The Nature of the Link Between Incentive Pay & Employee Motivation
Incentive pay is additional pay or a higher wage paid to boost the productivity of an employee. The various forms of incentive pay include merit pay, pay-for-performance, variable pay plans, individual or group bonus plans, profit-sharing, gain-sharing incentive plans, or even a salary raise.
Motivation is the activation or inducement of goal-oriented behavior such as job performance.
The classical reinforcement theory that focuses on the relationship between a target behavior (such as work performance) and its consequences (such as pay) forms the basis of incentive pay to motivate employees. This theory premises a positive link between incentive pay and employee motivation under the assumption that since wages or salary is what ultimately brings people to work, increased wages as incentive pay would lead to increased motivation.
The behavioral school of management, however, holds that even though individuals experience increased happiness when their pay rises, the intensity of desire for wealth remains negatively correlated with psychological wellbeing. McClelland’s theory of needs, for instance, classifies employee needs into three: need for Achievement, Affiliation, or Power. Victor Vroom's theory holds motivation as a function of Expectation, Instrumentality, and Valance. Money thereby alone does not motivate, and the extent of motivation depends on the motive for acquiring wealth, in which psychological needs play an important role.
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