How a variable reward can stimulate employee and firm performance in a back-office/service environment.
Maurits van den Eijkel
Student identification number: 10640908 Thesis supervisor: M. de Haas
University of Amsterdam
Abstract
This case study examined the possible incentive effect of a variable reward on employee and firm performance in a back-office/service oriented environment of an individual company. The main goal of this research is to examine the incentive effect of a performance related variable reward and to investigate the predictions of the
self-determination theory and the agency theory. A qualitative approach with both semi-structured interviews and a data analysis of the performance numbers from the company were used. These measures were used to gather insights on employee and firm performance both before and after the implementation of a new bonus structure. The results from both measures indicate a positive relationship between the implementation of the bonus and employee and firm performance. Also, there was a positive effect of the bonus on teamwork inside the back-office/service department, which resulted in more efficiency and increased performance. Keywords
Pay for performance, Variable reward, Bonus, Self-determination theory, Agency theory, Motivation
Statement of Originality
This document is written by Student Maurits van den Eijkel who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references
have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Content
Introduction ... 4
Theoretical Framework ... 5
Pay for performance ... 5
The Self Determination Theory ... 7
The Agency Theory ... 10
Research Methodology ... 11
Sampling ... 11
Data collection ... 11
Data analysis and coding ... 12
Case ... 13
Participant characteristics & Work environment ... 14
Results ... 15
Participant satisfaction & stress ... 15
Intrinsic & extrinsic motivation ... 15
Rewards & performance ... 18
Bonus structure ... 19
Improvements (challenges) ... 21
Results from the data analysis ... 22
Discussion ... 23
Motivation & Performance ... 23
Bonus structure ... 24
Improvements (challenges) ... 25
Strengths and weaknesses ... 25
Conclusion ... 26
Introduction
Compensation cost in organizations cover about 65% to 70% of total production cost in the U.S. economy (Gerhart & Rynes, 2003). Since the beginning of the 19th century researchers have been studying how different kinds of pay structures shape individual behavior and performance. The relationship between monetary rewards and both employee and firm performance has been a center of attention in both economic and sociologic professions and studies (Cadsby, Song, & Tapon, 2007; Lawler, 1990; Lazear, 1999, 2000; Vroom, 1964; Ryan & Deci, 2000). Firms are always on the lookout for the best reward systems in order to improve both their employee and firm performance. In the current
research environment there are several beliefs in relation to monetary rewards. Much research has been done in this field. Lazear (2000) for example conducted an experiment in which he compared the effects of fixed salary with a pay for performance system. Cadsby, Song & Tapon (2007) did a comparable laboratory research with some improvements. Both studies found that PFP on average leads to better employee and firm performance. Yet there are other studies which argue that PFP systems could lead to diminished intrinsic motivation and thus performance (Ryan & Deci, 2000). To investigate under which conditions this negative effects occurs more research has to be done.
In this study the effect of a PFP system consisting of a bonus will be measured in a back-office/service oriented environment in an individual company. This study distinguishes itself from previous research because of the environment. Contrary to previous research which focused more on the trade/manufacturing departments, this study is conducted in a back-office/service kind of environment. In this research the performance of back-office employees will be investigated both before and after introducing a variable pay for performance bonus structure. To be able to measure this effect the following research question is formulated “What is the incentive effect of a variable reward on employee and firm performance in a back-office/service oriented environment?”. The effects of the variable rewards will be measured by both semi-structured interviews and an analysis of the performance numbers concerning employee performance. Finally these results will be tested and compared to each other.
The design of this paper will be structured as follows. Firstly, the theoretical framework including the proposal of this research will be discussed. Secondly, the
methodology and the specifics of this case study will be described. Third, the results of both the interviews and the analytical numbers will be presented. Finally the results will be tested against the theories from the theoretical framework and a short conclusion will be provided.
Theoretical Framework
In this paragraph the key theories and studies important for this research will be discussed. To be able to get a clear interpretation of the results a solid theoretical basis is required. First the reward system pay for performance and important studies in this field will be discussed. Second the self-determination effect will be discussed in combination with intrinsic and extrinsic motivation. Finally the agency theory and the possible affection with this research will be described.
Pay for performance
Compensation cost in organizations cover about 65% to 70% of total production cost in the U.S. economy (Gerhart & Rynes, 2003). Since the beginning of the 19th century researchers have been studying how different kinds of pay structures shape individual behavior and performance. The last two decades there has been an increase in different pay for performance systems in organizations (Milkovich & Newman, 2002). This research will be investigating how pay structures can influence employee behaviors such as performance and work motivation. The relationship between pay structure and both employee and firm performance has been an important field of study in economics management and sociology (Lazear, 2000; Cadsby, Song, & Tapon, 2007). Studies are also focusing at the relative importance of pay as compared to job attributes like autonomy, variety and responsibility influencing employee behaviors (Lawler, 1971).
First there is the expectancy theory by Vroom (1964) which identifies three factors, playing a role in peoples motivation. These factors are performance expectancy,
instrumentality and valence. Pay for performance (PFP) creates in contrast to fixed
performance a completely different kind of link, because when using fixed performance there is no clear link between performance and outcome. PFP creates a direct link between pay (outcome) and performance. Vroom (1964) implies that PFP could lead to higher performance under two conditions. First, the employees must value the monetary reward linked to the corresponding performance. And second, the employees must know that greater effort will lead to higher performance, and thus to higher rewards. If these two conditions hold, than the possibility of a higher reward when performing better will encourage employees to work harder.
Also, the incentive effect of PFP has been examined both theoretically and
empirically in the laboratory and in the field. A study by Lazear (1999,2000) used field data to investigate both sorting and incentive effects of a PFP structure opposite to a fixed pay
structure. The study found a significant increase in employee productivity and also a raise in earnings after implementing the PFP structure. The effect on the earnings was partially refuted by the increased loans of the employees. However, the results of this study were subject of criticism by other researchers.
Cadsby, Song and Tapon (2007) in contrast to Lazear (1999,2000) did a comparable but different laboratory study, avoiding the possible drawbacks of the former. This study did also find, like Lazear, a positive relation between PFP and employee performance. The research suggests that in general more productive employees prefer a PFP system. As mentioned earlier Cadsby, Song and Tapon found that employees in their study on average produced more under a PFP structure, in contrast to a fixed pay structure. However, they did find that employees who do not prefer a PFP structure are less responsive to the PFP
incentives, and thus experience a lower increase in performance. Also, employees who tended to be more risk averse were less likely to prefer PFP and also were less responsive to PFP incentives.
Other literature suggests that PFP is able to act as a sorting device to attract and retain the most productive and capable employees (Gerhart & Rynes, 2003; Jensen, 2003; Lazear, 2000). In 2003 Jensen argued that the most productive workers would prefer a PFP structure while less productive workers would go for a fixed salary (FS). Also, sorting based on pay structure suggest that job applicants would choose an organization based on the match
between their skills and the organizations characteristics. Human resources data records show that high performing employees who do not receive sufficient rewards will leave the
organization for another job, while low performing employees are more likely to stay inside the organization if the relation between pay and effort is not optimal (Trevor, Gerhart, & Boudreau, 1997).
On the other hand Ryan & Deci (2000) argue that pay for performance systems could also cause a detrimental effect on performance, they argue that it could harm the employees well being which on the long run could result in lower performance. This suggests that in this study the bonus structure could also have negative effects on employee performance and/or well being.
To conclude, PFP has been studied by many researchers; most of the literature suggests that performance based pay structures improve employee and firm performance significantly. Thus it is expected that this incentive effect will be observed in this study as well. In this study I am able to examine this PFP effect in a back-office environment in an individual company. This study differs from previous research because of the
back-office/service environment. Previous studies were more focused on the trade/manufacturing departments or on experiments. In this research the performance of the back-office employees will be measured both before and after introducing a variable pay for performance bonus structure. Therefore, the following research question is formulated:
“What is the incentive effect a variable reward on employee and firm performance in a back-office oriented environment?”.
In the remainder of this paragraph the self-determination theory, motivation and the agency theory will be discussed. These theories are important to get a clear understanding of the interviews which are conducted in this research.
The Self Determination Theory
First of all, there is the origin of the Self Determination Theory. The creation of the self-determination theory all started with the ‘expectancy-valance theory of motivation’ from Vroom (1964). After Vroom, Porter and Lawler (1968) also introduced a model concerning both intrinsic and extrinsic motivation. Porter and Lawler wanted to design the workplace of an organization in such a way that effective performance would lead to both extrinsic and intrinsic rewards for the employees. They argued that this would eventually lead to higher job satisfaction. In the model of Porter and Lawler (1968), they assumed that intrinsic and
extrinsic motivation rewards are added up, resulting in job satisfaction. Vroom’s expectancy theory of motivation, Porter and Lawler’s model and other theories generated much research in this field confirming and redefining several aspects. However, some research suggested that the additivity of intrinsic motivation and extrinsic motivation was not as self-evident as it seemed and maybe even controversial. The early study of Deci (1971) found that tangible extrinsic rewards diminished intrinsic motivation and that verbal extrinsic rewards like appreciation and recognition enhanced intrinsic motivation. He thus proved that intrinsic and extrinsic motivation can be both positively and negatively related. Knowing this, the cognitive evaluation theory (CET) was proposed, which tried to explain the effect of extrinsic
motivation on intrinsic motivation (Deci,1975;Deci & Ryan,1980). This theory was an early precursor of the self-determination theory and will be shortly explained below.
The cognitive evaluation theory states that some external factors tend to diminish people’s feeling of autonomy, cause a change in the persons perceived locus of causality and diminish intrinsic motivation. These external factors include tangible rewards, deadlines, surveillance and evaluations (Amabile, DeJong, & Lepper, 1976; Lepper & Greene, 1975).
There also are external factors that increase intrinsic motivation and enhance feelings of autonomy and cause a change in the persons perceived locus of causality from external to internal. An example is providing a choice about aspects of task engagement, which was studied by Zuckerman et al. (1978). Other research showed that tangible rewards and other extrinsic rewards can also be negatively related to outcomes such as creativity, cognitive flexibility and problem solving which are associated with the intrinsic motivation (Amabile, Goldfarb, & Brackfield, 1990). An example is form McGraw and McCullers (1979) who found that monetary rewards decrease the cognitive flexibility in problem solving. Another study found that monetary rewards tend to decrease performance on complex tasks (Erez, Gopher, & Arzi, 1990). However, the results of this study were subject of criticism by other researchers.
As an answer to the CET and central to this study is the self-determination theory. Important in the self-determination theory (SDT) is the distinction between autonomous motivation and controlled motivation. Autonomy means endorsing your actions at the highest level of reflection (Dworkin, 1998). On the other hand we have controlled motivation, which involves acting with some kind of pressure, or ’having to engage in a task’. Using extrinsic rewards is believed to cause controlled motivation (Deci, 1971). SDT assumes that
autonomous and controlled motivations vary in both their underlying processes and their accompanying experiences. SDT further suggests that behavior is characterized by the degree of being either autonomous or controlled. Finally SDT suggest that autonomous motivation and controlled motivation are intentional and that they stand in contrast to amotivation, which involves a lack of intention and motivation. To be able to show the different kind of
motivation Deci and Gagne (2005) created a model, which they call the self-determination continuum. First, this model shows amotivation, which is totally lacking self-determination. Secondly, there is extrinsic motivation, which vary in their degree of self-determination. And lastly we see intrinsic motivation, which is invariantly self-determined. At the bottom the model shows the nature of each factor in the model.
Intrinsic motivation and extrinsic motivation as described above are two different kinds of motivation which are an essential part of this study. All relevant theories for this study are based on these concepts. In order to create a clear understanding of motivation it is important to define these concepts. As described above Deci and Gagne (2005) studied the self determination effect, in order to do this they created two clear definitions of intrinsic motivation and extrinsic motivation which are based on previous research and definitions. These are the definitions that will be used in this study. The first part of motivation is the intrinsic motivation a part of autonomous motivation. Intrinsic motivation is the motivation that drives a person from within. This is the kind of internal motivation that moves people to perform an activity or task that they find interesting satisfying from the activity itself (Gagne & Deci, 2005). Extrinsic motivation is a part of controlled motivation. Extrinsic motivation drives a person through external factors. In this case satisfaction is derived not from the activity itself but from the extrinsic consequences or benefits to which performing the activity leads (Gagne & Deci, 2005). The remainder of this study will be based upon these definitions.
There are many studies which conducted research concerning compensation systems in firms. Gagne & Forest (2008) researched incentive systems that link rewards to
performance and examined the expectation of the self-determination theory stating that the external incentive rewards could be detrimental in this process. Also Ryan & Deci (2000) as stated before argued that pay for performance systems can also cause a detrimental effect on performance, they also argue that it could harm the employees wellbeing, which on the long
rung could result in lower performance.
Concerning this study, the self-determination theory is an important theory for
understanding the processes that stimulate employees both intrinsically and extrinsically. It is of importance to look at this theory and effect when conducting the research. Also, it is important that there is a separation between autonomous and controlled motivation and a separation between intrinsic and extrinsic motivation. In this research a case study is used to research a back-office/service environment inside a wholesale/trade company.
The Agency Theory
Jensen & Murphy (1990) argue that pay for performance measures are an effective strategy to resolve agency problems. This is because the PFP reward system helps to align the preference of the firm and the employee in the same direction.
In recent years there has been a lot do about whether the structure of employee compensation in large firms is designed so that employee decision making is directed toward maximizing the firms performance (Kerr and Bettis, 1987; Finkelstein and Hambrick, 1988). Many studies have been done in the field of this so called Agency problem.
For example control of many large firms is not in the hands of the owners but with managers (Galbraith, 1967), these two groups are likely to have different interests. The Owners of the firm are likely to be interested in maximizing firm performance. Managers on the contrary, if they control the firm, will seek to increase its size to be able to get more power(Amihud and Lev, 1981). Firm size allows more diversification of the managerial employment risk (Ahimud and Lev, 1981), which on its turn is associated with greater prestige for the firm's management (Marris, 1964), and is an important correlate of executive compensation (McEachern,1975; Crystal, 1988). The Agency theory is an explanation of how owners control managers or employees (agents) to operate the firm in the owners' interests. In agency theory, owners monitor employees and seek to design incentive structures to align the interests of owners and employees.
This theory if of importance for this study because the introduced bonus structure could be a tool to resolve a possible agency problem concerning the company of research. It is possible that the preference of the employees in the back-office/service department are not aligned with the preferences of the management in the firm. By introducing and working with the new bonus structure in this department the management may resolve this agency problem, because by using the bonus the back-office/service employees might work harder for their reward and thus indirectly increase firm performance and profit. It is important for this study
that this theory is well understood so the result of the interviews can be interpreted appropriately.
Research Methodology
The research in this article is mostly qualitative and uses a case study to gain a profound understanding of the motivations and processes underlying employee motivation and performance. Because thorough and in depth understanding of the employees is of major importance a case study design is chosen. The data for this study is collected using semi-structured interviews, since qualitative interviews can provide thorough descriptions and rich insights and empirical data (Eisenhardt & Graebner, 2007). Lewis and Ritchie (2003) argue that semi-structured interviews are one of the most used methods for gathering qualitative data. Semi-structured interviews also allow the researcher to discover underlying natures and thoughts of employee behavior (Strauss and Corbin 1990).
Sampling
The participants which were interviewed in this research were selected using a
purposive sampling method. A purposive sampling method gives the researcher the possibility to choose his participants based on sampling criterion (Stone, 1978). The participants in this study had to meet the following criteria: working in a back-office environment, at least 2 years of experience in his/her job, working in an wholesale automotive company in the
Netherlands. These criteria were chosen for several reasons. First, the employees working in a back-office service environment and in a wholesale automotive branch is of importance to future generalizability of the results . Second, requiring two years of work experience makes sure that employees have experience with the situations both before and after the
implementation of the new bonus structure. All employees who did not meet this criteria were excluded from this study. The resulting sample consist of seven individuals in a workforce of a total of twelve employees. The age of the participants varies between the 20 and 40, also two of the participants are females and five are males. The job descriptions and further descriptions of the participants are described later in this paragraph.
Data collection
The data in this study is collected by using semi-structured interviews, with open-ended questions. Semi-structured interviews, as the name implies, have both structure and the possibility to adapt during the interviews (Leech, 2002). This structure gives both the
gives the interviews more detail and depth which ensures better and more specific data collection (Leech, 2002). Every interview followed a protocol that served as a guideline. the participants were not informed of the content of the interviews beforehand, to in order to gather unbiased opinions about different concepts like intrinsic and extrinsic motivation. The questions asked in the interviews were derived from the theories described in the theoretical framework of this article. The first part on the interview focuses on the participant itself, in this phase a general image of the participant is created. The second part focuses on the
participants opinion about several aspects of the research question. In this part an image of the participants’ beliefs and psychological characteristics is researched. In part three the questions focus on the participants opinion about the bonus structure and his/her performance before and after the implementation. These questions try to get an understanding of what the participant thinks of the bonus and to the effects on his/her performance and the firms performance. During the fourth and last part the participants’ knowledge about the agency theory and the self-determination theory were tested and applied to the situation. Also there was an opportunity for the participant to ask further questions or add some additional comments. All the interviews were recorded with a voice recorder and transcribed, every participant agreed to this as long as they remained anonymous. The voice material is used to transcribe the interviews in text, so the data could be analyzed for the results. The interview questions can be found in appendix A. The interviews took approximately 40 minutes on general, depending on the cooperation of the participant an depth of the interview. After the transcription of the voice material the transcripts were sent to the participant to make sure the research did not misinterpret anything.
In addition to the interviews, also data from the companies system was obtained. One of the managers of the company gave permission to extract the data useful for this study out of their system (SalesForce). The data obtained from SalesForce include the measures of all mean transport prices from the years 2014 up to 2016. These numbers will be analyzed and compared with the findings from the interviews with the employees.
Data analysis and coding
To be able to get clear results, it is of importance to structure the data. This has been done by coding using computer-assisted software to analyze qualitative date. The program used for this research is ‘NVivo’. The analysis is divided in three different steps, which are coding, analyzing and drawing conclusions. In the first step the data is organized and coded in several categories. In the second step the categories and codes were analyzed to find patterns.
Finally, conclusions were drawn from the analysis, based on the relations between the categories and themes (Miles and Huberman 1984). In this study a deductive approach had been used for organizing the data. At the start of the coding process an existing set of codes was derived from existing theories. In the coding process important text from the interviews were marked with one or more codes. After analyzing these codes different patterns and interrelation relationships could be determined, more about this in the results.
Also, the results of the analysis of the data of the average transport prices for the corresponding time periods will be described in the results section.
Case
This case focuses on a newly introduced bonus structure inside the company Network4Cars. Network4Cars is a growing company in the international car trade. It is an automobile wholesaler which trades mainly in Europe. Their mission is to provide their customers the right cars at the right time. An important task to make this mission possible is the transportation of the cars, this is where the back-office/service department plays its role. Network4Cars arranges all the transports by itself, the back-office/service department had the responsibility do this in time and for a reasonable price. The management believed that the company was not making enough profit on the transport of the cars and felt that the back-office/service employees could work harder to cut the transport prices. This is when they introduced a new bonus structure for the back-office/service department . Using data of all transports from the past 3 years ‘transport zones’ were created, subsequently target prices were calculated for transports between each of the zones. These price were put into a diagram and presented to all back-office/service employees. The bonus the employees are able to earn is ten percent on every euro booked below the target price from the diagram, so ten percent on every euro saved on transport. Also, all the other back-office/service tasks have to be fulfilled properly, otherwise the employees will not receive the bonus when observed by the managers. The management believes that this bonus gives their employees extra motivation to cut down the transport prices, which results in the company making more profit on the transportation of the cars. Below the employees will be described in more detail.
Participant characteristics & Work environment
All participants in this study were between 20 and 40 years old, with one exception of 48 years. The nationality of the participants was very diverse. Participants were form Poland, Holland, Brazil, Slovakia and Hungary. All the participants started their career in Holland after studying in their home country. The participants moved to Holland to start their career. Reasons vary from opportunity to love. The participants’ education vary from Bachelor to Master level in the studies Tourism, Business studies, Corporate finance management, Marketing management and International business and languages. This is the first ‘serious job’ for all of the participant so they did not have any experience before working at this company. The most experienced participant worked for the company for seven years, while the least experienced participant worked there for two years.
Five of the seven participants are support and logistics employees, one is support coordinator and one is logistics coordinator. The job of the support coordinator is basically coordinating and supporting the support and logistics team where needed. But the support coordinator mentioned that because of a lack of employees for the French and German market she has to do operational tasks as well. The logistics coordinator makes sure that the
transports are arranged in time and for the right prices and coordinates the work of the employees involved. The rest of the participants are support and logistics employees; each of the employees supports different countries (languages). They are the ‘axis’ between suppliers and customers. They support both the purchasing department and the sales department of the company. Also, they support the customers. The other part of their job is logistics, every employee is responsible for the transport of the cars from their support countries. This means that they have to find transports in time and for the right price. This is where the bonus structure fits in, but we will discuss this later in more detail. The participants describe their main responsibilities as making sure the customer pays in time, making sure the vehicles arrive and depart in time. They also have to ascertain that their suppliers and customers are satisfied. They see themselves responsible from the moment of buying to the moment that the cars are paid by the customer. To make the distinction between the participants in the
remainder of the results more clear, the participants will be referred to as follows: Logistics Coordinator Italian employee
Support Coordinator Dutch employee
Hungarian employee Czech employee
Results
This part of the study provides an analysis of the seven conducted interviews. This analysis resulted in multiple findings. The most important finding is that using a pay for performance system in a back/office oriented environment can be associated with increased employee and firm performance. Also, the analysis showed some interesting findings concerning extrinsic motivation. The following paragraphs will discuss the findings in more detail.
Participant satisfaction & stress
All participants mentioned that they are moderately happy to happy with their jobs. The only thing that seems to disrupt this is that they often get to deal with other people’s problems.
I like my job and to be independent. It is nice to have the independency towards supplier and transport companies.
The Czech employee mentioned that she wanted more responsibilities and the possibility to grow in the company. All participants also mentioned that the workload is really high the during last few months. This is because there is a lack of employees for the French and
German market. They argue that this gives them more stress than usually, which they say isn’t a big problem but can work amotivating at some point. They see the stress as part of their jobs and say they have to cope with the stress that comes with it.
Concerning performance the participants on average were satisfied with their general performance. However, they stated that when they have too many work or are running out of time it causes them to lose track of what they are doing which results in poor quality work.
If I do not have time to make priorities I do not get to follow the track anymore. Intrinsic & extrinsic motivation
Concerning the internal motivation in the interviews, one important factor was the internal satisfaction of reaching something or a goal defined by the participant itself. The support coordinator and Czech/Polish employees also mentioned that they feel good when they are doing a good job and that they are able to ensure a smooth progress throughout their work. This suggests that the employees are intrinsically motivated when they are able to do their jobs without obstacles from outside.
Yes, we work in support logistics, we can easily burn out, mentally, you can get amotivated, if you enter in a trip on monotony.
It became clear that not being able to finish work in time or having too much work all the time are significant factors in diminishing intrinsic motivation. If the participants were overworked for a significant amount of time they tend to be less intrinsically motivated and in some cases even amotivated. The support coordinator even said that she wasn’t motivated anymore because there was so much work to do that she chocked under the pressure. The logistics coordinator also mentioned that monotony can be a negative factor for their internal motivation. He said:
“There is a point where you just burn out and just do your job”
This could imply that when the logistics coordinator is constantly overworked and has to do the same tasks over and over again without seeing progress he will get amotivated because at some point he will burn out.
What is really interesting to see concerning extrinsic motivation is that all of the participants placed monetary reward or money on the last place for externally motivational factors. While it was assumed that money motivates people. The participants tended to find appreciation from both the management and their fellow colleagues the most important extrinsic motivational factor. The participants want to be appreciated and recognized for the work they perform, so they know that the rest of the company is backing them up and recognizing them for the work they do.
Appreciation and recognition is really important for me, I think I’m just having more motivation on every day because of it.
After recognition and appreciation, development opportunity came out as an important motivator for the participants. It motivates people to get more responsibilities and to get the opportunity to be someone and to make progress in your career. The logistics coordinator argues this is because people want to see that they can truly grow both personally and functionally and in their career.
First I need to be given the opportunity to be someone
All participants in this study said that money comes on the last place concerning external motivation. The support and logistics coordinators tend to think that money is, of
course, important and that it would be strange if they did not care about money, but they think that appreciation and opportunity for instance are far more important motivators. They say that money is important because we are living in a financial world. Also the Dutch and Polish employees think that with money comes status what is important for some people. It isn’t exactly clear if money truly comes on the last place for these participants because the way they choose their words doesn’t makes sense. For instance, a participant said “It is motivating for me when I can climb the career ladder because when I get a better position I can get a better salary”, this implies that reaching a better position is a tool to earn a higher salary. In this case it would be assumed that money is a motivator to reach a higher position, instead of opportunity as motivator to do their job. This contradiction will be further discussed in the discussion. The logistics coordinator on the other hand was more convincing, he said that money makes a lot of people blind and thus makes them unhappy in doing their jobs.
“Money easily makes people blind”
Some participants talked about their fellow colleagues in the other departments who were only working for the money. The Italian and Dutch employee said that they are not happy if they did not earn enough. Hence, they argued that is always good to be able to earn extra money by reaching higher personal performance. It is always motivating to be able to earn a bonus, especially in an environment where you are not able to determine how much work you have. This is because the support/logistics department is depending on the purchase department and the sales department. When these departments do not buy and sell enough vehicles the back-office/service department have less work to do. The majority of the participants agreed that it is always motivating to have a bonus structure. The Czech
employee argues that it gives them more motivation everyday which causes them to come to work with a different feeling. The support coordinator mentioned that sometimes she just wanted to walk out and go home. But she said when she would know she could earn extra money by performing better it would give her an extra boost. It gives increased extrinsic motivation because you have got the chance to fight for your bonus.
“It’s an extra motivator, because every day you are fighting for it”
Feedback from outside also came up as an important motivator, people at support departments are always trying to satisfy their customers both inside and outside the firm. Their everyday work is solving problems. The Support coordinator and the Czech employee mentioned that the feedback they get from their colleagues motivates them in trying even
harder to satisfy them. They do not need to hear it all the time but it certainly helps to receive some feedback every once in a while.
sometimes it’s really good to hear from your boss and colleagues that you are doing well Another important factor in the participants motivation is the management. In the company of this study there has been a lot of change in management over the past two years. There was a really strong connection with the old support manager. This manager was really connected with the people and always knew what was going on. He cared about the people and knew how to motivate them. Also, he helped when needed and knew a solution to almost everything.
He was a lot more involved. I remember if someone was missing and he just filled the job , that motivates you, he was a leader type of man.
They argue that their new manager is a less personally involved as the previous one used to be. They see him more as a hierarchical manager who they need to report to and inform about problems. However, the participants think that the new manager is getting along with them better along the time. In the near future they hope to build the same kind of relationship they had with the old manager. The Polish employee said that a manager has to be better than you, because that motivates you to become better. You want to follow him not because you have to but because you know he is right.
Rewards & performance
When asked to choose between a Fixed pay structure and a Pay for performance structure six of the seven employees chose the pay for performance structure. The Italian employee that chose for the FP structure argued:
“I wouldn’t work harder under a PFP system, because I am already doing everything I can” The other six participants chose for PFP under the condition that they would have the tools and the opportunity to indeed earn more when working harder. They argued that a pay for performance system motivates you to work harder. They get the possibility to earn more money every month if you performance is good. The support coordinator argues that it would be good for everyone if they are paid on basis of their performance. This is because there is a motivational challenge behind the structure. She believed that PFP assures a more equal pay structure, so when you are working harder than the rest you are also earning more than the
rest. The logistics coordinator said that right now some people tend to do less than others because there is no reward in working harder. When people see that they can earn more by doing so it would be better. He thinks that for most employee it all comes up to the money, which is in contrast with the external motivators as mentioned before.
In the end it comes up to money. Bonus structure
When talking about a bonus all participants thought it was very important to be able to earn a bonus. When asking what a bonus reflects for the participants they all had their own ideas about what a bonus should be. The Polish employee described it as any kind of reward for your performance. What could be a training, personal development or a monetary reward. The Czech employee would like to see a bonus in a form of appreciation that he/se doesn’t have or gets otherwise. The Italian employee sees a bonus as spending more quality time with his/her fellow colleagues by having more parties or trips with the company, so basically things that distract you from everyday life. The logistics coordinator described a bonus as something that’s make your life a little better. He believes that a bonus should give you a little extra. He sees a bonus as a monetary reward from the company, and with that money you can treat yourself with a little extra like a vacation or something for your children.
“A ticket to a better life”
All of the participants agreed about the fact that you must have the right tools to be able to earn the bonus by working hard. The support coordinator argued that a bonus would be useless if you do not have the tools to earn it.
The participants were asked if they thought that the system that was recently implemented worked and if their own performance increased because of the system. The logistics manager was very positive about the bonus structure, he claimed that it is really motivating. He also believed that the department earns more profit on transport that before the new bonus which has a positive effect on the company.
“we made a lot of money the last couple of months”
The Italian employee was also positive about the new bonus structure. Though she claimed that the total bonus amount was not that much and that it would be more motivating if she was able to earn even more money because of the bonus. She believed that the bonus was good for the motivation in her department and that it would help to make the transport planning more
efficient and profitable. The Dutch employee argued that the bonus is really an everyday motivator but that a higher amount would be even more motivating. She thinks they are on the good track with the transport prices, and believes that it is good for the company as well. Though she argues that it is not the money that makes her work harder, because she is already doing everything she can. Which is a little odd because she does say that more money would motivate her to work even harder, this will be discussed further in the discussion. The Support coordinator says that she is really happy that finally something is happening concerning a bonus on the support/logistics department, since all the other department have some kind of bonus and they did not till now.
It’s nice, that finally something is happening, because we are fighting for the prices for a long time.
She also argues that the department is better at teamwork since the bonus was introduced. Every employee now focuses on his own strengths and does the work they are best at, so that the final result is better. She talks about synergy, because they are helping each other with their tasks they are able to work much more efficient than before, or as she said 1+1=3. The Czech employee claimed that she is also happy that there finally is a bonus, and that she thinks that it could motivate the entire department. This leads to customers being more satisfied and thus more cars being sold to the customers, which is good for the company. She thinks that the bonus has effects on the performance of the department but that it is essential that the bonus is used as honestly as possible. The Polish employee thinks that the bonus raises the department on a higher level, but said that he doesn’t believe that the prices are lower than before because they were already working as hard as they could. He thinks that the prices are on the same level but the efficiency of arranging them had improved, which is in contrast with the rest of the participants.
“I think we are lifting support on a very different level”
He said that sometimes they ignore the bonus to be able to help the customer the best way possible and to transport the cars in time, sometimes they have to do that to make sure the customer is satisfied. The Hungarian employee was the most optimistic about the new bonus structure, he believed that the bonus was the perfect tool to get better firm and employee performance.
He said the bonus was motivating right from the start because it was finally something to fight for in their department. He described it as something they could influence and earn by
working harder themselves instead of the other tasks they have to do every day. He claims that the support and logistics department is a really hard working team and that they need not only attention but also a reward for their effort.
Looking at the answers of all the participants, it can be concluded that the new bonus structure is indeed influencing the performance of the participants and the company in a positive way. It is interesting to see that some participants say that they already did everything they could before the introduction of the bonus, while they do say that their performance has improved after the implementation. More about this contradiction will we discussed later in the discussion.
Improvements (challenges)
During the interviews participants often came with things they did not agree with or things that they believed could be done better concerning rewards and bonus regulations. An important theme of improvements was the bonus structure. First, four out of seven
participants argued that the bonus would be more motivating to them if they would get paid every month instead of every quarter. These participant also thought that it would be
motivating if they could keep track of their earned bonus using some kind of dashboard in the system. In this way they could see their earned bonus for every day which would give them more visibility and daily motivation. They argue that right now it can sometimes be
amotivating that they do not see what they earned till they get their bonus every quarter. “I think it is really important that people can see their earned bonus cause that would
stimulates even more than the money every 3 months”
Secondly, three participants claimed that the bonus structure wasn’t complete enough. They say that the current bonus does not account for some transport routes. for example with vans they are really struggling to get good prices while the bonus system does not account for van transports. Another example is the transport from Romania, the system does not account for these transports either. The participants argued that if the management increases the functionality of the system on countries, types of cars and conditions the bonus would work better and increasingly motivating.
Another possible problem motioned by two participants is that the transports right now are suffering because they are cutting down the prices too much because of the bonus. The
transport companies do not agree with the sudden price changes and say that like this they prefer to take loads from other companies. But they think that along the time the transport companies will come along and start coming back. They solution that they are working on is recruiting more transport companies to work for the company so they are able to keep their prices down.
Finally the participants talked about the current state of feedback. Three participants were not happy with the quality and amount of feedback they are receiving about they work. They would like to receive more feedback concerning their working performance. They claim that all the information the managers need is in Salesforce, which is their operating system. Right now they only have feedback meetings once a year, the participant argue that it would be a lot more motivating if they did this every month so they know where to improve on. Results from the data analysis
In the table 1 below the average transport prices per vehicle of Network4Cars are presented. The timeframe in which these averages are calculated for each year is from March 15th till June 15th. These timeframes are chosen to eliminate possible seasonal fluctuations. The new bonus structure was introduced at the beginning of march 2016. One can see that the average transport prices in 2016 are considerably lower compared to 2014 and 2015. This would imply that the new bonus structure has a substantial positive effect on the average transport prices and thus on employee and firm performance.
Table 1
Year 2014 2015 2016
Average price € 300,14 € 301,57 € 283,41
In the discussion the results of both the interviews and data analysis will be compared and further discussed.
Discussion
The main goal of this research is to examine the incentive effect of a performance related variable reward and to investigate the predictions of the self-determination theory and the agency theory. Previous studies that researched this relation were conducted in domains different to a back-office/service environment, much of this research comes from laboratory experiments instead of case studies (Cadsby, Song & Tapon, 2007; Lazear, 1999). This research examines how this relationship works in a back-office/service environment. The results both from the interviews and the performance numbers show that the transport prices are reduced. This indicates a positive relationship between employee performance and the implementation of the bonus. In the remainder of this paragraph I will discuss the results and possible contradictions. Finally the limitations, strengths and suggestions for further research will be discussed.
Motivation & Performance
The results show that the bonus indeed has a positive effect on the external motivation of the employees at Network4Cars and also does not diminish the employees’ intrinsic
motivation contradicting the possible negative effect Gagne & Forest (2008) found in their study. What is interesting to see is that almost all participants think a monetary reward, which is also attached to the bonus, does not have much effect on their external motivation. They tend to find motivators like appreciation and opportunity more important. During the interviews it becomes clear that monetary rewards are in fact more important for the
participants than they acknowledged or think. As mentioned in the results, one participant said “It is motivating for me when I can climb the career ladder because when I get a better
position I can get a better salary” which implies that getting a higher position in the firm is instrumental for earning more money. This could imply that for the participants monetary reward in fact is more important than development opportunities.
Also, the participants told in their interviews that both their own and the firms
performance increased. This means that the motivation for employees to work harder for their bonus indirectly causes them to work harder or more efficient for the firm. This does not fit with the self-determination theory which states that the extrinsic rewards could have a detrimental effect on the intrinsic motivation of employees (Ryan & Deci, 2000). It could be that the employees already had enough intrinsic motivation to work hard, but that for some aspects of the work an extrinsic reward like this bonus could cause the employees to be more keen on negotiating better transport prices. This causes them to perform better solely on the
tasks for the bonus, which increases their performance and ultimately the firms performance. This could suggest that by implementing the bonus the employees indirectly work harder for the profit of the firm and thus for the goals of the owners and/or management which could resolve possible agency problems. This confirms the theory of Jensen & Murphy (1990), who argue that PFP structures help to align the preference of the firm and the company in the same direction.
Bonus structure
What is interesting to see is, as suggested before, that the participants mention that they do not believe they work harder after the implementation of the bonus because they were already doing everything they could. At the same time they suggest that the bonus has
positive performance effects. I would suggest that if the participants were already doing everything they could before the bonus it would be expected that their performance wouldn’t increase after the bonus. Also, the performance numbers suggest that the performance has in fact increased with a decrease in transport cost from about € 20,- per car, which is
considerable given the numbers of cars transported. In conclusion, the words or thoughts of the participants contradict with their performance. An explanation could be that the
employees did not work harder but more efficient which allowed them to negotiate better transport prices. This could suggests that they did not work much harder but were more focused on negotiating which resulted in better performance concerning the tasks relevant for the bonus. Another explanation could be that the employees wanted to give a socially
desirable statement. In conclusion, I think that it can be concluded that the participants were in fact working either harder or more efficient after the implementation of the bonus resulting in lower transport prices and thus increased performance. In contradiction to the study of Ryan and Deci (2000) this study did not find a possible negative effect of a pay for performance structure.
Another interesting observation is the effect of the variable reward on teamwork. The support coordinator mentioned that because of the bonus the employees tended to collaborate better than before. The employees focused more on the tasks that they are good at and
delegate the tasks they found difficult to employee colleagues who were better at that task. Notice that the employees do not have the possibility to neglect other tasks since they will not get the bonus if this is noticed by the management . The support coordinator argued that by this collaboration they were able to work more efficient and thus perform better. This could also add up to the explanation from above, the teamwork might have given the employees the
opportunity to focus more on negotiating better transport prices. This suggest that attaining a variable bonus not only stimulates individual performance but also team performance. Improvements (challenges)
The participants came up with improvements to make the bonus structure more motivating for them. The participants argued that they would be more motivated if the bonus is paid every month instead of every quarter. Also the participants agreed that it would be motivating if they had a dashboard on which they could see their everyday performance. I think this are two challenges that can be overcome in a short amount of time with low cost and effort from the management. I would advise the management to talk with the employees about the possibilities of these improvements, because they could make considerable
progress.
Strengths and weaknesses
An important strength of this research is the use of both the interviews and the
performance numbers of the company. By using the semi-structured interviews to obtain data from the participants a good understanding of the effect of the variable bonus structure and the theories around it could be obtained. Also, data was obtained by analyzing the numbers concerning the performance of the employees. This made it possible to use data triangulation, which measured the data from different angles (Teunissen, 1985). This provided more insights into the data and also pointed out some contradictions between the different kinds of data.
Another strength of this research is the different kind of environment in comparison with previous research. Where previous research focused on the manufacturing/trade departments using mainly laboratory studies, this study focuses on a back-office/service environment by means of a case study. Therefore this research contributes to previous research by investigating a new environment with both qualitative structured interviews as a analysis of the performance results.
An important weakness of this research is the lack of generalization possibility. Because the case study is conducted in only one individual company it is hard to generalize the results of this research, although it could give an indication of how bonuses work in these kinds of environments. Therefore I suggest that future research focuses on doing research on a larger scale, so the results can indeed be generalized.
Another direction for further research could be the effect of a bonus on teamwork inside back-office/service departments. Since in this case study, the bonus did have a positive effect on teamwork inside the department, which triggered the efficiency and performance of
both the employees and the firm. Also the effect of other PFP systems in this environment could be researched since this study only focuses on a variable monetary bonus connected to a certain performance quota.
A final further research direction could be the cultural differences between the employees. Almost all employees investigated in this research were from different cultural backgrounds, it is interesting that there were almost no differences between the answers of the participants. Further research might investigate the possible organizational cultural role in this.
Conclusion
This study examined the incentive role of a variable monetary bonus on employee and firm performance in a back-office/service oriented environment. Previous literature examined the same effect in different environments and using different research methods (Cadsby, Song ,& Tapon, 2007; Lazear, 2000). These studies found that the incentive effect of the bonus gave a positive effect on performance. Taking into account the findings of this study it can be argued that in a back-office/service environment a variable monetary reward has a positive effect on employee and firm performance. This is proven by both semi-structured interviews as a qualitative data analysis of the performance results. Also, there was a positive effect of a monetary bonus on teamwork inside the back-office/service department, which resulted in more efficiency and increased performance.
The generalizability of this research is limited because of the limited research environment. Therefore more research has to be done concerning the effect of a variable bonus inside back-office/service departments to confirm the generizability. Also, it is suggested to do further research on how a variable monetary bonus can stimulate teamwork inside organizations.
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Appendix A Interview template General Questions:
1. Tell something about yourself (Age, Nationality, Experience, etc.) 2. What is you function in the firm?
3. Is this your first function inside this firm? 4. How long are you currently working here? 5. What are your main responsibilities? Function Questions:
1. What does your function entail?
2. Are you happy with your current function? 3. What motivates you internally in doing your job? 4. What motivates you externally in doing your job? 5. Why did you apply for this job?
6. Do you think you are performing good? 7. What are your ambitions?
8. Are you happy with this job/function? Bonus Questions:
1. What do you think about when hearing the word ‘Bonus’? 2. Do you think you perform better when a bonus is included? 3. What do you think about the new bonus structure?
4. Does the new bonus structure motivate you to work harder and perform better? 5. Do you think your performance has improved since the implementation of the bonus
structure?
