Study notes

Financial methods of motivation

  • Levels: GCSE, AS
  • Exam boards: AQA, Edexcel, OCR, IB

Although some theorists like Herzberg believe that money is not a positive motivator (although lack of it can de-motivate), pay systems are designed to motivate employees.

The scientific / Theory X approach, in particular, argues that workers respond to financial rewards.

Getting employee pay right (often referred to as the "remuneration package") is a crucial task for a business.

Why is pay important?

  • It is an important cost for a business (in some "labour-intensive" businesses, payroll costs are over 50% of total costs)
  • People feel strongly about it
  • Pay is the subject of important business legislation (e.g. national minimum wage; equal opportunities)
  • It helps attract reliable employees with the skills the business needs for success
  • Pay also helps retain employees – rather than them leave and perhaps join a competitor
  • For most employees, the remuneration package is the most important part of a job – and certainly the most visible part of any job offer

There are many methods of financial reward:

  • Time-rate pay
  • Piece-rate pay
  • Commission
  • Other performance-related pay (including bonuses)
  • Shares and options
  • Benefits in kind ("fringe benefits")
  • Pensions

Because pay is a complex issue, there are several ways in which businesses determine how much to pay:

  • Job evaluation / content; this is usually the most important factor. What is involved in the job being paid? How does it compare with similar jobs?
  • Fairness – pay needs to be perceived and be seen to match the level of work
  • Negotiated pay rates – the rate of pay may have been determined elsewhere and the business needs to ensure that it complies with these rates.
  • Market rates – another important influence – particularly where there is a standard pattern of supply and demand in the relevant labour market. If a business tries to pay below the "market rate" then it will probably have difficulty in recruiting and retaining suitable staff
  • Individual performance – increasingly, businesses include an element of "performance-related" reward in their pay structures.

However, it is important to remember that pay is only one element of motivation and will work best where management also give attention to:

  • Developing good management and supervision
  • Designing jobs and organising work groups to make them as satisfying as possible
  • Providing feedback to staff about their performance and training and development
  • Making effective arrangements for communications and consultation


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