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Motivation by monetary rewards - DiVA 832229/FULLTEXT01.pdf · PDF fileemployees happy...

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  • Master Thesis in Business Administration, 15 ECTS

    Motivation by monetary rewards

    - A study about motivation and performance-based salary increase

    Author: Ali Karandish Tutor: Dr. Henrik Sllberg Summer 2011

  • Acknowledgements The author would like to take the opportunity to express his gratitude to all involved in the completion of this study. Special thanks are directed to all interviewed and respondent of the survey. Without their help it would not have become the study it is today. I would also like to thank my tutor Dr Henrik Sllberg for his feedback and help during the production of this thesis. Finally, I would like to thank my wife, Hoda Moravej, for her support during completion of this thesis.

    Stockholm, June 2011

    Ali Karandish

  • Abstract Background and discussion of the problem: As an employer, you want to keep your employees happy and motivated to perform at their best in the same direction as the companys objectives. This is not always easy because people are all different with different needs, interests, goals and thoughts and therefore would be motivated by different things. Sometimes employees even have goals that conflicts with the companies objectives. Monetary rewards are frequently suggested as a method for increasing the motivation and performance of employees and to align the employees objectives with the companies. A common type of monetary reward is Performance-based salary increase which is used by many companies to motivate their low- and middle-income employees. According to the law of diminishing marginal utility, as the money stock increases, the exchange value of a money unit decreases. This logically means that the change in the satisfaction derived from a unit of money received as a salary increase, would be less for a middle-income employee and therefore get less motivated, compared to a low-income employee. Since companies strive for an effective use of their scarce resources, it should be of great interest to many companies to further study if performance-based salary increase is more effective to apply on low-income employees compare to middle-income employees. Aim of research: The purpose of this study is to create a deeper understanding about the motivational effects of performance-based salary increase, on low- and middle-income employees. Research question: Do low-income employees perform better in response to performance-based salary increases compared to middle-income employees?

    Method: The study begins by reviewing different theories about motivation and rewards, Principal-Agent theory and Motivation-Hygiene Theory and based on reasoning the law of diminishing marginal utility and is selected as a framework of this study. This study has compared interviews with 12 employees (six low- and six middle-income) from eight different companies and 55 survey respondents (30 low- and 25 middle-income) from one company. The author has chosen to apply both qualitative and quantitative method when gathering the primary data. Result: The most obvious result from this study shows that both low- and middle income employees think of performance-based salary increase as an important factor to them and their motivation at work but their reasons varies considerably. Many of the low-income interviewees had a greater focus on the amount of money in the raise while most middle-income interviewees think of salary increase as an important feedback and recognition from their manager. The results of this study also shows that low-income employees are more than middle-income employees, ready to increase their efforts and performance; if they know they can get valuable salary increase in exchange.

    Keywords: Motivation, reward system, monetary rewards, performance-based salary increase, outcome-based compensation.

  • Table of Contents Introduction...............................................................................................................................................1

    1.1 Background....................................................................................................................................1

    1.2 Problem discussion.......................................................................................................................2

    1.3 Problem formulation and purpose..............................................................................................2

    1.4 De-limitations.................................................................................................................................3

    1.5 Thesis structure............................................................................................................................3

    2. Theoretical framework........................................................................................................................5

    2.1 Motivation of human beings........................................................................................................5

    2.1.1 What is motivation?...............................................................................................................5

    2.1.2 Motivation to work..................................................................................................................6

    2.2 Reward systems to motivate.......................................................................................................7

    2.2.1 Introduction and purposes of reward systems..................................................................7

    2.2.2 Monetary reward system......................................................................................................8

    2.3 Principal-Agent theory..................................................................................................................9

    2.3.1 Principal-Agent theory in general........................................................................................9

    2.3.2 Conflicts between the agents and principals...................................................................10

    2.3.3 Overcoming agency problems...........................................................................................11

    2.4 The law of diminishing marginal utility.....................................................................................12

    3. Method................................................................................................................................................14

    3.1 Choice of subject.........................................................................................................................14

    3.2 Choice of method - Qualitative and quantitative....................................................................14

    3.3 Selection of company and respondents..................................................................................16

    3.4 Analysis........................................................................................................................................18

    3.5 Credibility of the study................................................................................................................18

    3.5.1 Generalization.......................................................................................................................18

    3.5.2 Validity...................................................................................................................................19

    3.5.3 Reliability...............................................................................................................................19

    4. Empirical findings..............................................................................................................................20

    4.1 Importance of Performance-based salary increase to employees motivation.................20

    4.1.1ImportanceofPerformancebasedsalaryincreasetomiddleincomeemployees................21

    4.1.2ImportanceofPerformancebasedsalaryincreasetolowincomeemployees......................22

    4.2 Change in performance level as response to Performance-based salary increase.........22

    5. Analysis...............................................................................................................................................25

  • 5.1 Importance of Performance-based salary increase to employees motivation.................25

    5.2 Change in performance level as response to Performance-based salary increase.........27

    6. Conclusions........................................................................................................................................29

    6.1Conclusions.....................................................................................................................................29

    6.2Strengthandweaknesses...............................................................................................................30

    6.3Suggestionsforfurtherresearch:..................................................................................................30

    References.............................................................................................................................................32

    Appendix.................................................................................................................................................35

  • 1

    Introduction This chapter will give a background and present the problem discussed in this study. The research question and purpose of this study will be presented followed by limitations and structure of this thesis.

    1.1 Background Motivation can be defined in a number of ways. Gen