Chapter 6: Designing a Motivating Work

Environment
Learning Objectives

After reading this chapter, you should be able to do the following:

1. Describe the history of job design approaches.

2. Understand how to increase the motivating potential of a job.
3. Understand why goals should be SMART.
4. Set SMART goals.
5. Give performance feedback effectively.
6. Describe individual-, team-, and organization-based incentives that can be
used to motivate the workforce.

What are the tools companies can use to ensure a motivated workforce? Nucor seems
to have found two very useful tools to motivate its workforce: a job design
incorporating empowerment, and a reward system that aligns company performance
with employee rewards. In this chapter, we will cover the basic tools organizations
can use to motivate workers. The tools that will be described are based on motivation
principles such as expectancy theory, reinforcement theory, and need-based theories.
Specifically, we cover motivating employees through job design, goal setting,
performance feedback, and reward systems.

6.1 Motivating Steel Workers Works:

The Case of Nucor

Figure 6.1
Wikimedia Commons – public domain.

Manufacturing steel is not a glamorous job. The industry is beset by many problems, and
more than 40 steel manufacturers have filed for bankruptcy in recent years. Most young
employees do not view working at a steel mill as their dream job. Yet, one company
distinguished itself from all the rest by remaining profitable for over 130 quarters and by
providing an over 350% return on investment (ROI) to shareholders. The company is clearly
doing well by every financial metric available and is the most profitable in its industry.

How do they achieve these amazing results? For one thing, every one of Nucor Corporation’s
(NYSE: NUE) 12,000 employees acts like an owner of the company. Employees are
encouraged to fix the things they see as wrong and have real power on their jobs. When there
is a breakdown in a plant, a supervisor does not have to ask employees to work overtime;
employees volunteer for it. In fact, the company is famous for its decentralized structure and
for pushing authority and responsibility down to lower levels in the hierarchy. Tasks that
previously belonged to management are performed by line workers. Management listens to
lower level employees and routinely implements their new ideas.

The reward system in place at Nucor is also unique, and its employees may be the highest
paid steelworkers in the world. In 2005, the average Nucor employee earned $79,000,
followed by a $2,000 bonus decided by the company’s annual earnings and $18,000 in the
form of profit sharing. At the same time, a large percentage of these earnings are based on
performance. People have the opportunity to earn a lot of money if the company is doing
well, and there is no upward limit to how much they can make. However, they will do much
worse than their counterparts in other mills if the company does poorly. Thus, it is to
everyone’s advantage to help the company perform well. The same incentive system exists at
all levels of the company. CEO pay is clearly tied to corporate performance. The incentive
system penalizes low performers while increasing commitment to the company as well as to
high performance.

Nucor’s formula for success seems simple: align company goals with employee goals and
give employees real power to make things happen. The results seem to work for the company
 and its employees. Evidence of this successful method is that the company has one of the
lowest employee turnover rates in the industry and remains one of the few remaining
nonunionized environments in manufacturing. Nucor is the largest U.S. minimill and steel
scrap recycler.
Based on information from Byrnes, N., & Arndt, M. (2006, May 1). The art of
motivation. BusinessWeek. Retrieved April 30, 2010,
from [Link] Foust, D. (2008,
April 7). The best performers of 2008. BusinessWeek. Retrieved April 30, 2010,
from [Link]
chan=magazine+channel_top+stories; Jennings, J. (2003). Ways to really motivate people:
Authenticity is a huge hit with Gen X and Y. The Secured Lender, 59, 62–70; Marks, S. J.
(2001). Incentives that really reward and motivate. Workforce, 80, 108–114.

Discussion Questions

1. What are some potential problems with closely tying employee pay to company
performance?
2. Nucor has one of the lowest turnover rates in the industry. How much of the organization’s
employee retention is related to the otherwise low pay of the steel working industry?
3. What would Nucor’s strategy look like in a nonmanufacturing environment (e.g., a bank)?
4. Would Nucor’s employee profit-sharing system work at a much larger company? At what
point does a company become too large for profit sharing to make a difference in employee
motivation?
5. Imagine that the steel industry is taking a major economic hit and Nucor’s profits are way
down. Employees are beginning to feel the pinch of substantially reduced pay. What can
Nucor do to keep its employees happy?

6.2 Motivating Employees Through

Job Design
Learning Objectives

1. Learn about the history of job design approaches.

2. Consider alternatives to job specialization.
3. Identify job characteristics that increase motivating potential.
4. Learn how to empower employees.

Importance of Job Design

Many of us assume the most important motivator at work is pay. Yet,
studies point to a different factor as the major influence over worker
motivation—job design. How a job is designed has a major impact on
employee motivation, job satisfaction, commitment to an organization,
absenteeism, and turnover.
The question of how to properly design jobs so that employees are more
productive and more satisfied has received attention from managers and
researchers since the beginning of the 20th century. We will review major
approaches to job design starting from its early history.

Scientific Management and Job

Specialization
Perhaps the earliest attempt to design jobs came during the era of
scientific management. Scientific management is a philosophy based on
the ideas of Frederick Taylor as presented in his 1911 book, Principles of
Scientific Management. Taylor’s book is among the most influential
books of the 20th century; the ideas presented had a major influence over
how work was organized in the following years. Taylor was a mechanical
engineer in the manufacturing industry. He saw work being done
haphazardly, with only workers in charge. He saw the inefficiencies
inherent in employees’ production methods and argued that a manager’s
job was to carefully plan the work to be performed by employees. He also
believed that scientific methods could be used to increase productivity.
As an example, Taylor found that instead of allowing workers to use their
own shovels, as was the custom at the time, providing specially designed
shovels increased productivity. Further, by providing training and specific
instructions, he was able to dramatically reduce the number of laborers
required to handle each job (Taylor, 1911; Wilson, 1999).

Figure 6.2
This Ford panel assembly line in Berlin, Germany, is an example of specialization. Each person on the line has a
different job.
Kyle Harris – This old #Model T assembly line is awesome! – CC BY 2.0.

Scientific management proposed a number of ideas that have been

influential in job design in the following years. An important idea was to
minimize waste by identifying the most efficient method to perform the
job. Using time–motion studies, management could determine how much
time each task would require and plan the tasks so that the job could be
performed as efficiently as possible. Therefore, standardized job
performance methods were an important element of scientific
management techniques. Each job would be carefully planned in advance,
and employees would be paid to perform the tasks in the way specified by
management.

Furthermore, job specialization was one of the major advances of this

approach. Job specialization entails breaking down jobs into their
simplest components and assigning them to employees so that each
person would perform a select number of tasks in a repetitive manner.
There are a number of advantages to job specialization. Breaking tasks
into simple components and making them repetitive reduces the skill
requirements of the jobs and decreases the effort and cost of staffing.
Training times for simple, repetitive jobs tend to be shorter as well. On
the other hand, from a motivational perspective, these jobs are boring and
repetitive and therefore associated with negative outcomes such as
absenteeism (Campion & Thayer, 1987). Also, job specialization is
ineffective in rapidly changing environments where employees may need
to modify their approach according to the demands of the situation
(Wilson, 1999).

Today, Taylorism has a bad reputation, and it is often referred to as the

“dark ages” of management when employees’ social motives were
ignored. Yet, it is important to recognize the fundamental change in
management mentality brought about by Taylor’s ideas. For the first time,
managers realized their role in influencing the output levels of
employees. The concept of scientific management has had a lasting
impact on how work is organized. Taylor’s work paved the way to
automation and standardization that is virtually universal in today’s
workplace. Assembly lines where each worker performs simple tasks in a
repetitive manner are a direct result of job specialization efforts. Job
specialization eventually found its way to the service industry as well.
One of the biggest innovations of the famous McDonald brothers’ first
fast-food restaurant was the application of scientific management
principles to their operations. They divided up the tasks so that one
person took the orders while someone else made the burgers, another
person applied the condiments, and yet another wrapped them. With this
level of efficiency, customers generally received their order within 1
minute (Spake, 2001; Business heroes, 2005).

Rotation, Job Enlargement, and

Enrichment
One of the early alternatives to job specialization was job rotation. Job
rotation involves moving employees from job to job at regular intervals.
When employees periodically move to different jobs, the monotonous
aspects of job specialization can be relieved. For example, Maids
International Inc., a company that provides cleaning services to
households and businesses, utilizes job rotation so that maids cleaning the
kitchen in one house would clean the bedroom in a different one (Denton,
1994). Using this technique, among others, the company is able to reduce
its turnover level. In a supermarket study, cashiers were rotated to work
in different departments. As a result of the rotation, employees’ stress
levels were reduced, as measured by their blood pressure. Moreover, they
experienced less pain in their neck and shoulders (Rissen et al., 2002).

Job rotation has a number of advantages for organizations. It is an

effective way for employees to acquire new skills and in turn for
organizations to increase the overall skill level of their employees
(Campion, Cheraskin, & Stevens, 1994). When workers move to different
positions, they are cross-trained to perform different tasks, thereby
increasing the flexibility of managers to assign employees to different
parts of the organization when needed. In addition, job rotation is a way
to transfer knowledge between departments (Kane, Argote, & Levine,
2005). Rotation may also have the benefit of reducing employee
boredom, depending on the nature of the jobs the employee is performing
at a given time. From the employee standpoint, rotation is a benefit,
because they acquire new skills that keep them marketable in the long
run.

Is rotation used only at lower levels of an organization? Anecdotal

evidence suggests that companies successfully rotate high-level
employees to train managers and increase innovation in the company. For
example, Nokia uses rotation at all levels, such as assigning lawyers to
act as country managers or moving network engineers to handset design.
This approach is thought to bring a fresh perspective to old problems
(Wylie, 2003). Wipro Ltd., India’s information technology giant that
employs about 80,000 workers, uses a 3-year plan to groom future leaders
of the company by rotating them through different jobs (Ramamurti,
2001).

Job enlargement refers to expanding the tasks performed by employees to

add more variety. By giving employees several different tasks to be
performed, as opposed to limiting their activities to a small number of
tasks, organizations hope to reduce boredom and monotony as well as
utilize human resources more effectively. Job enlargement may have
similar benefits to job rotation, because it may also involve teaching
employees multiple tasks. Research indicates that when jobs are enlarged,
employees view themselves as being capable of performing a broader set
of tasks (Parker, 1998). There is some evidence that job enlargement is
beneficial, because it is positively related to employee satisfaction and
higher quality customer services, and it increases the chances of catching
mistakes (Campion & McClelland, 1991). At the same time, the effects of
job enlargement may depend on the type of enlargement. For example,
job enlargement consisting of adding tasks that are very simple in nature
had negative consequences on employee satisfaction with the job and
resulted in fewer errors being caught. Alternatively, giving employees
more tasks that require them to be knowledgeable in different areas
seemed to have more positive effects (Campion & McClelland, 1993).

Job enrichment is a job redesign technique that allows workers more

control over how they perform their own tasks. This approach allows
employees to take on more responsibility. As an alternative to job
specialization, companies using job enrichment may experience positive
outcomes, such as reduced turnover, increased productivity, and reduced
absences (McEvoy & Cascio, 1985; Locke, Sirota, & Wolfson, 1976).
This may be because employees who have the authority and
responsibility over their work can be more efficient, eliminate
unnecessary tasks, take shortcuts, and increase their overall performance.
At the same time, there is evidence that job enrichment may sometimes
cause dissatisfaction among certain employees (Locke, Sirota, &
Wolfson, 1976). The reason may be that employees who are given
additional autonomy and responsibility may expect greater levels of pay
or other types of compensation, and if this expectation is not met they
may feel frustrated. One more thing to remember is that job enrichment is
not suitable for everyone (Cherrington & Lynn, 1980; Hulin & Blood,
1968). Not all employees desire to have control over how they work, and
if they do not have this desire, they may become frustrated with an
enriched job.

Job Characteristics Model

The job characteristics model is one of the most influential attempts to
design jobs with increased motivational properties (Hackman & Oldham,
1975). Proposed by Hackman and Oldham, the model describes five core
job dimensions leading to three critical psychological states, resulting in
work-related outcomes.

Figure 6.3

The Job Characteristics Model has five core job dimensions.

Source: Adapted from Hackman, J. R., & Oldham, G. R. (1975). Development of the job diagnostic survey.
Journal of Applied Psychology, 60, 159–170.

Skill variety refers to the extent to which the job requires a person to
utilize multiple high-level skills. A car wash employee whose job consists
of directing customers into the automated car wash demonstrates low
levels of skill variety, whereas a car wash employee who acts as a
cashier, maintains carwash equipment, and manages the inventory of
chemicals demonstrates high skill variety.

Task identity refers to the degree to which a person is in charge of

completing an identifiable piece of work from start to finish. A Web
designer who designs parts of a Web site will have low task identity,
because the work blends in with other Web designers’ work; in the end it
will be hard for any one person to claim responsibility for the final
output. The Web master who designs an entire Web site will have high
task identity.

Task significance refers to whether a person’s job substantially affects

other people’s work, health, or well-being. A janitor who cleans the floors
at an office building may find the job low in significance, thinking it is
not a very important job. However, janitors cleaning the floors at a
hospital may see their role as essential in helping patients get better.
When they feel that their tasks are significant, employees tend to feel that
they are making an impact on their environment, and their feelings of
self-worth are boosted (Grant, 2008).

Autonomy is the degree to which a person has the freedom to decide how
to perform his or her tasks. As an example, an instructor who is required
to follow a predetermined textbook, covering a given list of topics using a
specified list of classroom activities, has low autonomy. On the other
hand, an instructor who is free to choose the textbook, design the course
content, and use any relevant materials when delivering lectures has
higher levels of autonomy. Autonomy increases motivation at work, but it
also has other benefits. Giving employees autonomy at work is a key to
individual as well as company success, because autonomous employees
are free to choose how to do their jobs and therefore can be more
effective. They are also less likely to adopt a “this is not my job”
approach to their work environment and instead be proactive (do what
needs to be done without waiting to be told what to do) and creative
(Morgeson, Delaney-Klinger, & Hemingway, 2005; Parker, Wall, &
Jackson, 1997; Parker, Williams, & Turner, 2006; Zhou, 1998). The
consequence of this resourcefulness can be higher company performance.
For example, a Cornell University study shows that small businesses that
gave employees autonomy grew four times more than those that did not
(Davermann, 2006). Giving employees autonomy is also a great way to
train them on the job. For example, Gucci’s CEO Robert Polet points to
the level of autonomy he was given while working at Unilever PLC as a
key to his development of leadership talents (Gumbel, 2008). Autonomy
can arise from workplace features, such as telecommuting, company
structure, organizational climate, and leadership style (Gajendran &
Harrison, 2007; Garnier, 1982; Lyon & Ivancevich, 1974; Parker, 2003).

Feedback refers to the degree to which people learn how effective they
are being at work. Feedback at work may come from other people, such
as supervisors, peers, subordinates, and customers, or it may come from
the job itself. A salesperson who gives presentations to potential clients
but is not informed of the clients’ decisions, has low feedback at work. If
this person receives notification that a sale was made based on the
presentation, feedback will be high.

The relationship between feedback and job performance is more

controversial. In other words, the mere presence of feedback is not
sufficient for employees to feel motivated to perform better. In fact, a
review of this literature shows that in about one-third of the cases,
feedback was detrimental to performance (Kluger & DeNisi, 1996). In
addition to whether feedback is present, the sign of feedback (positive or
negative), whether the person is ready to receive the feedback, and the
manner in which feedback was given will all determine whether
employees feel motivated or demotivated as a result of feedback.

According to the job characteristics model, the presence of these five core
job dimensions leads employees to experience three psychological states:
They view their work as meaningful, they feel responsible for the
outcomes, and they acquire knowledge of results. These three
psychological states in turn are related to positive outcomes such as
overall job satisfaction, internal motivation, higher performance, and
lower absenteeism and turnover (Brass, 1985; Humphrey, Nahrgang, &
Morgeson, 2007; Johns, Xie, & Fang, 1992; Renn & Vandenberg, 1995).
Research shows that out of these three psychological states, experienced
meaningfulness is the most important for employee attitudes and
behaviors, and it is the key mechanism through which the five core job
dimensions operate.

Are all five job characteristics equally valuable for employees? Hackman
and Oldham’s model proposes that the five characteristics will not have
uniform effects. Instead, they proposed the following formula to calculate
the motivating potential of a given job (Hackman & Oldham, 1975):

Equation 6.1
MPS = ((Skill Variety + Task Identity + Task Significance) ÷ 3) ×
Autonomy × Feedback

According to this formula, autonomy and feedback are the more

important elements in deciding motivating potential compared to skill
variety, task identity, or task significance. Moreover, note how the job
characteristics interact with each other in this model. If someone’s job is
completely lacking in autonomy (or feedback), regardless of levels of
variety, identity, and significance, the motivating potential score will be
very low.

Note that the five job characteristics are not objective features of a job.
Two employees working in the same job may have very different
perceptions regarding how much skill variety, task identity, task
significance, autonomy, or feedback the job affords. In other words,
motivating potential is in the eye of the beholder. This is both good and
bad news. The bad news is that even though a manager may design a job
that is supposed to motivate employees, some employees may not find
the job to be motivational. The good news is that sometimes it is possible
to increase employee motivation by helping employees change their
perspective about the job. For example, employees laying bricks at a
construction site may feel their jobs are low in significance, but by
pointing out that they are building a home for others, their perceptions
about their job may be changed.

Do all employees expect to have a job that has a high motivating

potential? Research has shown that the desire for the five core job
characteristics is not universal. One factor that affects how much of these
characteristics people want or need is growth need strength. Growth need
strength describes the degree to which a person has higher order needs,
such as self-esteem and self-actualization. When an employee’s
expectation from his job includes such higher order needs, employees
will have high-growth need strength, whereas those who expect their job
to pay the bills and satisfy more basic needs will have low-growth need
strength. Not surprisingly, research shows that those with high-growth
need strength respond more favorably to jobs with a high motivating
potential (Arnold & House, 1980; Hackman & Lawler, 1971; Hackman &
Oldham, 1975; Oldham, Hackman, & Pearce, 1976). It also seems that an
employee’s career stage influences how important the five dimensions
are. For example, when employees are new to an organization, task
 significance is a positive influence over job satisfaction, but autonomy
may be a negative influence (Katz, 1978).

OB Toolbox: Increase the Feedback You Receive: Seek It!

 If you are not receiving enough feedback on the job, it is better to seek it instead
of trying to guess how you are doing. Consider seeking regular feedback from
your boss. This also has the added benefit of signaling to the manager that you
care about your performance and want to be successful.
 Be genuine in your desire to learn. When seeking feedback, your aim should be
improving yourself as opposed to creating the impression that you are a
motivated employee. If your manager thinks that you are managing impressions
rather than genuinely trying to improve your performance, seeking feedback
may hurt you.
 Develop a good relationship with your manager. This has the benefit of giving
you more feedback in the first place. It also has the upside of making it easier to
ask direct questions about your own performance.
 Consider finding trustworthy peers who can share information with you
regarding your performance. Your manager is not the only helpful source of
feedback.
 Be gracious when you receive feedback. If you automatically go on the defensive
the first time you receive negative feedback, there may not be a next time.
Remember, even if receiving feedback, positive or negative, feels
uncomfortable, it is a gift. You can improve your performance using feedback,
and people giving negative feedback probably feel they are risking your good
will by being honest. Be thankful and appreciative when you receive any
feedback and do not try to convince the person that it is inaccurate (unless there
are factual mistakes).

Sources: Adapted from ideas in Jackman, J. M., & Strober, M. H. (2003, April).
Fear of feedback. Harvard Business Review, 81(4), 101–107; Wing, L., Xu, H.,
Snape, E. (2007). Feedback-seeking behavior and leader-member exchange: Do
supervisor-attributed motives matter? Academy of Management Journal, 50, 348–
363; Lee, H. E., Park, H. S., Lee, T. S., & Lee, D. W. (2007). Relationships
between LMX and subordinates’ feedback-seeking behaviors. Social Behavior &
Personality: An International Journal, 35, 659–674.

Empowerment
One of the contemporary approaches to motivating employees through
job design is empowerment. The concept of empowerment extends the
idea of autonomy. Empowerment may be defined as the removal of
conditions that make a person powerless (Conger & Kanugo, 1988). The
idea behind empowerment is that employees have the ability to make
decisions and perform their jobs effectively if management removes
certain barriers. Thus, instead of dictating roles, companies should create
an environment where employees thrive, feel motivated, and have
discretion to make decisions about the content and context of their jobs.
Employees who feel empowered believe that their work is meaningful.
They tend to feel that they are capable of performing their jobs
effectively, have the ability to influence how the company operates, and
can perform their jobs in any way they see fit, without close supervision
and other interference. These liberties enable employees to feel powerful
(Spreitzer, 1995; Thomas & Velthouse, 1990). In cases of very high
levels of empowerment, employees decide what tasks to perform and how
to perform them, in a sense managing themselves.

Research has distinguished between structural elements of empowerment

and felt empowerment. Structural empowerment refers to the aspects of
the work environment that give employees discretion, autonomy, and the
ability to do their jobs effectively. The idea is that the presence of certain
structural factors helps empower people, but in the end empowerment is a
perception. The following figure demonstrates the relationship between
structural and felt empowerment. For example, at Harley-Davidson Motor
Company, employees have the authority to stop the production line if
they see a blemish on the product (Lustgarten, 2004). Leadership style is
another influence over experienced empowerment (Kark, Shamir, &
Chen, 2003). If the manager is controlling, micromanaging, and bossy,
chances are that empowerment will not be possible. A company’s
structure has a role in determining empowerment as well. Factories
organized around teams, such as the Saturn plant of General Motors
Corporation, can still empower employees, despite the presence of a
traditional hierarchy (Ford & Fottler, 1995). Access to information is
often mentioned as a key factor in empowering employees. If employees
are not given information to make an informed decision, empowerment
attempts will fail. Therefore, the relationship between access to
information and empowerment is well established. Finally, empowering
individual employees cannot occur in a bubble, but instead depends on
creating a climate of empowerment throughout the entire organization
(Seibert, Silver, & Randolph, 2004).

Figure 6.4
 The empowerment process starts with structure that leads to felt empowerment.
Source: Based on the ideas in Seibert, S. E., Silver, S. R., & Randolph, W. A. (2004). Taking empowerment to the
next level: A multiple-level model of empowerment, performance, and satisfaction. Academy of Management
Journal, 47, 332–349; Spreitzer, G. M. (1995). Psychological empowerment in the workplace: Dimensions,
measurement, and validation. Academy of Management Journal, 38, 1442–1465; Spreitzer, G. M. (1996). Social
structural characteristics of psychological empowerment. Academy of Management Journal, 39, 483–504.

Empowerment of employees tends to be beneficial for organizations,

because it is related to outcomes such as employee innovativeness,
managerial effectiveness, employee commitment to the organization,
customer satisfaction, job performance, and behaviors that benefit the
company and other employees (Ahearne, Mathieu, & Rapp, 2005; Alge et
al., 2006; Chen et al., 2007; Liden, Wayne, & Sparrowe, 2000; Spreitzer,
1995). At the same time, empowerment may not necessarily be suitable
for all employees. Those individuals with low growth strength or low
achievement need may not benefit as strongly from empowerment.
Moreover, the idea of empowerment is not always easy to implement,
because some managers may feel threatened when subordinates are
empowered. If employees do not feel ready for empowerment, they may
also worry about the increased responsibility and accountability.
Therefore, preparing employees for empowerment by carefully selecting
and training them is important to the success of empowerment
interventions.

OB Toolbox: Tips for Empowering Employees

 Change the company structure so that employees have more power on their jobs.
If jobs are strongly controlled by organizational procedures or if every little
decision needs to be approved by a superior, employees are unlikely to feel
empowered. Give them discretion at work.
 Provide employees with access to information about things that affect their
work. When employees have the information they need to do their jobs well and
understand company goals, priorities, and strategy, they are in a better position
to feel empowered.
 Make sure that employees know how to perform their jobs. This involves
selecting the right people as well as investing in continued training and
development.
 Do not take away employee power. If someone makes a decision, let it stand
unless it threatens the entire company. If management undoes decisions made by
employees on a regular basis, employees will not believe in the sincerity of the
empowerment initiative.
 Instill a climate of empowerment in which managers do not routinely step in and
take over. Instead, believe in the power of employees to make the most accurate
decisions, as long as they are equipped with the relevant facts and resources.

Sources: Adapted from ideas in Forrester, R. (2000). Empowerment: Rejuvenating

a potent idea. Academy of Management Executive, 14, 67–79; Spreitzer, G. M.
(1996). Social structural characteristics of psychological empowerment. Academy
of Management Journal, 39, 483–504.
Key Takeaway
Job specialization is the earliest approach to job design, originally described by the
work of Frederick Taylor. Job specialization is efficient but leads to boredom and
monotony. Early alternatives to job specialization include job rotation, job
enlargement, and job enrichment. Research shows that there are five job
components that increase the motivating potential of a job: Skill variety, task
identity, task significance, autonomy, and feedback. Finally, empowerment is a
contemporary way of motivating employees through job design. These approaches
increase worker motivation and have the potential to increase performance.
Exercises
1. Is job rotation primarily suitable to lower level employees, or is it possible to use
it at higher levels in the organization?
2. What is the difference between job enlargement and job enrichment? Which of
these approaches is more useful in dealing with the boredom and monotony of
job specialization?
3. Consider a job you held in the past. Analyze the job using the framework of the
job characteristics model.
4. Does a job with a high motivating potential motivate all employees? Under
which conditions is the model less successful in motivating employees?
5. How would you increase the empowerment levels of employees?

6.3 Motivating Employees Through

Goal Setting
 Learning Objectives

1. Describe why goal setting motivates employees.

2. Identify characteristics of a goal that make it effective.
3. Identify limitations of goals.
4. Understand how to tie individual goals to strategic goals.

Goal-Setting Theory
Goal-setting theory (Locke & Latham, 1990) is one of the most
influential and practical theories of motivation. In fact, in a survey of
organizational behavior scholars, it has been rated as the most important
(out of 73 theories) (Miner, 2003). The theory has been supported in over
1,000 studies with employees ranging from blue-collar workers to
research-and-development employees, and there is strong support that
setting goals is related to performance improvements (Ivancevich &
McMahon, 1982; Latham & Locke, 2006; Umstot, Bell, & Mitchell,
1976). According to one estimate, goal setting improves performance at
least 10%–25% (Pritchard et al., 1988). Based on this evidence,
thousands of companies around the world are using goal setting in some
form, including Coca Cola Company, PricewaterhouseCoopers
International Ltd., Nike Inc., Intel Corporation, and Microsoft
Corporation, to name a few.

Setting SMART Goals

Are you motivated simply because you have set a goal? The mere
presence of a goal does not motivate individuals. Think about New
Year’s resolutions that you made but failed to keep. Maybe you decided
that you should lose some weight but then never put a concrete plan in
action. Maybe you decided that you would read more but didn’t. Why did
your goal fail?

Figure 6.5
 SMART goals help people achieve results.

Accumulating research evidence indicates that effective goals are

SMART. A SMART goal is a goal that
is specific, measurable, aggressive, realistic, and time-bound.

Specific and Measurable

Effective goals are specific and measurable. For example, “increasing
sales to a region by 10%” is a specific goal, whereas deciding to “delight
customers” is not specific or measurable. When goals are specific,
performance tends to be higher (Tubbs, 1986). Why? If goals are not
specific and measurable, how would you know whether you have reached
the goal? A wide distribution of performance levels could potentially be
acceptable. For the same reason, “doing your best” is not an effective
goal, because it is not measurable and does not give you a specific target.

Certain aspects of performance are easier to quantify. For example, it is

relatively easy to set specific goals for productivity, sales, number of
defects, or turnover rates. However, not everything that is easy to
measure should be measured. Moreover, some of the most important
elements of someone’s performance may not be easily quantifiable (such
as employee or customer satisfaction). So how do you set specific and
measurable goals for these soft targets? Even though some effort will be
involved, metrics such as satisfaction can and should be quantified. For
example, you could design a survey for employees and customers to track
satisfaction ratings from year to year.

Aggressive
This may sound counterintuitive, but effective goals are difficult, not
easy. Aggressive goals are also called stretch goals. According to a Hay
Group study, one factor that distinguishes companies that are ranked as
“Most Admired Companies” in Fortune magazine is that they set more
difficult goals (Stein, 2000). People with difficult goals outperform those
with easier goals (Mento, Steel, & Karren, 1987; Phillips & Gully, 1997;
Tubbs, 1986; Yukl & Latham, 1978). Why? Easy goals do not provide a
challenge. When goals are aggressive and require people to work harder
or smarter, performance tends to be dramatically higher. Research shows
that people who have a high level of self-efficacy and people who have a
high need for achievement tend to set more difficult goals for themselves
(Phillips & Gully, 1997).

Realistic
While goals should be difficult, they should also be based in reality. In
other words, if a goal is viewed as impossible to reach, it will not have
any motivational value. In fact, setting impossible goals and then
punishing people for not reaching these goals is cruel and will demotivate
employees.

Time-Bound
The goal should contain a statement regarding when the proposed
performance level will be reached. For example, “increasing sales to a
region by 10%” is not a time-bound goal, because there is no time limit.
Adding a limiter such as “by December of the current fiscal year” gives
employees a sense of time urgency.

Here is a sample SMART goal: Wal-Mart Stores Inc. recently set a goal
to eliminate 25% of the solid waste from U.S. stores by the year 2009.
This goal meets all the conditions of being SMART (as long as 25% is a
difficult yet realistic goal) (Heath & Heath, 2008). Even though it seems
like a simple concept, in reality many goals that are set within
organizations may not be SMART. For example, Microsoft recently
conducted an audit of its goal setting and performance review system and
found that only about 40% of the goals were specific and measurable
(Shaw, 2004).

Why Do SMART Goals Motivate?

There are at least four reasons why goals motivate (Latham, 2004; Seijts
& Latham, 2005; Shaw, 2004). First, goals give us direction. When you
have a goal of reducing shipment of defective products by 5% by
September, you know that you should direct your energy toward defects.
The goal tells you what to focus on. For this reason, goals should be set
carefully. Giving employees goals that are not aligned with company
goals will be a problem, because goals will direct employees’ energies to
a certain end. Second, goals energize people and tell them not to stop
until the goal is accomplished. If you set goals for yourself such as “I will
have a break from reading this textbook when I finish reading this
section,” you will not give up until you reach the end of the section. Even
if you feel tired along the way, having this specific goal will urge you to
move forward. Third, having a goal provides a challenge. When people
have goals and proceed to reach them, they feel a sense of
accomplishment. Finally, SMART goals urge people to think outside the
box and rethink how they are working. If the goal is not very difficult, it
only motivates people to work faster or longer. If a goal is substantially
difficult, merely working faster or longer will not get you the results.
Instead, you will need to rethink the way you usually work and devise a
creative way of working. It has been argued that this method resulted in
designers and engineers in Japan inventing the bullet train. Having a goal
that went beyond the speed capabilities of traditional trains prevented
engineers from making minor improvements and inspired them to come
up with a radically different concept (Kerr & Landauer, 2004).
 Figure 6.6

SMART goals motivate for a variety of reasons.

Sources: Based on information contained in Latham, G. P. (2004). The motivational benefits of goal-
setting. Academy of Management Executive, 18, 126–129; Seijts, G. H., & Latham, G. P. (2005). Learning versus
performance goals: When should each be used? Academy of Management Executive, 19, 124–131; Shaw, K. N.
(2004). Changing the goal-setting process at Microsoft. Academy of Management Executive, 18, 139–142.

When Are Goals More Effective?

Even when goals are SMART, they are not always equally effective.
Sometimes, goal setting produces more dramatic effects compared to
other methods. At least three conditions that contribute to effectiveness
have been identified (Latham, 2004; Latham & Locke, 2006).

Feedback
To be more effective, employees should receive feedback on the progress
they are making toward goal accomplishment. Providing employees with
quantitative figures about their sales, defects, or other metrics is useful
for feedback purposes.

Ability
Employees should have the skills, knowledge, and abilities to reach their
goals. In fact, when employees are lacking the necessary abilities, setting
specific outcome goals has been shown to lead to lower levels of
performance (Seijts & Latham, 2005). People are likely to feel helpless
when they lack the abilities to reach a goal, and furthermore, having
specific outcome goals prevents them from focusing on learning
activities. In these situations, setting goals about learning may be a better
idea. For example, instead of setting a goal related to increasing sales, the
goal could be identifying three methods of getting better acquainted with
customers.

Goal Commitment
SMART goals are more likely to be effective if employees are committed
to the goal (Donovan & Radosevich, 1998; Klein et al., 1999; Wofford,
Goodwin, & Premack, 1993). As a testament to the importance of goal
commitment, Microsoft actually calls employee goals “commitments”
(Shaw, 2004). Goal commitment refers to the degree to which a person is
dedicated to reaching the goal. What makes people dedicated or
committed to a goal? It has been proposed that making goals public may
increase commitment to the goal, because it creates accountability to
peers. When individuals have a supportive and trust-based relationship
with managers, goal commitment tends to be higher. When employees
participate in goal setting, goal commitment may be higher. Last, but not
least, rewarding people for their goal accomplishment may increase
commitment to future goals (Klein & Kim, 1998; Latham, 2004;
Pritchard et al., 1988).

Are There Downsides to Goal Setting?

Figure 6.7 Potential Downsides of Goal Setting

 Sources: Based on LePine, J. A. (2005). Adaptation of teams in response to unforeseen change: Effects of goal
difficulty and team composition in terms of cognitive ability and goal orientation. Journal of Applied
Psychology, 90, 1153–1167; Locke, E. A. (2004). Linking goals to monetary incentives. Academy of Management
Executive, 18, 130–133; Pritchard, R. D., Roth, P. L., Jones, S. D., Galgay, P. J., & Watson, M. D. (1988).
Designing a goal-setting system to enhance performance: A practical guide. Organizational Dynamics, 17, 69–78;
Seijts, G. H., & Latham, G. P. (2005). Learning versus performance goals: When should each be used? Academy of
Management Executive, 19, 124–131.

As with any management technique, there may be some downsides to

goal setting (Locke, 2004; Pritchard et al., 1988; Seijts & Latham, 2005).
First, as mentioned earlier, setting goals for specific outcomes may
hamper employee performance if employees are lacking skills and
abilities needed to reach the goals. In these situations, setting goals for
behaviors and learning may be more effective than setting goals for
outcomes. Second, goal setting may prevent employees from adapting
and changing their behaviors in response to unforeseen threats. For
example, one study found that when teams had difficult goals and
employees within the team had high levels of performance expectations,
teams had difficulty adapting to unforeseen circumstances (LePine,
2005). Third, goals focus employee attention on the activities that are
 measured. This focus may lead to sacrificing other important elements of
performance. If goals are set for production numbers, quality may suffer.
As a result, it is important to set goals touching on all critical aspects of
performance. Finally, an aggressive pursuit of goals may lead to unethical
behaviors. If employees are rewarded for goal accomplishment but there
are no rewards for coming very close to reaching the goal, employees
may be tempted to cheat.

Ensuring Goal Alignment Through

Management by Objectives (MBO)
Goals direct employee attention toward a common end. Therefore, it is
crucial for individual goals to support team goals and team goals to
support company goals. A systematic approach to ensure that individual
and organizational goals are aligned is Management by Objectives
(MBO). First suggested by Peter Drucker (Greenwood, 1981; Muczyk &
Reimann, 1989; Reif & Bassford, 1975), MBO involves the following
process:

1. Setting companywide goals derived from corporate strategy

2. Determining team- and department-level goals
3. Collaboratively setting individual-level goals that are aligned with
corporate strategy
4. Developing an action plan
5. Periodically reviewing performance and revising goals

A review of the literature shows that 68 out of the 70 studies conducted

on this topic displayed performance gains as a result of MBO
implementation (Rodgers & Hunter, 1991). It also seems that top
management commitment to the process is the key to successful
implementation of MBO programs (Rodgers, Hunter, & Rogers, 1993).
Even though formal MBO programs have fallen out of favor since the
1980s, the idea of linking employee goals to corporate-wide goals is a
powerful idea that benefits organizations.
Key Takeaway
Goal-setting theory is one of the most influential theories of motivation. In order
to motivate employees, goals should be SMART (specific, measurable, aggressive,
realistic, and time-bound). SMART goals motivate employees because they
energize behavior, give it direction, provide a challenge, force employees to think
outside the box, and devise new and novel methods of performing. Goals are more
 effective in motivating employees when employees receive feedback on their
accomplishments, have the ability to perform, and are committed to goals. Poorly
derived goals have the downsides of hampering learning, preventing adaptability,
causing a single-minded pursuit of goals at the exclusion of other activities, and
encouraging unethical behavior. Companies tie individual goals to company goals
using management by objectives.
Exercises
1. Give an example of a SMART goal.
2. If a manager tells you to “sell as much as you can,” is this goal likely to be
effective? Why or why not?
3. How would you ensure that employees are committed to the goals set for them?
4. A company is interested in increasing customer loyalty. Using the MBO
approach, what would be the department- and individual-level goals supporting
this organization-wide goal?
5. Discuss an experience you have had with goals. Explain how goal setting
affected motivation and performance.

6.4 Motivating Employees Through

Performance Appraisals
Learning Objectives

1. Understand why companies use performance appraisals.

2. Describe basic characteristics of performance appraisals.
3. List the characteristics of an effective performance appraisal.
4. Compare the advantages and disadvantages of relative versus absolute appraisals.
5. Learn how to conduct a performance appraisal meeting.
6. Understand the biases inherent in performance appraisals.

What Is a Performance Appraisal?

When employees have goals, they tend to be more motivated if they also
receive feedback about their progress. Feedback may occur throughout
the workday, but many organizations also have a formal, companywide
process of providing feedback to employees, called the performance
appraisal. A performance appraisal is a process in which a rater or raters
evaluate the performance of an employee. More specifically, during a
performance appraisal period, rater(s) observe, interact with, and evaluate
a person’s performance. Then, when it is time for a performance
appraisal, these observations are documented on a form. The rater usually
conducts a meeting with the employee to communicate performance
feedback. During the meeting, the employee is evaluated with respect to
success in achieving last year’s goals, and new goals are set for the next
performance appraisal period.

Even though performance appraisals can be quite effective in motivating

employees and resolving performance problems, in reality, only a small
number of organizations use the performance appraisal process to its full
potential. In many companies, a performance appraisal takes the form of
a bureaucratic activity that is mutually despised by employees and
managers. The problems a poor appraisal process can create may be so
severe that many experts, including the founder of the total quality
movement, Edward Deming, have recommended abolishing appraisals
altogether (Carson & Carson, 1993). On the other hand, creating and
executing an effective appraisal system actually leads to higher levels of
trust in management (Mayer & Davis, 1999). Therefore, identifying ways
of increasing appraisal effectiveness is important.

Giving employees feedback is not synonymous with conducting a

performance appraisal, because employees may (and should) receive
frequent feedback. The most effective feedback immediately follows high
or low performance. Therefore, waiting for a formal process to give
feedback would be misguided. A formal appraisal is often conducted
once a year, even though there are some organizations that conduct them
more frequently. For example, there are advantages to conducting
quarterly appraisals, such as allowing managers to revise goals more
quickly in the face of changing environmental demands (Odiorne, 1990).
Conducting appraisals once a year has the advantage of being more
convenient for managers and for effectively tying performance to annual
pay raises or bonuses.

What Is the Purpose of a Performance

Appraisal?
Performance appraisals can be important tools to give employees
feedback and aid in their development. Yet feedback is only one reason
why companies perform appraisals. In many companies, appraisals are
used to distribute rewards such as bonuses, annual pay raises, and
promotions. They may also be used to document termination of
employees. Research shows that performance appraisals tend to be
viewed as more effective when companies tie them to reward decisions
and to terminate lower performers (Lawler, 2003). This is not surprising
in light of motivation theories such as reinforcement theory, which
indicates that behavior that is rewarded is repeated. Tying appraisal
results to rewards may lead to the perception that performance is
rewarded. However, if performance appraisal ratings are not accurate, it
is possible for appraisals to be a major cause of reward unfairness.

Who Is the Rater?

Traditionally, the rater has been the supervisor. Supervisors have more at
stake when an employee is not performing well and they have access to
greater resources that can be used to improve performance. However,
relying solely on supervisors may lead to a biased appraisal system.
Many aspects of a person’s performance may remain hidden from
managers, particularly in team-based settings or organizations where
supervisors do not work in the same physical setting as the employees.
Therefore, organizations are introducing additional raters into the system,
such as peers, customers, and subordinates. As organizations become
more flat, introducing more perspectives may provide richer feedback to
employees in question. Organizations using supervisors, peers,
subordinates, and sometimes even customers are using 360-degree
feedback. In this system, feedback is gathered from all these sources, and
shared with the employee for developmental purposes. It is important to
note that 360-degree appraisals are not often used in determining pay or
promotion decisions and instead are treated as feedback tools. Using 360-
degree feedback in reward decisions may be problematic, because
individuals may avoid giving objective feedback if it means causing a
peer to lose a bonus. Since not all feedback will necessarily be positive, if
competition or jealousy exists among peers, some feedback may be
retaliatory and too negative. Keeping these problems in mind,
organizations may benefit from using only supervisor ratings in reward
decisions and using feedback from other sources for developmental
purposes (Toegel & Conger, 2003).

What Makes an Effective Appraisal

System?
What are the characteristics of an effective appraisal system? Research
identified at least three characteristics of appraisals that increase the
perception that they are fair. These characteristics include adequate
notice, fair hearing, and judgment based on evidence. Adequate
notice involves letting employees know what criteria will be used during
the appraisal. Unfortunately, in many companies the first time employees
see the appraisal form may be when they are being evaluated. Therefore,
they may be rated low on something they didn’t understand was part of
their performance. Fair hearing means ensuring that there is two-way
communication during the appraisal process and the employee’s side of
the story is heard. Judgment based on evidence involves documenting
performance problems and using factual evidence as opposed to personal
opinions when rating performance (Taylor et al., 1995).

Absolute Rating versus Relative Ranking

Appraisals
As a student, would you rather be evaluated with respect to some
objective criteria? For example, you could get an A if you correctly
answer 90% of the questions in the exam, but would get a B if you
answered only 80%. We are calling this type of appraisal an absolute
rating because the grade you get depends only on your performance with
respect to the objective criteria. The alternative to this approach is relative
ranking. In this system, you would get an A if you are one of the top 10%
of the students in class, but you would get a B if you are between 10%
and 20%. In a relative ranking system, your rating depends on how your
objective performance (test grade) compares with the rest of the students’
grades in your class.

If you say you would prefer an absolute rating, you are not alone.
Research shows that ranking systems are often viewed more negatively
by employees. However, many major corporations such as General
Electric Company (GE), Intel, and Yahoo! Inc. are using relative rankings
and truly believe in its advantages. For example, Jack Welch, the former
CEO of General Electric, instituted a forced ranking system at GE in
which 20% of employees would be in the top category, 70% would be in
the middle, and 10% would be at the bottom rank. Employees who are
repeatedly ranked at the lowest rank would be terminated. Relative
rankings may create a culture of performance by making it clear that low
performance is not tolerated; however, there are several downsides to
rankings. First, these systems carry the danger of a potential lawsuit.
Organizations such as Ford Motor Company and Microsoft faced lawsuits
involving relative rankings, because employees who were older, female,
or minority members were systematically being ranked in the lowest
category with little justification. Second, relative rankings are also not
consistent with creating a team spirit and may create a competitive,
cutthroat environment. Enron Corporation was an organization that used
relative rankings to its detriment. Third, relative systems have limited
value in giving employees concrete feedback about what to do next year
to get a better ranking. Despite their limitations, using them for a few
years may help the organization become more performance-oriented and
eliminate stagnation by weeding out some employees with persistent
performance problems. As long as these systems fit with the company
culture, are not used in a rigid manner, and are used for a short period of
time, they may be beneficial to the organization (Boyle, 2001; Lawler,
2003; McGregor, 2006).

Conducting the Appraisal Meeting

Figure 6.8

A performance appraisal meeting serves as a medium through which the rater gives positive and negative feedback
to the ratee, helps the ratee solve performance problems, and recognizes effective performance.
Reynermedia – Businessmen shaking hands – CC BY 2.0.

A performance appraisal meeting is the most important component of a

performance appraisal. After the rater uses the company’s appraisal form
to evaluate the performance of the ratee, both sides meet to discuss
positive and negative instances of performance. Thus, the meeting serves
as the key medium through which the rater gives feedback to the ratee.
 The goal of providing performance feedback is to help the ratee solve
performance problems and to motivate the employee to change behavior.
Conducting this meeting is often stressful for both parties, and training
managers in providing performance feedback may be useful to deal with
the stress of the managers as well as creating a more positive experience
for both parties (Davis & Mount, 1984).

In the most effective meetings, feedback is presented in a constructive

manner. Instead of criticizing the person, the focus should be on
discussing the performance problems and aiding the employee in
resolving these problems. By moving the focus of the conversation from
the person to the behaviors, employee defensiveness may be reduced.
When the supervisor is constructive, employees develop a more positive
view of the appraisal system. Another approach to increasing the
effectiveness of appraisal meetings is to increase employee participation.
When employees have the opportunity to present their side of the story,
they react more positively to the appraisal process and feel that the
system is fair. Finally, supervisors should be knowledgeable about the
employee’s performance. When it becomes clear that the person doing
the evaluation has little understanding of the job being performed by the
employee, reactions tend to be more negative (Cawley, Keeping, & Levy,
1998; Cederblom 1982; Burke, Weitzel, & Weir, 1978).

OB Toolbox: Conducting an Effective Performance Appraisal Meeting

Before the meeting

 Ask the person to complete a self-appraisal. This is a great way of making sure
that employees become active participants in the process and get their voice
heard.
 Complete the performance appraisal form. Document your rating using many
examples. Have more examples handy.
 Avoid recency bias. Be sure that your review covers the entire year’s
performance, not just recent events.
 Handle the logistics. Be sure that you devote sufficient time to each meeting. If
you schedule appraisals back to back, you may lose your energy in later
meetings. Be sure that the physical location is conducive to a private
conversation.

During the meeting

 Be sure to recognize effective performance. Give specific praise.

 Do not start the meeting with a criticism. Starting with positive instances of
performance helps establish a better mood and shows that you recognize what
the employee is doing right.
 Give employees lots of opportunities to talk. Ask them about their greatest
accomplishments, as well as opportunities for improvement. If they touch on an
area you wanted to cover, provide your thoughts.
 Show empathy and support. Remember: your job as a manager is to help the
person solve performance problems. Identify areas where you can help.
 Set goals and create an action plan. The outcome of the meeting should be a
written agreement about what the employee will do in the near future and how
the manager will help.

After the meeting

 Continue to give the employee periodic and frequent feedback. Effective

feedback immediately follows key incidents of performance. Do not wait until
the next appraisal to discuss important issues.
 Follow through on the goals that were set. Provide continuous support to the
employee to help him or her achieve the goals.

Sources: Make employee appraisals more productive. (2007, September). HR

Focus, 84(9), 1, 11–15; Ryan, L. (2007, January 17). Coping with performance-
review anxiety. Business Week Online, 6; Stone, D. L. (1984). The effects of
feedback sequence and expertise of the rater on perceived feedback
accuracy. Personnel Psychology, 37, 487–506; Sulkowicz, K. (2007, September
10). Straight talk at review time. Business Week, 16.

Managing Potential Bias in Performance

Appraisals
Performance appraisal is by nature a subjective event. Unless the
performance appraisal is purely relying on objective criteria such as sales,
it requires one or more human beings to observe and evaluate another and
arrive at a consensus. Raters, intentionally or unintentionally, make
mistakes or exhibit biases. These biases trickle down into the appraisal
system and can affect other decisions that are based on appraisals, such as
pay and promotion. Therefore, being aware of these tendencies is the first
step to managing their influence over the appraisal system.

Liking
A performance appraisal does not occur between strangers. The rater and
ratee have an existing relationship. If they like or dislike each other, these
feelings may bias the ratings. For example, research shows that regardless
of their objective performance levels, managers give employees they have
a good relationship with higher ratings (Duarte, Goodson, & Klich,
1994). It is possible that sometimes liking is not a bias and a manager
likes an employee because of high performance levels (Varma, DeNisi, &
Peters, 1996). Still, for some managers, liking someone may mean
ignoring the faults of the person and selectively remembering the positive
things that person has done. One way of dealing with this problem may
be journaling. By recording positive and negative performance incidents
throughout the year for each employee, managers may recall each
employee’s performance more accurately (DeNisi, Robbins, & Cafferty,
1989).

Leniency
One of the common problems in appraisals is that managers give
employees ratings higher than warranted. There may be many reasons for
this, such as the desire to avoid confrontation with the employee, having a
very agreeable personality, the desire to avoid hurting the chances of the
employee to get a bonus, the desire to motivate employees by giving
them high ratings, or liking the employee as a person. Regardless of the
reason, leniency is a problem because it makes ratings relatively useless
for determining raises, bonuses, or promotions. At the same time,
leniency makes it harder for employees to change their behaviors. One
way of dealing with this problem could be using relative rankings or at
least giving managers a suggested distribution. If managers are asked to
grade on a curve, they may end up being less lenient. Moreover, making
managers accountable for the ratings they give may be a good idea. For
example, if managers are evaluated based on how well they recognize
different levels of performance, they may be less tempted to be lenient in
appraisals (Bernardin, Cooke, & Villanova, 2000; Jawahar & Williams,
1997; Longenecker, 1989).

Stereotypes
One of the factors that create bias in appraisals is the stereotypes that
raters may have regarding the gender, race, age or another characteristic
of the person being rated. Beliefs about different groups may be
generalized to the person in question even though they may have little
basis in reality. For example, research shows that women in
stereotypically male jobs were rated lower than women in stereotypically
 female jobs. Similarly, attractive women were rated higher if they held
nonmanagement jobs, but they were rated lower if they held management
jobs. When factors that have no bearing on one’s job performance are
used to evaluate the person, employees, overall, will be demoralized, the
appraisals will lose their effectiveness, and the company may face costly
lawsuits (Heilman & Stopeck 1985; Lyness & Heilman, 2006).
Understanding the importance of eliminating stereotypes from
performance appraisals and training managers to accurately observe and
evaluate performance may be beneficial in limiting exposure to this type
of bias.
Key Takeaway
Performance appraisals involve observing and measuring an employee’s
performance during an appraisal period, recording these observations,
communicating results to the employee, and recognizing high performance while
devising ways of improving deficiencies. Most appraisals are conducted by the
supervisor, but there are many advantages to using 360-degree appraisals.
Appraisals that are more effective give employees adequate notice, fair hearing,
and judgment based on evidence. Some companies use relative rankings in which
employees are compared to each other, but this system is not suitable to all
companies. A performance appraisal meeting should be planned and executed
carefully, with the supervisor demonstrating empathy and supportiveness. There
are intentional and unintentional biases inherent in appraisals and being aware of
them, increasing rater accountability, and training managers may be useful in
dealing with some of them.
Exercises
1. What are the disadvantages of using only supervisors as the rater? What are the
disadvantages of using peers, subordinates, and customers as raters?
2. Do you believe that self-appraisals are valid? Why would it be helpful to add
self-appraisals to the appraisal process? Can you think of any downsides to using
them?
3. Why do some managers intentionally give an employee a higher rating than
deserved? What are the disadvantages of biased ratings? How could this
tendency be prevented?
4. Some recommend that performance appraisals be abolished altogether. What do
you think about this approach? What are the downsides of eliminating appraisals
altogether?
5. If your objective is to minimize the effects of rater biases, what type of appraisal
system would you design?
 6.5 Motivating Employees Through
Performance Incentives
Learning Objectives

1. Learn the importance of financial and nonfinancial incentives to motivate employees.

2. Understand the benefits of different types of incentive systems, such as piece rate and merit
pay.
3. Learn why nonfinancial incentives can be effective motivators.
4. Understand the tradeoffs involved in rewarding individual, group, and organizational
performance.

Performance Incentives
Perhaps the most tangible way in which companies put motivation
theories into action is by instituting incentive systems. Incentives are
reward systems that tie pay to performance. There are many incentives
used by companies, some tying pay to individual performance and some
to companywide performance. Pay-for-performance plans are very
common among organizations. For example, according to one estimate,
80% of all American companies have merit pay, and the majority
of Fortune 1000 companies use incentives (Luthans & Stajkovic, 1999).
Using incentives to increase performance is a very old idea. For example,
Napoleon promised 12,000 francs to whoever found a way to preserve
food for the army. The winner of the prize was Nicolas Appert, who
developed a method of canning food (Vision quest, 2008). Research
shows that companies using pay-for-performance systems actually
achieve higher productivity, profits, and customer service. These systems
are more effective than praise or recognition in increasing retention of
higher performing employees by creating higher levels of commitment to
the company (Cadsby, Song, & Tapon, 2007; Peterson & Luthans, 2006;
Salamin & Hom, 2005). Moreover, employees report higher levels of pay
satisfaction under pay-for-performance systems (Heneman, Greenberger,
& Strasser, 1988).

At the same time, many downsides of incentives exist. For example, it

has been argued that incentives may create a risk-averse environment that
diminishes creativity. This may happen if employees are rewarded for
doing things in a certain way, and taking risks may negatively affect their
paycheck. Moreover, research shows that incentives tend to focus
employee energy to goal-directed efforts, and behaviors such as helping
team members or being a good citizen of the company may be neglected
(Breen, 2004; Deckop, Mengel, & Cirka, 1999; Wright et al., 1993).
Despite their limitations, financial incentives may be considered powerful
motivators if they are used properly and if they are aligned with
companywide objectives. The most frequently used incentives are listed
as follows.

Piece Rate Systems

Under piece rate incentives, employees are paid on the basis of individual
output they produce. For example, a manufacturer may pay employees
based on the number of purses sewn or number of doors installed in a
day. In the agricultural sector, fruit pickers are often paid based on the
amount of fruit they pick. These systems are suitable when employee
output is easily observable or quantifiable and when output is directly
correlated with employee effort. Piece rate systems are also used in
white-collar jobs such as check-proofing in banks. These plans may
encourage employees to work very fast, but may also increase the number
of errors made. Therefore, rewarding employee performance minus errors
might be more effective. Today, increases in employee monitoring
technology are making it possible to correctly measure and observe
individual output. For example, technology can track the number of
tickets an employee sells or the number of customer complaints resolved,
allowing a basis for employee pay incentives (Conlin, 2002). Piece rate
systems can be very effective in increasing worker productivity. For
example, Safelite AutoGlass, a nationwide installer of auto glass, moved
to a piece rate system instead of paying workers by the hour. This change
led to an average productivity gain of 20% per employee (Koretz, 1997).

Individual Bonuses
Bonuses are one-time rewards that follow specific accomplishments of
employees. For example, an employee who reaches the quarterly goals set
for her may be rewarded with a lump sum bonus. Employee motivation
resulting from a bonus is generally related to the degree of advanced
knowledge regarding bonus specifics.

Merit Pay
In contrast to bonuses, merit pay involves giving employees a permanent
pay raise based on past performance. Often the company’s performance
appraisal system is used to determine performance levels and the
employees are awarded a raise, such as a 2% increase in pay. One
potential problem with merit pay is that employees come to expect pay
increases. In companies that give annual merit raises without a different
raise for increases in cost of living, merit pay ends up serving as a cost-
of-living adjustment and creates a sense of entitlement on the part of
employees, with even low performers expecting them. Thus, making
merit pay more effective depends on making it truly dependent on
performance and designing a relatively objective appraisal system.

Figure 6.9

Properly designed sales commissions are widely used to motivate sales employees. The blend of straight salary and
commissions should be carefully balanced to achieve optimum sales volume, profitability, and customer
satisfaction.
Rossbeane – the bike shop – CC BY-SA 2.0.

Sales Commissions
In many companies, the paycheck of sales employees is a combination of
a base salary and commissions. Sales commissions involve rewarding
sales employees with a percentage of sales volume or profits generated.
Sales commissions should be designed carefully to be consistent with
company objectives. For example, employees who are heavily rewarded
with commissions may neglect customers who have a low probability of
making a quick purchase. If only sales volume (as opposed to
profitability) is rewarded, employees may start discounting merchandise
too heavily, or start neglecting existing customers who require a lot of
attention (Sales incentive plans, 2006). Therefore, the blend of straight
salary and commissions needs to be managed carefully.

Awards

Figure 6.10

Plaques and other recognition awards may motivate employees if these awards fit with the company culture and if
they reflect a sincere appreciation of employee accomplishments.
Steve B – Scenic District Recognition Banquet 1985 – CC BY-NC-ND 2.0.

Some companies manage to create effective incentive systems on a small

budget while downplaying the importance of large bonuses. It is possible
to motivate employees through awards, plaques, or other symbolic
methods of recognition to the degree these methods convey sincere
appreciation for employee contributions. For example, Yum! Brands Inc.,
the parent company of brands such as KFC and Pizza Hut, recognizes
employees who go above and beyond job expectations through creative
awards such as the seat belt award (a seat belt on a plaque), symbolizing
the roller-coaster-like, fast-moving nature of the industry. Other awards
include things such as a plush toy shaped like a jalapeño pepper. Hewlett-
Packard Development Company LP has the golden banana award, which
came about when a manager wanted to reward an employee who solved
an important problem on the spot and handed him a banana lying around
the office. Later, the golden banana award became an award bestowed on
the most innovative employees (Nelson, 2009). Another alternative way
of recognizing employee accomplishments is awarding gift cards. These
methods are more effective if employees have a choice among
alternatives (such as between restaurants, or between a restaurant or a
retailer). The advantage of gift cards over pay is that instead of paying for
life’s necessities such as mortgage or college, employees can enjoy the
gift of going out to dinner, going on a vacation to a fun place, or
acquiring a cool gadget they may not have purchased with their own
money. Thus, these awards may help create a sense of commitment to the
company by creating positive experiences that are attributed to the
company.

Team Bonuses
In situations in which employees should cooperate with each other and
isolating employee performance is more difficult, companies are
increasingly resorting to tying employee pay to team performance. For
example, in 2007, Wal-Mart gave bonuses to around 80% of their
associates based on store performance. If employees have a reasonable
ability to influence their team’s performance level, these programs may
be effective.

Gainsharing
Gainsharing is a companywide program in which employees are
rewarded for performance gains compared to past performance. These
gains may take the form of reducing labor costs compared to estimates or
reducing overall costs compared to past years’ figures. These
improvements are achieved through employee suggestions and
participation in management through employee committees. For example,
Premium Standard Farms LLC, a meat processing plant, instituted a
gainsharing program in which employee-initiated changes in production
processes led to a savings of $300,000 a month. The bonuses were close
to $1,000 per person. These programs can be successful if the payout
formula is generous, employees can truly participate in the management
of the company, and if employees are able to communicate and execute
their ideas (Balu & Kirchenbaum, 2000; Collins, Hatcher, & Ross, 1993;
Imberman, 1996).
Profit Sharing
Profit sharing programs involve sharing a percentage of company profits
with all employees. These programs are companywide incentives and are
not very effective in tying employee pay to individual effort, because
each employee will have a limited role in influencing company
profitability. At the same time, these programs may be more effective in
creating loyalty and commitment to the company by recognizing all
employees for their contributions throughout the year.

Stock Options
A stock option gives an employee the right, but not the obligation, to
purchase company stocks at a predetermined price. For example, a
company would commit to sell company stock to employees or managers
2 years in the future at $30 per share. If the company’s actual stock price
in 2 years is $60, employees would make a profit by exercising their
options at $30 and then selling them in the stock market. The purpose of
stock options is to align company and employee interests by making
employees owners. However, options are not very useful for this purpose,
because employees tend to sell the stock instead of holding onto it. In the
past, options were given to a wide variety of employees, including CEOs,
high performers, and in some companies all employees. For example,
Starbucks Corporation was among companies that offered stock to a large
number of associates. Options remain popular in start-up companies that
find it difficult to offer competitive salaries to employees. In fact, many
employees in high-tech companies such as Microsoft and Cisco Systems
Inc. became millionaires by cashing in stock options after these
companies went public. In recent years, stock option use has declined.
One reason for this is the changes in options accounting. Before 2005,
companies did not have to report options as an expense. After the changes
in accounting rules, it became more expensive for companies to offer
options. Moreover, options are less attractive or motivational for
employees when the stock market is going down, because the cost of
exercising their options may be higher than the market value of the
shares. Because of these and other problems, some companies started
granting employees actual stock or using other incentives. For example,
PepsiCo Inc. replaced parts of the stock options program with a cash
incentive program and gave managers the choice of getting stock options
coupled with restricted stocks (Brandes et al., 2003; Rafter, 2004;
Marquez, 2005).
 Key Takeaway
Companies use a wide variety of incentives to reward performance. This is
consistent with motivation theories showing that rewarded behavior is repeated.
Piece rate, individual bonuses, merit pay, and sales commissions tie pay to
individual performance. Team bonuses are at the department level, whereas
gainsharing, profit sharing, and stock options tie pay to company performance.
While these systems may be effective, people tend to demonstrate behavior that is
being rewarded and may neglect other elements of their performance. Therefore,
reward systems should be designed carefully and should be tied to a company’s
strategic objectives.
Exercises
1. Have you ever been rewarded under any of the incentive systems described in
this chapter? What was your experience with them?
2. What are the advantages and disadvantages of bonuses compared to merit pay?
Which one would you use if you were a manager at a company?
3. What are the advantages of using awards as opposed to cash as an incentive?
4. How effective are stock options in motivating employees? Why do companies
offer them?
5. Which of the incentive systems in this section do the best job of tying pay to
individual performance? Which ones do the worst job?

6.6 The Role of Ethics and National

Culture
Learning Objectives

1. Consider the role of job design, goals, and reward systems in ethical behavior.
2. Consider the role of national culture on job design, goals, and reward systems.

Designing a Motivating Work

Environment and Ethics
The design components of an organization’s internal environment, such
as the presence of goal setting, performance appraisals, and the use of
incentive-based reward systems, have a direct connection with the level
of ethical or unethical behaviors demonstrated within a company.
Although a large number of companies successfully use goal setting and
rewarding employees based on goal accomplishment, there is an
unintended consequence to using goals: Goal setting may lead to
unethical behaviors on the part of employees. When goal accomplishment
is rewarded, and when rewards are desirable, employees will have two
basic options: Work hard to reach the goals, or cheat.

The connection between goal setting and unethical behaviors has been
well documented. For example, teachers rewarded for their students’
success were more likely to cheat by giving the answers to students.
Sanitation workers on an incentive scheme were more likely to take their
trucks to the landfill with loads exceeding legal limits (Pfeffer, 2004).
Salespeople working on commissions may push customers to make a
purchase beyond their budget. At higher levels within companies, a
CEO’s method of payment has been related to the ethical behaviors of
companies. For example, when a large percentage of a CEO pay package
consists of stock options, companies are more likely to misrepresent the
financial situation of the company, particularly when the CEO is also the
head of the board of directors (Harris & Bromiley, 2007; Priem, Coombs,
& Gilley, 2006).

This does not mean that goal setting always causes unethical behavior.
People who behave unethically tend to constitute a small percentage of
the workforce. However, for this small percentage, goal setting and
incentives act as motivation to behave unethically. The tendency to
behave unethically under these systems also increases when goals are not
met, but instead, employees come close to reaching them, particularly
when they are competing against each other to receive the rewards
(Bellizzi, 1995; Schweitzer, Ordonez, & Douma 2004). There are several
ways companies can reduce the temptation to behave unethically.
Specifically rewarding ethical behavior within the company is related to
lower levels of unethical behaviors (Trevino & Youngblood, 1990). Also,
instead of only rewarding people who reach a high goal and not giving
anything to those who come close, companies may consider creating
multiple levels of goals and distribute rewards corresponding to the goal
that is achieved (Locke, 2004). Enforcing an ethical code of conduct and
withholding rewards from those who are not demonstrating ethical
behaviors are other ways of preventing goal setting from leading to
unethical behaviors.

Designing a Motivating Work

Environment Around the Globe
The effectiveness of methods such as job design, goal setting,
performance appraisals, and the use of incentives is likely to be culturally
determined. For example, research conducted in Western countries
suggests that empowering employees is an effective method of
motivating them. However, not all employees around the world respond
favorably to concepts such as autonomy or empowerment. For example, it
has been noted that the use of self-managing teams, a method of
increasing employee empowerment in the workplace, is difficult to
execute in Mexican companies because of the traditionally paternalistic
and hierarchical nature of many Mexican organizations. In such a context,
employees may not be willing or ready to take responsibility for
individual action, while managers may be unwilling to share real power
with employees (Nicholls, Lane, & Brechu, 1999). Researchers also
found in a four-country study that while employees in the United States,
Mexico, and Poland responded positively to empowerment, Indian
employees were actually less satisfied when they were empowered
(Robert et al., 2000). In other words, we may expect both greater levels of
difficulty and potentially different reactions to empowerment depending
on the cultural context.

Are all employees around the globe motivated by goal setting? Even
though there is limited research in this area, existing findings point to
some differences. For example, we know that American employees
respond negatively to goals when these goals are perceived to be
extremely difficult. However, Chinese employees actually were most
motivated when the goals were very difficult. This may be because
Chinese employees believe that their performance depends on their effort,
and therefore, they are able to respond to goals that are very difficult with
very high effort. On the other hand, there is some evidence that while
specific goals motivate Western salespeople, in China goals low in
specificity were more motivational (Fang, Palmatier, & Evans, 2004).

How about performance appraisals? You may predict that concepts such
as 360-degree appraisal are not suitable to all cultures. The 360-degree
appraisals require a climate of openness and social equality in the
workplace. Therefore, countries high in power distance and
authoritarianism may respond negatively to appraisal systems where
lower level employees give performance feedback to their managers.
Likewise, in cultures high in collectivism, using peer appraisals may not
be as effective, because employees might be hesitant to give accurate
performance feedback to their colleagues with the fear that negative
feedback may damage interpersonal relationships.
Key Takeaway
 Goal setting and reward systems influence the level of ethics in the work
environment. When employees come close to reaching their goals but fall short,
they are more likely to behave unethically. The type of incentive system used in a
company may generate unethical behaviors. Moreover, job design, goal setting,
performance appraisals, and incentives should be designed while considering the
national culture context, because they may not be universally valid.
Exercises
1. Do you have any experience with goal setting leading to unethical behaviors?
2. Many observers and employees are concerned about the spread between CEO
pay and average employee pay. Is it ethical for CEOs to be paid so much more
than other employees? Under which conditions would it be unethical?
3. How would you determine whether a certain incentive scheme or a type of
performance appraisal could be transferred to a different culture?

6.7 Motivation Key for Success: The

Case of Xerox

Figure 6.11

Anne Mulcahy, Former Xerox Chairman of the Board (left), and Ursula Burns, Xerox CEO (right)

Fortune Live Media – Fortune Most Powerful Women 2012 – CC BY-NC-ND 2.0; Fortune Live Media – Fortune Most Powerful Women 2013 –
CC BY-NC-ND 2.0.

As of 2010, Xerox Corporation (NYSE: XRX) is a $22 billion, multinational company

founded in 1906 and operating in 160 countries. Xerox is headquartered in Norwalk,
 Connecticut, and employs 130,000 people. How does a company of such size and magnitude
effectively manage and motivate employees from diverse backgrounds and experiences? Such
companies depend on the productivity and performance of their employees. The journey over
the last 100 years has withstood many successes and failures. In 2000, Xerox was facing
bankruptcy after years of mismanagement, piles of debt, and mounting questions about its
accounting practices.

Anne Mulcahy turned Xerox around. Mulcahy joined Xerox as an employee in 1976 and
moved up the corporate ladder, holding several management positions until she became CEO
in 2001. In 2005, Mulcahy was named by Fortune magazine as the second most powerful
woman in business. Based on a lifetime of experience with Xerox, she knew that the company
had powerful employees who were not motivated when she took over. Mulcahy believed that
among other key businesses changes, motivating employees at Xerox was a key way to pull
the company back from the brink of failure. One of her guiding principles was a belief that in
order to achieve customer satisfaction, employees must be interested and motivated in their
work. Mulcahy not only successfully saw the company through this difficult time but also was
able to create a stronger and more focused company.

In 2009, Mulcahy became the chairman of Xerox’s board of directors and passed the torch to
Ursula Burns, who became the new CEO of Xerox. Burns became not only the first African
American woman CEO to head a Standard & Poor’s (S&P) company but also the first woman
to succeed another woman as the head of an S&P 100 company. Burns is also a lifetime
Xerox employee who has been with the company for over 30 years. She began as a graduate
intern and was hired full time after graduation. Because of her tenure with Xerox, she has
close relationships with many of the employees, which provides a level of comfort and
teamwork. She describes Xerox as a nice family. She maintains that Mulcahy created a strong
and successful business but encouraged individuals to speak their mind, to not worry about
hurting one another’s feelings, and to be more critical.

Burns explains that she learned early on in her career, from her mentors at Xerox, the
importance of managing individuals in different ways and not intentionally intimidating
people but rather relating to them and their individual perspectives. As CEO, she wants to
encourage people to get things done, take risks, and not be afraid of those risks. She motivates
her teams by letting them know what her intentions and priorities are. The correlation
between a manager’s leadership style and the productivity and motivation of employees is
apparent at Xerox, where employees feel a sense of importance and a part of the process
necessary to maintain a successful and profitable business. In 2010, Anne Mulcahy retired
from her position on the board of directors to pursue new projects.
Based on information from Tompkins, N. C. (1992, November 1). Employee satisfaction
leads to customer service. AllBusiness. Retrieved April 5, 2010,
from [Link] 50 most
powerful women. (2006). Fortune. Retrieved April 5, 2010,
from [Link] Profile: Anne
M. Mulcahy. (2010). Forbes. Retrieved April 5, 2010,
from [Link] Whitney, L. (2010, March 30).
Anne Mulcahy to retire as Xerox chairman. CNET News. Retrieved April 5, 2010,
from [Link] Bryant, A. (2010, February 20).
Xerox’s new chief tries to redefine its culture. New York Times. Retrieved April 5, 2010,
from [Link]

Discussion Questions

1. How do you think Xerox was able to motivate its employees through the crisis it faced in
2000?
2. How does a CEO with such a large number of employees communicate priorities to a
worldwide workforce?
3. How might Ursula Burns motivate employees to take calculated risks?
4. Both Anne Mulcahy and Ursula Burns were lifetime employees of Xerox. How does an
organization attract and keep individuals for such a long period of time?

5. 6.8 Conclusion
6. In this chapter, we reviewed specific methods with which companies attempt
to motivate their workforce. Designing jobs to increase their motivating
potential, empowering employees, setting goals, evaluating performance using
performance appraisals, and tying employee pay to individual, group, or
organizational performance using incentive systems are methods through
which motivation theories are put into action. Even though these methods
seem to have advantages, every method could have unintended consequences,
and therefore, application of each method should be planned and executed
with an eye to organizational fairnes

6.9 Exercises
Ethical Dilemma

James is about to conduct a performance appraisal for Maria. Maria has exhibited some
performance problems in the past 6 months. She has been coming in late and leaving early,
and she missed two important deadlines. At the same time, she is a very likeable and nice
person who gets along well with others in the office. James also knows that Maria has a
significant amount of debt and getting a bonus after this appraisal would really help her.
James does not want to jeopardize his relationship with her and he does not want to prevent
her from getting the bonus. Therefore, he is considering giving her a “good” rating in the
appraisal. What would be your advice to James regarding this situation?

Individual Exercise

 A call center is using the metric of average time per call when rewarding employees. In
order to keep their average time low, employees are hanging up on customers when they
think that the call will take too long to answer.
 In a department store, salespeople are rewarded based on their sales volume. The
problem is that they are giving substantial discounts and pressuring customers to make
unnecessary purchases.
 All employees at a factory are receiving a large bonus if there are no reported injuries for 6
months. As a result, some employees are hiding their injuries so that they do not cause
others to lose their bonus.

What are the reasons for the negative consequences of these bonus schemes? Modify these
schemes to solve the problems.

Group Exercise

Performance Appraisal Role Play

This role play will involve three students. One student will be the supervisor and the second
will be the subordinate. The supervisor and the subordinate will conduct a formal
performance appraisal interview. The third role is of an observer who should provide
feedback to both parties regarding how they could have improved their effectiveness.

Be sure to read only the role sheet assigned to you by your professor.