Is money a real motivator for employees to perform better? What are the relationships between pay raises and performance from experts?

According to Laegard (2006), money is a complicated motivational factor, which is interconnected with other motivating factors and is therefore difficult to determine. While financial rewards can play a role in motivating employees, it is important to recognize that they are not the sole determining factor. Based on the studies of Kulchmanov & Kaliannan (2014), money still is the strongest and compulsory factor for employees, which can satisfy only basic needs. In isolation of other non-financial motivational factors money is not able to encourage staff to go beyond their duties and increase their productivity. 

Many different studies and experts have shed light on the relationship between pay raises and performance. In this article we will discuss a few factors affecting the motivation of employees.

Motivation and money

Lazear (2000) observed that after the introduction of an incentive payment plan at a company, employee productivity increased by 44%. However, money is just one aspect of motivation. Herzberg defined two sets of factors in deciding employees' working attitudes and level of performance, named Motivation & Hygiene Factors (Robbins, 2009). Motivation Factors are intrinsic factors that will increase employees’ job satisfaction; while Hygiene Factors are extrinsic factors to prevent any employees’ dissatisfaction Tan (2013). According to Herzberg, money falls into the category of hygiene factors, which are essential for preventing dissatisfaction but do not necessarily lead to long-term motivation or job satisfaction. Motivators, on the other hand, include factors like challenging tasks, recognition, growth opportunities, which have a more significant impact on employee performance and satisfaction.

Adam’s equity theory 

Another aspect that is important to consider is that employees often compare their pay and rewards to those of their colleagues. If the employee perceives inequality, he or she he will act to correct the inequity. The employee may lower productivity or reduce the quality of their job (Al-Zawahreh & Al-Madi, 2012). This suggests that employees evaluate the fairness of their pay in relation to others. If they perceive inequity, either overpayment or underpayment compared to colleagues in similar positions, it can negatively affect their motivation and performance. Therefore, it is crucial to establish fair and transparent compensation structures to maintain employee morale and engagement.

Individual perception of payment

According to (Dyer & Parker, 1975), some of the employees often see both intrinsic and extrinsic aspects, such as achievement, recognition, prestige, and advancement.This suggests that impact of pay raises on performance can vary among individuals. Some employees may be highly motivated by financial rewards and strive to perform better when offered higher compensation. Others may be driven by factors such as job satisfaction, autonomy, or professional growth. Understanding individual preferences and aligning rewards with employee needs and aspirations can contribute to better performance outcomes.

Pay for performance

Organizations such as Google, Facebook heavily rely on human capital and also give a central role to pay, being among the highest paying companies (Robinson, 2014). Research suggests that tying pay raises directly to performance can positively influence motivation and performance. According to Gerhart et al (2009, p. 253), what makes pay for performance such an interesting and important topic is that “when ‘it works,’ it seems capable of producing spectacularly good results and when it does not work, it can likewise produce spectacularly bad results”. Many researches have shown that pay for performance is very risky and can produce excessive competition within the company, focusing too little on performance (e.g., quality, customer service). This method must therefore be used with care.

Non-monetary reward

While pay raises can provide short-term motivation, sustained performance improvement often requires a combination of financial and non-financial factors. Bari et al. (2013) found that freedom, career development plan, valuation of employees, learning programs, open and comfortable work environment and good supervisory relations, all these factors positively impacts employee attitude and performance in the workplace. Creating a positive work environment, fostering a supportive culture, providing opportunities for skill development and career advancement, recognizing and rewarding achievements, and promoting work-life balance are all critical aspects that contribute to employee performance and engagement.

Conclusion

Money can be a strong motivator for employees to do better at their jobs, but its effect on performance depends on many things. While it's important to offer financial rewards, employees are also driven by non-financial factors like how satisfied they are with their work, the opportunities for growth, recognition, and the overall work environment. To ensure long-lasting high performance and keep employees happy, organizations should take a holistic approach by combining financial incentives with other things that motivate them.

References:

Laegard J. (2006), Organizational Theory, Chapter 3 (p. 68)

Kulchmanov A. & Kaliannan M. (2014), Does Money Motivate Employees? Empirical Study of Private and Public Financial Sector in Kazakhstan, International Journal of Business and Management; Vol. 9, No. 11

Robbins S. P. (2009). Organizational Behavior: International Version, 13/E. Pearson Higher Education

Tan S.K. (2013), Herzberg's Two-Factor Theory on Work Motivation: Does it Work for Today's Environment? Global Journal of Commerce & Management Perspective

Al-Zawahreh A. & Al-Madi F. (2012), The Utility of Equity Theory in Enhancing Organizational Effectiveness, European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 46

Lazear E. (2000). Performance pay and productivity. Am. Econ. Rev. 90:1346–61

Robinson M. (2014). The best-paying companies in America. Business Insider, April 16

Bari, N., Arif, U., & Shoaib, A. (2013). Impact of Non-Financial Rewards on Employee Attitude and Performance in the Workplace. A Case Study of Business Institute of Karachi, International Journal of Scientific and Engineering Research, Pakistan, 4(7), 2554-2559.