Compensation

Management, 2e
Dipak Kumar
Bhattacharyya
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CHAPTER 6
Employee Motivation
and Compensation

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Introduction
Designing compensation with employee motivation requires understanding of
factors that motivate them and so also their perceived reinforcers that can be
included in the compensation structure.
A well-designed compensation structure can motivate employees.

A motivating compensation design not only motivates the employees to become

good performers and continue with it, but also attracts others to join the
organization.
For compensation design to derive the benefit of motivation, it needs to focus on
all these aspects so that the desired behavioural outcome in employees could lead
to significant changes in the organizational performance.
Motivation is a dynamic human resource (HR) process and it is difficult to specify
an organization-specific motivation tool.

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Objectives of Motivation
Motivation enhances performance and improves productivity. Motivation fulfils
several important objectives of an organization, as explained below:

Productive use of resources

Increased efficiency
Quality consciousness
Goal-directed behaviour
Friendly work culture
Increased morale
Increased sense of responsibility and belonging
Integration of individual identity with organizational identity
Teamwork
Participative decision making
Creativity and growth
Reduced employee turnover
Organizational stability

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Mechanism of Motivation
The process starts with physiological (extrinsic) or psychological (intrinsic)
needs of an employee.
The satisfaction of extrinsic or intrinsic needs activates the drive of the
employee to achieve a goal.

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Relationship between motivation and compensation

Employee compensation is linked to both intrinsic and extrinsic factors of
motivation of an individual.
Any compensation system needs to be motivating in order to:

attract individuals with knowledge, ability, and talent as demanded

by specific organizational tasks
retain effective, valued, and productive employees to get the
desired level of performance
promote high degree of job involvement and job satisfaction, and an
attitude conducive to loyalty and commitment to the organization

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Theories of Motivation
Process of development of work motivation theory is documented in figure below:

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Theories of Motivation
Megginson (1977), for the sake of our convenience, classified the leading theories
of motivation into three groups:
1.

2.

3.

Perspective theories Taylors scientific management approach, various

human relations theories, McGregors theory Y, etc., which, in reality,
stress upon the management to motivate employees.
Content theories Maslows hierarchy of needs theory, Herzbergs twofactor theory, McClellands achievement need theory, etc., which try to
identify the causes of behaviour.
Process theories Various behavioural theories, which believe in stimulus
response relationship vis--vis motivation (e.g. Skinners behaviour
modification theory) and cognitive theories (e.g., Vrooms expectancy
theory and PorterLawlers future-oriented expectancy theory), which
deal with the genesis of behaviour.

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Motivation and Morale

Morale is `a mental condition or attitude of individual and groups which
determines their willingness to cooperate (Flippo, 1989).
Morale is `the overall tone, climate or atmosphere of work (Dale, 1970).

Motivation stimulates individuals into action to achieve the desired goals.

Motivation thus is the function of need and drives. Motivation enhances
the potential for morale.
Morale is an individuals or a groups attitude towards a particular subject,
which contributes to a general feeling of satisfaction at the workplace.

High morale is an index of good human relations, which reduces labour

turnover, absenteeism, indiscipline, grievances, etc.

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Motivational Research and Compensation Design

Understanding of effective motivational research process can help
in identifying the appropriate compensation components.
For effective compensation design, we need a deeper
understanding as the perceived need factors of employees differ
from one organization to another. Motivational surveys are used in
organizations to understand whether employees are motivated and
are contributing their best.

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Motivating Generation Y
Millennial or Generation Y employees are those who were born
between 1976 and 1996.
These employees are considered to be attitudinally different from
Generation X (born between 1965 and 1975) and Baby Boomers
(born between 1945 and 1964).
Generation Y employees show more interest for career options, that
can meet their job expectations. They are more demanding from
their employers, and expect their workplaces should have the stateof-the art technology, with access to internet.

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Compensation practices for talented employees

Attracting and retaining talent in organizations require designing
compensation plan that matches with the expectations of talented
employees.

Employee stock option plan (ESOP) is extensively used by

organizations to motivate talented employees.
Most of the companies, in India and abroad, have now embraced
ESOP as a compensation element to attract and retain talent in their
organizations.

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