HR.
3
Problem 5. Money, money, money…
What is the meaning of good salary?
What factors influence the amount of salary?
What are economic explanations for the salary systems?
Does money result in better performance?
Which reward systems are there, and which is most effective?
What are theories on rewards?
ü Jenkins, Mitra, Gupta, & Shaw (1998) – Are financial incentives related to performance? A meta-analytic
review of empirical research
Introduction
- Financial incentives long thought to affect employee motivation + performance. BUT:
systematic examinations of relationship (because complex studies?). Estimate of
overall association of financial incentives + performance is necessarily affected by
multitude of factors + no baseline info.
- Aim study: develop baseline info, to ascertain whether + how strongly financial
incentives are related to performance quantity + quality. Meta-analysis/quantitative.
- Financial incentives improve performance: financial incentives are (most) potent
influences on employee performance + other desired behaviours.
o They’re not ineffective but too effective + express symbolic meaning (e.g.,
recognition, status) beyond monetary value: they meet humans needs + serve
functions.
o Employers find financial incentives useful in matching differences in
employees’ marginal products to differences in wage rates à reduces costs
associated with dysfunctional employee behaviour.
- Financial incentives doesn’t improve performance: detrimental effects of money on
intrinsic motivation à financial incentives control behaviour externally, reducing self-
determination + intrinsic motivation.
o Also jeopardise relationship between supervisors + subordinates, and reduce
risk-taking behaviours.
o Rewards encourage people to focus narrowly on task, to do it as quickly as
possible + to take few risk.
o Money is not motivator: may reduce job dissatisfaction, but don’t motivate.
- 5 primary theoretical frameworks addressing relationship money + performance:
o Expectancy theory: tying financial incentives to performance increases extrinsic
motivation to expend effort + consequently performance.
o Reinforcement theory: tying money to performance reinforces performance.
o Goal-setting theory: financial incentives increase acceptance of difficult
performance goals, enhancing performance.
o Cognitive evaluation theory: performance-contingent financial incentives erode
intrinsic motivation, thereby diminishing task performance (contrary to goal-
setting theory).
o Equity theory: people are motivated to reduce inequity, but no specific
predictions (although deviations from fairness may erode association of
financial incentives to performance).
à Both theory + practice highlight ambiguity in how financial incentives affect
performance. Spare empirical research to resolve issue.
1
, Laura Heijnen – Organisational Psychology: Performance at Work
- Research by Jenkins showed positive effects of financial incentives on performance
quantity, but no similar effect found for quantity. Other studies also support positive
relationship between financial incentives + task performance. BUT: all qualitative
studies à control for potential moderators: setting (laboratory or not), task type +
theoretical framework.
Method
- Finding empirical studies through computerised database services + manual searches
in few journals à 39 studies used.
- Inclusion criteria: 1960-1996, empirical, hard performance measures, focus on
individual, have control group, focus on monetary incentives + use adults.
- Extrinsic/boring/non-appealing + intrinsic/exciting/appealing = intertwined terms.
Results
- 30.3% of observed variance is explained by sampling + measurement error.
- Relationship of financial incentives + performance quality (.08) isn’t significant.
- Setting consistently moderated financial incentives-performance relationships.
o Laboratory experiment = .24.
o Experimental simulation = .56.
o Field experiment = .48.
- Task type doesn’t moderate relationship between financial incentives + performance,
because all 4 criteria were met marginally at best (.34 + .35).
- Theoretical framework:
o Goal setting = .23.
o Expectancy-reinforcement = .52.
o Cognitive evaluation = .22.
à Settings were likely to vary for expectancy-reinforcement subgroup but not for
other 2. Setting may have caused larger observed variance within subgroup (=
moderator). Relation reward + performance.
- Covariation financial incentives with performance quality not significantly different
from zero, but with performance quantity is (.34) à quality stays same, but more
quantity = positive effect.
Discussion
- Limitations:
o Stringent inclusion criteria used, which could limit representativeness of
results. BUT: also enhanced quality of interpretability of data.
o Dissertations + unpublished works not included à representative? BUT: had to
do it, because most financial incentive studies were embedded in different
contexts, making identification challenge. BUT: still valid sample.
o Reliability estimates not available most studies, BUT: measurement error
accounts for a small fraction of artefactual variance in meta-analytic research.
o Made subjective decisions, which is common in meta-analyses.
o Couldn’t explore moderating effects of incentive size: laboratory studies
usually use small incentives, while large incentives probably influence
performance more.
2
, Laura Heijnen – Organisational Psychology: Performance at Work
o Extent to which interdependences among employees may affect
performance/size of incentive also not explored; could change the
relationship.
o No unpublished articles included.
- Conclusions: financial incentives are related to performance also found in this study,
with effect size of .34 à better than other theoretical frameworks.
o Financial incentives may jeopardise intrinsic motivation, but correlation with
performance quantity is positive rather than negative.
o If money isn’t important, financial incentives should show no systematic
relationship with performance à not true, so money is important.
o Confirms that with respect to quantity of performance, positive incentive
effects on performance can be found in all settings. Effect sizes ranging from
.24 (laboratory experiments) to .56 (experimental simulations), significant for
all settings à experimental simulations combine realism of field settings with
controls of laboratory settings, offering ideal arena to investigate financial
incentives dynamic. Laboratories may provide lower bound estimates of
relevant effects, because it’s virtually impossible to replicate complex field
phenomena (different meaning money in different environments).
à More extrinsic motivation, intrinsic stayed same à positive effect.
o Theoretical framework affected strength of observed relationships between
financial incentives + performance à guides design of research, affecting
salience of different variables for subjects-respondents (e.g., expectancy +
reinforcement theories tie between performance + rewards; goal-setting +
cognitive evaluation theories don’t focus so much on performance-reward
connected, but rather on goals/tasks à further research: if theoretical
framework moderates effect size for financial incentives, it might also
moderate effect size for other predictors.
à Paradigm affects relationship à negative effect.
o Task type didn’t moderate strength relationship between financial incentives +
performance quantity: if financial incentives erode intrinsic motivation (IM),
then effects of financial incentives should have been stronger for extrinsic than
for intrinsic tasks à perhaps valid IM scale should’ve been used + approaches
used in earlier research might have biased results in one direction.
- Results offer indirect support for conclusions regarding rewards + intrinsic motivation.
Empirical evidence on relationship between different types of rewards + different
operationalisations of intrinsic motivation.
- Rewards erode intrinsic motivation under extremely circumscribed conditions à may
explain why task type didn’t emerge as moderator in analysis.
- Study dispels together with previous research the myth that financial incentives erode
intrinsic motivations.
à Study underscores generalizable positive relationship between financial incentives +
performance. Emphasises wisdom of designing incentive systems carefully + utility of
including financial incentives as integral components in theoretical frameworks of
organisational behaviour and management of HR.
3
