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Abstract
This explorative study looked at the influence of different performance measurement and incentive systems on the perception of fairness by employees. This investigation is done in eleven companies in different branches. Fourteen semi-structured interviews are held with alternately policy makers, policy executers and policy experiencers. These respondents were asked about the reward system and their perception of procedural, distributive and interactional fairness. There is looked what, in practice, makes a performance measurement system enabling. That is not only determined based on the features of the system, but also on how it interacts within the organization. Second, although it was expected that an enabling measurement system leads to more fairness, interviews revealed that this is not always true, and that coercive systems also can be perceived as fair. Thirdly, interviews showed when
incentives are involved, the perception of the measurement is influenced.
Key words: Enabling and coercive performance measurement, incentives, procedural-, distributive-, and interactional fairness.
University of Groningen
Faculty of Economics and Business
MSc Business Administration
Organizational & Management Control
Supervisor: prof. dr. ir. Van Veen-Dirks
Co-assessor: mr. dr. Kaufmann
Rixt Geertsma Fahrenheitstraat 82 hs 1097 PV Amsterdam a.r.geertsma@student.rug.nl Student number: 19649413
Preface
At this moment, you are reading my master thesis, ‘Perception of fairness of performance measurement and incentive systems in different organizations’. It is a research, based on interviews with fourteen people. I wrote this thesis for my graduation on the master Business Administration, track organizational and management control on the Rijksuniversiteit Groningen.
After five months of hard work, it is finished. It brought me expansion of my knowledge, inspiring learning experiences and a lot of interesting conversations. I can look back on an intense, but successful time. I combined the writing of this thesis with an internship at Starred. This combination asked a lot of devotion and focus from me, but I’m really proud I brought both projects to a good end.
I owe this partly to Paula and Wesley: thank you for your good advice, useful feedback and support. I also want to thank all the respondents, who were willing to give me their time, and trusted me with their honest answers. Without you, there would be no thesis: Gerbrich, Tjalline, Bert, Paula, Tim, Mark, Eveline, Jan, Carla, Marcella, Alicia, Lars, Nick and Pieter. I want to thank Herman and Jurjen for taking this thesis to a higher level.
I am deeply grateful to Tim, my parents and my friends, for supporting me, stimulating me letting me know they always had faith in me. I hope you enjoy reading.
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1. Introduction
Our economy is changing. It is more and more knowledge and service based. The materials that go into making goods are not what is valuable anymore: employers pay for the skills of the people providing the service (Coyle, 2001). In most cases, employees are the key asset of an organization. The long-term success of an organization depends largely on the motivation of its workers (Ajang, 2007). Organizations like to see that their personnel strives for the same goals as the organization. But employees, as human beings, have their own goals and interests in mind. If these personal goals are not fulfilled, it is more likely that they engage in effort-averse behavior (Merchant & Van der Stede, 2012). This goal congruence can be achieved by different methods. The presence of rewards and compensation leads to increased effort, as compared to an absence of such rewards and compensation (Bonner & Sprinkle, 2002). Rewards, as the most common method, are in principal intended to encourage positive behavior (Jelavic & Salter, 2014).
To be able to give rewards, formalization is needed: the extent of written rules, procedures and instructions governing employee activities. Adler and Borys (1996) defined two different control styles for formalized organizations: enabling and coercive. In an organization with enabling control, workers are motivated by flexible and dynamic rules. Coercive control focuses on strict rules to reward or punish certain behavior (Wouters & Wilderom, 2008). To reward behavior, it first needs to be measured. A good performance measure includes all the relevant dimensions of performance for an organization or manager (Feltham & Xie, 1994). The organization of measuring performance is called a Performance Measurement System (PMS). PMSs can also be indicated as enabling or coercive. The attitudinal outcomes of these different PMS are likely to be very different (Adler & Borys, 1996). If rewards are (partially) based on the performance, it is called performance based rewards, in this paper indicated as incentives. Incentives are variable rewards, used to motivate the work force and to let them act on behalf of the firm (Gibbs, Merchant, Van der Stede & Vargus, 2004).
Current PMS research mostly focuses on the relationship between different PMSs and performance (Aguinis & Pierce 2008). There is still much to learn regarding which elements of a PMS are the most important for motivating employees. One known element is fairness. Dewettinck and Van Dijk (2013) found that fairness partially mediates the relationship between PMS characteristics and their effectiveness. Not much research elaborates on this specific influence of PMSs on fairness.
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As seen in the research of Jordan and Messner (2012), the perception of fairness and the effect of incentives are strongly influenced by the design of a PMS. They found this by observing the effect of a change to a coercive PMS on employee behavior and the effects on their perception of fairness about that system. People perceived higher unfairness when a PMS tended to be coercive. Although they reached this outcome, it is not thoroughly investigated what, in different organizations, makes a performance measurement enabling or coercive, and which factors are causing this perception of unfairness. The presence or absence of consequences of this measurements, like incentives, could influence this perception. To get more insight in these perceptions of fairness, the following research question is presented:
In what way does the design of a Performance Measurement and Incentive System influence the perception of fairness of such a system?
This thesis investigates the way in which the design of a PM&IS directly and indirectly influence the way employees perceive this system’s fairness. Different PMSs are analyzed and rated in terms of enabling and coercive. The incentives are rated on height and sort. The use of interviews it gives a clear view on which factors and combinations are perceived as fair or unfair. It is executed in the Netherlands, which is one of European countries where performance pay is relatively rare. For this reason, Dutch people do not take incentives for granted and can be critical about it.
The theoretical interest is that this study extends our understanding of how different aspects of the PM&IS design influences employees’ perception of fairness about that system. It shows how the PM&IS influences their perception of procedural, distributive and interactional fairness and which factors make such a system enabling or coercive. Secondly, this paper helps in the scientific search for understanding the conditions which maximize motivation and productivity by a correct understanding of the effects of differently designed PM&IS.
This can be translated into the following managerial interests. This investigation will give designers of a PM&IS better insights into the effects on the perceived fairness and thus on the working of this system. It will help to select a rewarding system that, by taking the effects on the perceived fairness into account, motivates employees. A manager gets more insights into which characteristics of the PM&IS are important in different circumstances, and the effects and the reasons behind it. Secondly, this research adds to current knowledge because it deepens our understanding of the effects of incentives in a specific characteristic of the PMS. It also helps a manager to know which problems to expect with incentive systems within different PMS’s.
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2. Literature review
In this literature review incentives, enabling and coercive performance measurement, fairness and their relations are discussed. The chapter ends with subquestions addressing the relation between PMS & incentives, PMS & fairness and incentives and fairness.
2.1 Incentives
Incentives are performance based rewards. Incentives are a way to motivate employees to align with the organization goals (Gibbs et al., 2004). It is a way to increase the extrinsic motivation of the workers.The design, development and implementation of an incentive system are multifaceted tasks, because the effects reach far and faults can be costly. An incentive is an important part of the PM&IS. PMSs are evaluated differently if those measures determine the incentive (Jordan & Messner, 2012).
Incentives are used to motivate the staff to use their knowledge to increase firm value. It can cause a higher focus on performance, commitment and development and therefore better results, because employees have an extra motivation. How employees value their incentives, can also be impacted by personal circumstances and economical changes (Jelavic & Staltler, 2014). Prior studies have examined that the adoption of performance related pay improves performance (Banker, Lee, Potter and Srinivasan, 1996).
There are a few of downsides to incentives. If incentives are given on a short-term, some investments may not be done. It can also be at the expense of creativity: employees notice that a certain ‘trick’ gives good results, and stop being creative and innovative. There is also a chance people stop showing out-of-role behaviors, which are nevertheless important for organizational effectiveness. Another negative point is the crowding out effect. All this extrinsic motivation can supplant the intrinsic motivation people have for doing their job (Georgellis, Iossa, Tabvuma, 2011). These disadvantages can be partly prevented by high quality measures, and making sure that helping others and showing initiatives are still encouraged.
Use in the Netherlands
There are a lot of different designs of PMS and incentives. Stichting Loonwijzer did a large-scale quantitative investigation in 2008 about the use of performance based pay in the Netherlands (Klaveren & Tijdens, 2008). There are six types commonly used:
1. Pay fluctuates with variation in hours 2. Piece/sales output dependent wage
3. Receiving annual extra wage partly depending on performance (merit rating). 4. Performance dependent growth within wage scale
5. Result dependent bonus or 13th month
6. Profit share/ stock(options)
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2.2 Performance measurement
PMSs are complex systems consisting of financial and nonfinancial measures of performance (Kaplan & Norton 1996). A PMS helps employees form accurate job expectations and a better understanding of what is expected. Performance measurement is often the basis for incentives. It is almost impossible to make a perfect performance measurement, because that would involve an exact and comprehensive measure of the employee’s effort (Lazear & Gibbs, 2009). Only results are not always a good benchmark, because results do not always reflect the amount of effort someone puts in.
One difficulty when designing a good PMS is the presence of risk. An uncontrollable risk is one that the employee cannot react to. Controllable risk is environmental uncertainty that can be reacted to, after observing and interpreting the information that is given about what is going on (Gibbs et al., 2004). A situation where there are more uncontrollable, external causes will be judged as having more risk than a situation with internal and controllable factors. When a performance measurement is broad, based on a lot of variables, too many controllable and uncontrollable risks distort these observations (Jordan & Messner, 2012). Such measurements will not be perceived as fair, because they do not give a clear view of someone’s effort. But a measurement that is too narrowly defined and includes only a single or a few performance indicators will demotivate the employee to do tasks that fall outside this measurement. This narrowly defined measurement distorts the real efforts of the employee (Feltham & Xie, 1994).
PMSs can be characterized as enabling or coercive. In an organization with enabling control, workers are motivated by flexible and dynamic rules. Coercive control focuses on strict rules to reward or punish certain behavior (Wouters & Wilderom, 2008). The two different systems have a great effect on the personnel’s attitude towards formalization. Adler and Borys (1996) suggest that employee attitudes are more positive with enabling formalization in comparison with coercive formalization. The two types can be characterized along three dimensions: These are 1) the features of the system 2) the process of designing the system and 3) the implementation of the systems (Adler & Borys 1996).
Enabling performance measurement
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understand the underlying theory of the process. Global transparency is reached when employees understand the implications and consequences of their work, upstream and downstream in the organization, and see their tasks in the broader picture of the whole organization. The fourth factor is the flexibility of the use of the indicators, if there is a possibility to deviate from the official way because that seems more right (Adler & Borys, 1996).
Coercive performance measurement
Coercive control focuses on strict rules to reward or punish certain behavior (Wouters & Wilderom, 2008). Tasks and goals are clear and strict. Employees experience control when it generates disciplined behavior. There is rather spoken of control over than control with. Coercive control is associated with predictability and the decline of opportunism. It provides guidance and clarifies responsibilities, eases role stress and helps individuals feel more effective (Adler & Borys, 1996). This system has a technical function, and the potential contribution of the efficiency that can be reached in this way. Well-designed procedures would facilitate task performance. There is a lot of monitoring. On the other hand, more than with enabling PMS, a coercive PMS can stifle creativity, foster dissatisfaction and punishes mistakes. Such formalization can undermine employees’ commitment, and it is ineffective for organizations in dealing with innovation, change and environmental complexity (Burns & Stalker, 1961).
Summarized, in an enabling system, employees get more freedom, and procedures are seen as valuable sources that support workers in doing their job. In a coercive system, effort of the employees is coerced, tasks are demarked and there is not much room for experimentation. Performance measurement in an enabling way is much more difficult and time consuming than a coercive system, because there are no strict and easily measurable targets or guidelines an employee should strive for.
2.3 Fairness
Fairness in organizations includes issues related to perceptions of fair pay, equal opportunities for promotion, and personnel selection procedures. Greenberg (1987) introduced the concept of organizational justice with regard to how an employee judges the behavior of the organization and the employee's resulting attitude and behavior. Sweeney and McFarlin (1993) described and found support for a model which distinguishes between distributive and procedural fairness. Colquitt (2001) demonstrated that a four-factor model, including procedural, distributive, interpersonal, and informational fairness explains perception of fairness, because it refines the different aspects of the procedural fairness much better. Rawl (1971) found that interpersonal and informational fairness can be combined as interactional fairness. That distinction will be used in this article, because with those three elements a PM&IS can best be evaluated. Colquitt (2001) found that the different types of fairness are linked to different types of variables: procedural fairness affects mostly evaluations of the organization, and interactional fairness effects the evaluation of the person in charge.
Procedural fairness
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rules or interpersonal treatment. Procedural fairness is about how consistently, accurately and neutrally the supervisors apply organizational policies to subordinates (Long, Bendersky & Morril, 2011). Current research establishes that procedural fairness does affect judgments of the overall fairness of an outcome. Procedural fairness implies a thorough understanding of the measurement system by employees and can reduce feelings of unfairness about an outcome. This means that procedural fairness can have a ‘buffering’ effect by which negative consequences of unfair outcomes are less sharp for the person involved (Blader & Tyler, 2003).
Distributive fairness
Perceptions of distributive fairness are higher when outcomes are perceived to be equal (Greenberg, 1987). Distributive fairness refers to the comparison an individual makes of his or her outcome to another’s outcome. It refers to the extent to which rewards are distributed fairly amongst colleagues. When this is unjust, there is a strong feeling that this way of distribution has to change. Distributive theories show the importance of comparing outcomes when evaluating outcomes (Van den Bos, Vermunt & Wilke, 1997). People can become suspicious when an equal person receives a significantly different compensation, and lose faith in the PM&IS, which lowers motivation. Other important factors are a fair distribution regarding education, age and position, and whether the reward is in itself justifiable (Colquitt, 2001). The process leading to the general feeling of fairness, is more affected by procedures than by the distribution (Van den Bos et al., 1997).
Interactional fairness
Interactional fairness is a part of procedural fairness, but is dealt with separately in this research because of its great affect in organizational circumstances. It is about how the process is communicated and whether the supervisor treats the subordinates with respect (Blader & Tyler, 2003). Also the possibility to express one’s opinion makes a process more fair. Levanthal (1980) determined six rules, factors, that make a system fair. These factors are consistence, bias suppression, accuracy, correctability, representativeness and ethicality. Interactional fairness is also divided in interpersonal fairness and informational fairness: Interpersonal fairness reflects the degree in which people are treated with politeness, dignity, and respect by authorities and third parties involved in executing procedures or determining outcomes. Informational fairness covers the explanations provided to people and giving information about why procedures were used in a certain way or why rewards are distributed in a certain way (Colquitt, 2001). Whether a PM&IS is perceived as interactionally fair depends on the way the incentives are announced, whether there is transparency, whether the PM&IS’s meaning is clear and how changes and procedures are communicated.
2.4 Sub-questions
In this section the specific focus of this study is explained, and literature about the relations among the above-named concepts is reviewed. Expectations are discussed concerning which relations are to be expected and for what reason. These expectations result in three sub-questions.
PMSs and incentives
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reward performance. This system as a whole (PM&IS) can be enabling or coercive; a difference that can be very significant. If such a system is designed as enabling, can be determined by the presence of four factors of Adler & Borys: repair, internal transparency, global transparency, and flexibility. In the same article they state that in further research development of appropriate theoretical explanations of why these four features should lead to the associated outcomes. Other researchers endorsed this and took it even further by indicating that PMSs are not simply coercive or enabling by their design. It is how these systems are implemented that makes them enabling or coercive (Minnaard, Hassan & Vosselman). This raises the question what exactly makes a PMS enabling.
An enabling system often is present in a company where tasks have high complexity and there are no strict outcomes. This makes it more difficult to measure performance, because there is no clear output which can be used to measure performance (Wouters & Wilderom, 2008). This can cause performance measures to be incomplete. This absence of the possibility for objective measurement makes an enabling PMS hard to combine with incentives, which are based on measurements. Besides that, organizations with an enabling PMS often have intrinsically motivated employees. Extrinsic motivation through incentives can crowd out the intrinsic motivation (Georgellis, Iossa, Tabvuma, 2011). Therefore it is expected that incentives, especially when high, are not often combined with an enabling PMS. This in contrast to a coercive PMS, which often have measurable outcomes. The need for extrinsic motivation of employees also better suits within a coercive PMS.
This raises the first sub-question:
1. What makes a PM&IS enabling?
PMSs and fairness
A reward is introduced to improve the motivation, and thereby the effort of the employee. But a reward is mostly based on the employee’s performance. If the relation between effort and performance is not clear enough (for example, because of uncontrollable risk), and the performance according to the measurement does not align with the effort made, the measurement can be perceived as unfair. This addresses the importance of a good PMS.
A PMS has many aspects that influence the perception of fairness. The design and use of a PMS has an influence on the perception of fairness. The scope and method of measurement both influence the perception of fairness. When performance is measured with inaccurate measurement systems, employees feel that the measurement does not truthfully reflect what they see as their real contribution to their organization (Wouters & Wilderom, 2008). Inaccuracy can caused by the scope: a narrow measurement system measures only some of the activities of the employee, and therefore he or she will not feel valued for his or her actual performance. An overly broad measurement will result in there being too much uncontrollable risk involved. An employee will feel that the measurement will depend on actions for which he or she has no responsibility (Jordan & Messner, 2012). In both situations a system will be perceived as rather unfair, because there might be no clear link between effort and performance.
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the outcomes they experience are more positive when the procedures that produce these outcomes are fair (Thibaut & Walker, 1975). An enabling PMS has a number of characteristics in common with procedural fairness, such as transparency, flexibility, and repair. Also influence in the form of voice, which is present in enabling PMS, makes the perception of this system more fair. This suggests that an enabling measurement system is often perceived as more fair when compared to a coercive system, because in a coercive systems these factors are often absent. To overcome situations of unfairness, firms can use subjective evaluations as substitute for explicit matters, which is often seen within enabling PMSs (Gibbs et al., 2009). How PMS are perceived is important to know, because the more confident employees are that they are being treated fairly, the more willing they are to accept authorities’ efforts to direct their work (Blader & Tyler, 2003).
This raises the second sub-question:
2. Is an enabling PMS perceived as more fair?
Incentives and fairness
A PM&IS differs from a PMS in that there are consequences based on the measurement, in the form of incentives. For an incentive to be effective and motivating, it needs to be fair. The incentive is linked to the distributive fairness. An incentive is fair when someone perceives that he or she earns this incentive, and when it is equal compared to colleagues doing the same work. This distributive perceived fairness amongst colleagues is very important. People do not value their rewards in terms of absolute value, they feel appreciation when they compare them with the rewards received by others (Wawoe, 2011). People have the tendency to evaluate their own performance as more positive than it actually is. This makes that people quickly feel offended when someone else receives more reward than they do, because they cannot value their own performance objectively. Distributive unfairness can be tempered by procedural and interactional fairness. If employees receive unequal incentives, it is very important that at least the procedural is very clear, to work as a ‘buffering’ effect for unfair distributed incentives (Blader & Tyler).
This leads to the final sub-question:
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3. Methodology
This chapter will elaborate on the research methodology. It defines how the empirical research is performed and what type of method is used to conduct this research.
This paper provides a better understanding of how different PM&IS’s are perceived in terms of fairness. The aim is to understand and describe this phenomenon and mechanisms which are at work. Cooper and Schindler (2008) state that if the why and how of a phenomena are investigated, it is a qualitative study. It explores this particular field, by gathering rich data. Interviews are a good method to directly gather perceptions of individual members (Yin, 1994). The perspectives of people involved are gathered through interviews, to find the reasoning behind the influence of different PM&ISs on fairness. This approach will lead to new insights to extent our current knowledge about this subject. It is built on existing literature about incentives and PMS’s of Adler and Borys (1996), Wouter and Wilderom (2008) and Ahrens and Chapman (2004). In the last part of this article, findings that add to the existing literature are presented (Van Aken, Berends & van der Bij, 2012).
3.1 Data collection
The data for this research is gathered in various medium to large sized companies located in the Netherlands which work with incentive systems. Research showed that companies with more than one affiliate are more likely to use a form of performance based rewards (Klaveren & Tijdens, 2008), the reason why mostly companies with more establishments are approached. Data is collected in a wide range of companies: profit, non-profit, local, national and international. The companies are active in different industries, to get a broad overview and complete picture of various incentive systems. To get insights in the influence of the various PM&ISs on the perception of fairness, this diversity is important. When selecting respondents, function, length of position held and the reward system are taken into consideration. Primary data about this business phenomenon is collected in the form of fourteen interviews. Eventually four HR-employees, five managers and five employees from eleven different companies have been interviewed. A complete list of respondents can be found in appendix one. They were asked questions in a semi-structured interview about their function, the PMS, incentives and fairness. The interviews being semi-structured help limit the researcher bias by giving guidelines, but give enough freedom to be able to identify new issues that were not originally part of the questionnaire (Yin, 1994). In some cases two people with a different function within the same company are interviewed. This is done in order to get a more complete overview of the situation in a company. The mixture of insights and perspectives from employees from different companies and different functions lower the respondent bias and increase the reliability of the data (Akens, Berends & Van der Bij, 2012). The interviews took place between the 20th of November and the 18th of December and lasted between 42 and 79 minutes. Besides
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3.2 Data analysis
All interviews were recorded with the respondents permission. The interviews are completely transcribed. The framework of Adler and Borys (1996) is used to analyze the PM&ISs. The method used is a coding process which increased recognition of important findings in the interviews prior to the process of interpretation. The codes are used to determine the different PMS, types of fairness and incentives present in each company. That information is used to make a summary for each company, which can be found in the result section. The codes for this part were mostly deductive: based on examined literature. The interviews were analyzed with the qualitative data analysis program Kwalitan. When analyzing the different areas, all relevant text could be brought up, which made the analysis more complete. The codes used can be found in appendix three. Because it is a small sample, the data may not be generalized, and only preliminary propositions have been suggested in the discussion section.
3.3 Questionnaire
For the semi-structured interviews, three questionnaires are used. One for the policymaker (HR-employee), one for the executor, the serving hatch of the policy (manager) and one for the persons that receive performance based pay (employee). The questionnaires are largely the same, but the employee is asked about their own experiences and the policy maker and manager about how it is perceived by their subordinates. In the next section the questions that are asked are explained.
First, general information about the respondent and the company are asked, to get a clear image of the respondent and his or her education. Questions about the function are asked to get insights in the activities and responsibilities of the respondent and/or subordinates. After that, information about the performance measurement is gathered, to figure out how the PMS is designed and whether the PMS is enabling or coercive. This is inventoried by asking questions about options for repair, transparency and flexibility. Questions about the incentive are asked to get to know which information the incentives are based on and how they are divided, including the amount and time frame. In this part also questions about the fairness of the link between effort and incentive are asked. Last, questions about the distributive, interactional and procedural fairness are asked. HR-employees are also asked about their role in the PM&IS.
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4. Results
The results are presented for each company. A short description of the company is followed by a description of the performance measurement system, the incentive and the perceived fairness. The performance measurement system is analyzed on a scale of being enabling or coercive, based on the results on repair, internal transparency, global transparency and flexibility. The incentive is based on its height, in comparison with the base pay. It is concluded with the perception of fairness this system has.
4.1 Company results
Company R
Company R is a multinational selling services. The people that work there are highly educated and/or experienced. The work is complex. They receive a high salary, of which 30% is variable. This variable part varies depending on the team turnover (75%) compared to the targets, and how well they executed their personal targets (25%) that are set with their manager, and grated by that manager. The target-setting and evaluation happen each quarter. The managers have a calibrate-session before they grade the employees.
Repair: Low, because the reward system is set internationally, and only evaluated briefly by an employee satisfaction survey.
Internal transparency: High, workers are explicitly instructed how the system works and they can look it up in databases.
Global transparency: High, because goals were shared and attuned to each other internationally. Flexibility: Low, 75% was based on figures, so there was no flexibility. The reaching of one’s own targets was more flexible; because that was based on the grade of the manager.
It can be concluded that the PM&IS is mostly coercive, also because there was such over-regulation that people sometimes stopped showing out-of-role behavior. The incentives are really high, but the employees are more motivated by getting high grades, because those also work as entrance requirements for trainings (abroad), coaching sessions and promotions. Because of the high reliance on the team turnover, the link between your own performance and your incentive is too unclear. Therefore the incentive is perceived as little unfair by the staff.
Company S
This is a local Dutch company with a staff of 40 people, selling ground (territory), to people who want to invest. The work is simple and repetitive. My respondent has to call people to sell ground, and calls about 120 people on a working day. Besides a base salary, the employees receive a % of the sales of the customers who eventually end up paying. There are also competitions between colleagues for money. The performance of the sales people is judged according to the number of clients that make an appointment.
Repair: Low, the employees feel free to express their opinion about the system directly to the managers, but don’t have an official vote.
Internal transparency: High, because the systems is exactly clear.
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at the expense of targets for other people and the organizational goal, so awareness is present but subordinate to self-interest.
Flexibility: Low, exact measures are used. Someone either does become a client or does not, no matter how hard you tried.
It can be concluded that the PMS tends to be coercive, because it is set to make the workers keep doing their job and there is no room for experimentation. The incentive is high, with the only aim to keep the employees motivated. The intrinsic motivation is low. Depending on your sales, you can receive up to 25% of your salary as an extra incentive. The current system is perceived as completely fair.
McDonald’s
The managers of McDonalds, a multinational, get an incentive if they reach four self-set, ambitious targets based on a percentage of the turnover. The managers can receive €300 euro’s, or part of it, each month. This incentive is only cashed if the mystery guest, which visits the restaurant twice a month, found the service adequate. If there is one chance ‘missed’ to satisfy the mystery guest, the bonus is cut in half. Repair: Medium, the system itself is set, but it is evaluated in inter-branch meetings, and changed over the last years based on feedback from the managers. If a manager has plausible reasons to disagree with a mystery guest, they can appeal against the score.
Internal transparency: High, the company numbers are well-known and are presented each week so that every management team member knows whether they are going to reach the targets.
Global transparency: Medium, role within the company is clear, but your contribution to the whole , there is transparency in the job that you have and how your work contributes to the whole company.
Flexibility: Low, the evaluation of the goals is based on straight figures, so there can be no discussion or (miss)interpretation.
Based on the above the system seems between enabling and coercive, but during the interview it became clear that there are strict rules and regulations, and there is less room for experimentation. Therefore, the PM&IS is mostly coercive. The effect of the incentive is to create awareness of the financial part of the job. The incentive is medium/high; too low to actually be motivating. The kick of getting a good assessment and satisfying the mystery guest is much more important. The respondent thinks it is a fair system, although she does not help the guests herself, but it is her task and responsibility to train her employees.
Wensink
The respondent is the responsible manager for repair and maintenance of Mercedes cars. The incentive system is identical to the other 20 affiliates. The manager receives 1% of the net profits, on top of a good base salary. Investments above €1.000 euro are not included. This results in the respondent trying to replace equipment, when the cost of repairs almost reach €1.000. Headquarters know about this, and think it is ‘part of the game’.
Repair: This is medium, because although the system is imposed from the headquarters, there is room for feedback. Each month there is an evaluation with the headquarters. As a result the incentive system has changed over time. Years ago it was based on estimated budget, which led to ‘monkey business’. Internal transparency: High, it is completely clear for the employee how much he is going to earn and how this is linked with his activities.
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Flexibility: Low, because that 1% will stay the same, regardless the circumstances.
It can be concluded that the PMS is mostly enabling, because of the high degree of freedom there is. The incentive is medium/high, but rather to create awareness for the financial part of the job than motivating. It works to stimulate the manager to be innovative but also to cut costs. He finds the link fair, although it does not reflect his effort, because his goal is to get the net profit as high as possible, which is his responsibility. However great the uncontrollable risk might be, ultimately he has to perform well.
Company T
Company T is a Dutch, internationally operating bank. Employees could get a yearly salary increase by reaching targets. Targets were partly set nationally, and partly together with a manager, and evaluated by the end of each year.
Repair: This was low, because the system was set nationally, and some targets were function specific and pre-set. You could pick a few for yourself from predetermined targets.
Internal transparency: Low, because a lot of goals were already set by higher management which prevented employees thinking of goals themselves. The goals are evaluated by the manager, and could not be influenced.
Global transparency: Medium, employees focus on their own targets and less with the whole company. Flexibility: Medium, you could not change goals in the course of the year, but the assessment was done by the opinion of the manager which could take your personal situation into account.
It can be concluded that the PMS is mostly coercive. The incentive is medium, a different assessment can result in hundreds of euros per year. The assessment is much more important than the increase in salary. 75% of the employees are already on the maximum of their salary scale, so they do not receive an incentive, and aren’t actually bothered by the PM&IS. The system is seen as unfair by some employees, because not all activities are measured, and the measurement of some goals is very subjective.
Navy
The navy is a non-profit organization. The respondent is a manager of a team of twenty people. Every year personal goals are set and after a year evaluated for each employee together with their manager. The manager gets to divide a variable amount reserved for bonuses each year among the team. There are also ‘personal temporary allowances’, to keep high-valued employees from leaving. The awarding of these is subjective and not public.
Repair: Low, it is a set system, which can’t be influenced.
Internal transparency: Medium, manager has to justify to her management why certain people receive the gratification, but the personal allowances are granted behind closed doors.
Global transparency: Medium, the Navy is a real hierarchical and scattered organization so the official contribution to the whole organization is clear, but employees are mostly focused on their own task. Flexibility: High, the manager judges based on her own observations.
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NHL
NHL is the university of applied sciences in Leeuwarden. Together with the head of the department, personal goals are set at the beginning of the year. When evaluated, the teacher receives a bad,
satisfactory/good or excellent. In case of performing regularly (satisfactory or good), employees receive
one step salary growth within their scale. It is possible to receive an extra step when someone is granted with excellent, but this is rare, only 1% receives that. Only 0,5% receives a bad. This is granted in private to prevent feelings of unfairness.
Repair: Medium, employees can influence the way in which the assessment form is used, and make minor changes to it.
Internal transparency: Medium, the workers understand the system, but are upset when they receive a ‘satisfactory’, and are not aware that a certain group should receive a satisfactory. Some also not see the use of the system and only see it as formality instead of the enabling function it supposed to have. Global transparency: High, the teachers are highly intrinsically motivated and working together a lot, to reach the best possible outcome for the organization as a whole.
Flexibility: High, targets are set and evaluated with the manager. The manager can use his or her personal evaluation, and can take the personal situation of the evaluated person into account.
It can be concluded that the PMS is mostly enabling. The incentive system is not really used. When it is used, it is to elevate inequalities between people doing equal work, but are not paid likewise. The culture, a non-profit organization, best served with a pleasant atmosphere without competition. There is a high perception of fairness. There is a high ‘equality’ feeling, so employees prefer to see that everyone gets the same pay.
Municipality Texel
This is a public organization, employees are granted by the default salary-structure for the public sector: Salary scales are fixed, based on functions, and within scales, the staff members make a small salary progress each year, until they reach their scale maximum in approximately 10 years within a function. There are gratification options, but these are only given as ‘thank you’ for extra effort, and are in most of the cases not expected by the recipients. The HR-staff would like to change this, and work with wage steps within the scale according to performance. There is a lot of resistance by employees because they would like to keep everything the same because they feel they have the ‘right’ on extra salary each year. Repair: Medium, workers have influence on which goals they are going to strive for each year.
Internal transparency: High, the system is very clear and enables the staff to do other tasks beside their normal work. The goals each year are based on the input of the employee.
Global transparency: High, there is a lot of teamwork, because people have a clear image of the higher goal of the municipality.
Flexibility: High, targets are set and evaluated together with the manager.
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Municipality Zwolle
The basic principle is the same as Texel, but Zwolle is a further in pay for performance. This is unique amongst municipalities. Around 8% gets an extra salary progress. There are also gratifications handed out, to 15% of the employees. It is possible for supervisors to make performance agreements with subordinates. The HR manager would like to develop this system further, to base it even more on someone’s personal competences.
Repair: Medium, personnel has influence on which goals they are going to strive for each year.
Internal transparency: High, employees are stimulated to do other tasks beside their normal work and their manager gives them that opportunity. The goals each year are based on the input of the employee. Global transparency: High, there is a ‘make Zwolle the best municipality of Europe’ spirit.
Flexibility: High, targets are set and evaluated together with the manager.
It can be concluded that the PMS is enabling. There are more incentives than at Texel, and indeed work a little as motivating factor. They think the system is fair, because when someone receives a gratification or extra wage it is obvious that that person deserves it.
Kopwerk
Kopwerk is the umbrella foundation for 25 Christian elementary schools. Teachers receive salary based on the default salary-structure for public organizations. The government wants to have 20% of the teachers in each school to be ‘LB’ teachers, with more education and responsibilities, in exchange for a little more pay. This 20% is difficult to achieve, because in some schools there are many candidates and they have to reject competent people, and in some schools there are not enough candidates.
Repair: Medium, there are set goals and responsibilities that belong to a LB function.
Internal transparency: Medium, the system is explained well, but the selection of people who may become an ‘LB’ teacher is difficult. Steps are undertaken to make it as objective as possible.
Global transparency: High, the role of teachers in the total organizations is very clear. One good teacher doesn’t make well-educated children, so teachers help each other.
Flexibility: Low, because the requirements to become an LB teacher and 20% are set.
There can be concluded that the system is mostly coercive. It is present to get teachers in the LB function and to reward them accordingly, but only in a fixed way. The incentive is low, most teachers do the LB function because they are only intrinsically motivated. Some teachers think it is fair that they get paid for the more demanding job they do. But it is also perceived as not fair, because not everyone with the same competences can become LB teacher.
Protestantse Kerk Nederland
The PKN is a national service giving nonprofit organization with the default salary-structure. Until recently, there was no a PMS. My respondent, HR-manager, introduced the measurement system and that was not easy to implement. The employees really like doing things as they did, and are really ‘kind’ to each other. Before performance related pay can be introduced, there has to be a huge culture change.
Repair: Medium, the system is set, but the goals can be set and evaluated individual.
Internal transparency: Medium, the system is explained well, but personnel more ‘fears’ the system than they see it as enabling system. The managers also have difficulty criticizing people.
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employees still did not share things with each other, because they were afraid they would lose their ‘trick’. Flexibility: High, because the assessment of the goal is evaluated based on input of the individual. The system is enabling, but perceived as little coercive because employee aren’t used to the system. There are no incentives. Employees are afraid the new system will be fair.
Summary
In this figure, the results are summarized. In the Legend the colors, abbreviations and dots are explained. Legend:
RP = Repair
IT = Internal Transparency GB = Global Transparency FL = Flexibility
Low Middle High
PMS System: • = coercive •• = mostly coercive ••• = between both •••• = mostly enabling ••••• = enabling
Table 1: Summary of results
4.2 Related findings
In this section, the results that came out of the interviews about the relations between PMSs, incentives and fairness are presented. Figure one will be used to show the results.
Performance measurement and incentives
If there is looked at the factors and the interpretation of the PMSs in table one, it can be noticed that the companies with presence of the four factors of Adler and Borys (1996), tend to have a more enabling PMS. The darker the four blocks, the more dots are present, which indicate an enabling PMS. The determination whether a PMS is enabling or coercive is not the sum of the score on the four blocks. This is caused by additional factors from the interviews that made a PMS more coercive or enabling. With enabling companies, this can be seen at municipality Texel and the Navy. They are both indicated as mostly enabling, buy the Navy scores lower on the four factors, but the high flexibility still makes it mostly enabling. When looked at the more coercive companies this nuance can be seen at Company T and Company S. Although Company T scores lower on the four factors of enabling, it is perceived as less coercive than Company S. The differences is these companies is that Company T has flexibility. In general, PM&IS were rather perceived as more enabling when the employees felt that the system helped them by doing their tasks, and not by when it worked as a control device for the management.
Remarkable is the fact that all four companies with a high incentive, score low on flexibility. They had in common that there were strict rules about whether or not someone would receive an incentive and how
Name RP IT GB FL PMS Incentive Fairness
Company R •• high between
Company S • high fair
McDonald’s •• medium/high fair
Wensink •••• medium/high fair
Company T •• medium unfair
Navy •••• low fair
NHL •••• low fair
Texel •••• low fair
Zwolle ••••• low fair
Kopwerk •• low little unfair
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high this incentive would be. All these companies also have a (mostly) coercive PMS. This companies have clear tasks for every employee and performance is clear to measure. An exception on this is Wensink. Despite the incentives, the respondent perceived the system as enabling.
“There are no rules or borders about what I am allowed to decide on or not. That is done in good conscience.” Mr Hogewerf, Wensink.
The interviews also showed that often the measurement in itself is very important in determining the PMS. On all levels over performance-based pay respondents mentioned that the assessment itself was more important than the money. Respondents that received a high level of performance-based pay already had a good base salary, so the money did not matter that much, but the assessment did. The importance of the assessment is also seen at non-profit institutions. Recently at NHL, they split
satisfactory/good into satisfactory and good on the assessment form, because people did not like to be
merely ‘satisfactory’. This change mattered a lot to the employees, even though it did not influence their salary.
“Formally it doesn’t have any effect, but the need was there. We want to let someone know if his performance is satisfactory or good, that’s the difference. But this doesn’t have effect on the pay.” Mw Idsardi, NHL.
The most aversion to incentives was found in organizations with a public nature, such as the government, schools, and the church. In all these organizations there is a minimal presence of incentives. There is the belief that inequality causes dissatisfaction. There is a culture of working together, helping each other, and being nice, and competition does not play a part.
Performance measurement and fairness
All enabling companies had a high perception of fairness. All these companies had performance evaluation based on the opinion of the manager, often combined with input of their own. This doesn’t mean that all coercive systems were perceived as unfair; some were, and some weren’t.
Although a coercive system, my respondent at McDonald’s perceived the PM&IS as fair. In the first case, the employee had a function with a lot of responsibility, and the uncontrollable risk lay in the performance of her team of subordinates, for whom she carried responsibility. The responsibility is very clearly delimited. This reduces the fear of uncontrollable risk, because it is part of the job, and perceived as fair. The weak link between effort and incentive is still perceived as fair, because that is the job she signed up for.
“You can keep rewarding [if someone tries really hard], but if things aren’t right, they aren’t right. You don’t have to receive money for it then.” Mw Marks, McDonald’s.
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seen at Company R, people are bothered and have a sense of unfairness. This is because they cannot influence a situation in which the uncontrollable risk lies with someone else. That system indeed was not perceived as totally fair.
The other example of a coercive system that is perceived as fair, is at Company S. The output of work is easy to measure, there is no deviation of the rules and there is no uncontrollable risk. This causes the system to be perceived as fair.
“You can’t have bad luck, it’s a numbers game. If you perform well enough, you always make a sale.” Mr. de Boer.
The coercive system at Company T and Kopwerk were also (partly) seen as unfair. Those two companies had in common that the system had the potential to be enabling, because was is designed to capture experience in procedures. However, the implementation created a culture of fear at Company T, and feelings of unfairness at Kopwerk because not everyone could be treated equally based on performance. This were both consequences which were not intended when designing the PM&IS.
Incentives and fairness
All the interviewees agreed on the fact that they feel that they have earned the extra money they have received. In that view, all the incentives someone received were perceived as fair. But, when those incentives were compared to the incentives received by others, there were perceptions of unfairness. The extent to which incentives are motivating, and their effectiveness, depends largely on the perception of fairness.
An incentive is less motivating if the procedure behind it or its distribution is seen as unfair. This is especially seen in public or non-profit organizations with low rivalry. Even though the incentive is very low, it is very important that the distribution is done fairly and that everyone is treated equally. Not because of the importance of the money, but employees want to be valued the same as people they perceive as equals. This was such a point of discussion at the NHL, that they decided to keep private which persons received an incentive. This is understandable in the light of what is noticed when incentives are handed out in public. When it cannot be justified to the others, employees are quickly discontented about unfair distribution. Especially in these organizations a high sensitivity to distributive unfairness is seen.
“If the manager can’t justify why someone gets a gratification, it leads to disgruntled reactions. Luckily, in 9 out of 10 cases no one is aggrieved.” Mw Kersbergen, municipality Texel.
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5. Discussion
In this section, the results are interpreted and explained by existing literature. Each relation will be discussed by answering the sub-question.
PMS and incentives
To find what actually makes an PMS enabling, the presence four factors of Adler and Borys (1996) were compared with the actual classification of the PMS. It was expected that the four factors would make a PM&IS enabling. However, during the analysis it became clear that whether or not a PM&IS was enabling was not only determined by the design. The absence or presence of those four factors did not predict whether or not a PM&IS was enabling. Other factors are also at work. This was also found by Wouters & Wilderom (2008), who identified three other important factors: a PMS has to be experience-based, allow experimentation and be professional to be enabling. The results of this research support the importance of these other factors. Minnaard, Hassan & Vosselman also state that determining an PM&IS is not about the structures, but that the ongoing interactions in everyday operational activities have even more influence.
The existence of an enabling system with high incentives at Wensink was not expected. It turned out that this enabling system worked very well combined with incentives. This finding, that some enabling systems also have incentives, is supported by the work of Wouters & Wilderom (2008). They deny that incentives are not suitable when combined with an enabling PMS: performance-based rewards can enable employees to do tasks in their own way without functioning as a control device (Wouters & Wilderom, 2008).
The implementation and the way a system is carried out can cause a system to be perceived as more enabling or coercive as it actually is. When employees perceive a system as helpful and supporting, a system is perceived as more enabling. When it is restrictive and employees feel being narrowed in their work, the system is perceived as more coercive.
PMS and fairness
To find out if an enabling PMS is perceived as more fair, the PM&IS of the companies are compared with the perceived fairness. As expected, in general an enabling PMS increased the perceived level of fairness. This relation was enhanced by the fact that employees in companies with equal levels of incentives, but one with an enabling PMS and one with a coercive PMS had unequal perceptions about the fairness of the PM&IS. Results of fair procedures are almost always seen as more fair than results with unfair procedures (Sweeny & McFarlin, 1992).
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and low performers to leave the organization (Dijke et al., 2009). This was demonstrated through a temporary change in the reward system, which, in the eyes of the employees, was not fair. They were less motivated, so they worked less hard. This can also be explained by the research of McFarin & Sweeney (1992). They found that when employees perceived high levels of procedural fairness, distributive fairness is also perceived as higher. Other companies with coercive PMS that were perceived as fair had in common that they had high transparency and low flexibility. The low flexibility was embodied in clear rules and coals concerning the measurement and granting of incentives. It seems that these factors cause high procedural justice, which makes the procedure still fair enough to work motivating. This procedural justice obviates the lack of distributive justice.
Some systems that were perceived as enabling actually had no objective measurement process. The measurement of one’s performance was made based on the manager’s perception. It is common that the assessment of performance is done by one’s supervisor (Campbell, Campbell & Ho-Beng, 1998). This might explain the acceptance of this method of measurement. This fact, combined with the low level of incentive as consequence of this measurement, could explain why the employees were not bothered by this subjective measurement system.
Incentives and fairness
To find out which role incentives have on fairness, the working and perception of the incentives is explored. In general, if the procedural fairness is high employees find their incentives fair, unless they feel that they receive less pay than an equal performing colleague. This is consistent with of Wawoe’s (2011) explanation of high distributive fairness. The procedure of granting an incentive, is the PMS. This indicates that the PMS has a lot of influence in whether the distribution of the incentive itself is perceived as fair.
Another finding is that the companies with low incentives seems to be less bothered by the measurement. This is in line with the findings of Jordan & Messner (2012), that unfair measurements are not really important, until there are consequences linked to that measurement, in the form of incentives. In this cases, people seem to be more motivated by appreciation than by money. People are not bothered by unfair measurement, if the consequences are small.
The fear of a reward system with high incentives found in non-profit organizations was remarkable. This might be explained by the type of people working in such organizations. If they are people with a history of mediocre performance, or employees with low self-esteem, such employees could expect that more fairly distributed earnings would actually mean lower earnings (Dijke et al., 2009).
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6. Conclusion
6.1 Summary
This paper began by addressing the importance of motivating employees. The development of a PM&IS that actually motivates is not easy. Fairness is one condition for a motivating incentive. Therefore, inspired by the case study of Jordan & Messner (2012) the goal was to find out in what way the design of a PM&IS influences the perception of the fairness of such a system. To find an answer, fourteen employees, from eleven different companies, were interviewed. The literature of Adler & Borys (1996) and Wouters & Wilderom (2008) was used to identify PMSs as enabling or coercive, and Collquitt (2001) was used to identify different aspects of fairness. This literature field is enriched by the rich data that was collected in a broad field. By focusing on different dimensions of measurement, incentives, and perceptions, the results and relations become more specific and precise. More understanding of what determines whether a PM&IS is fair is added to the existing literature. This study particularly responds to a call for research into the factors that influence a coercive or enabling orientation in a firm (Free, 2007).
6.2 Managerial implications
This study addresses a combination of factors that has not been investigated in the literature before. In that way, it provides a positive contribution towards the understanding of the influences of different types of PM&ISs on the perception of fairness. Knowing the importance of fairness for employee motivation, an implication of this study’s conclusions is that analyzing what sort of uncontrollable risk is present is very important to keeping employees motivated. Managers must try to include only ‘manageable’ uncontrollable risk within the performance measurement. Risk within one’s responsibility seems to bother employees less than risk outside’s someone’s responsibility. The finding that employees experience an assessment as being more important than the incentive itself implies that managers should focus on the fair assessment of an employee rather than on the incentive. The manager should consider whether the effects that he or she wants to produce are necessarily best accomplished through incentives. If it is hard to distribute incentives in a fair way, it is better to not distribute them at all. This improves the ability of managers to understand the correlation between reward systems and employee needs (Long, Bendersky & Morril, 2011).
6.3 Limitations
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6.4 Future research
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7. Appendices
7.1 Respondents
Table 2, overview of the respondents *Marco Jansen, Leon de Vries and Nick de Boer are fictitious names.
7.2 Questionnaire
Presented is the questionnaire for the employee, and HR or M for a question means that that question is only for the HR-employee or the Manager. Between braces is extra information or purpose of that question.
1. General
Name, age, educational background, company, company information, function, length of position held.
2. Function
What does your function include? HR+M: What is your role in the PM&IS?
What for education or experience was necessary for this specific function?
How complex is your work? (lot of different tasks, lot of autonomy, responsibilities)
3. Performance measurement
How is your performance measured? (explicitly for incentives)
Are you doing things differently because of this measurement system?
(repair) To which extent is it possible to change the performance measurement system, according to new insights or knowledge?
(internal transparency) Are you able to see through and understand the logic of the system?
