Behavioral Theories of Compensation

AND BENEFITS
Chapter 4:
Behavioral Theories of Compensation AND BENEFITS

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This chapter examines the psychological and sociological theories of
compensation.

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No one questions the interest of economists in wages. After all, wages are a
form of price. But why are psychologists and sociologists interested in pay?
What concepts link the interests of these behavioral scientists to pay?
THE EMPLOYMENT EXCHANGE
The most obvious concept is the concept of exchange that economists,
psychologists, and sociologists use to study behavior. It is useful to think of
employment as involving an exchange of work for pay. Economists treat
employment as an exchange of time, effort, and ability for payment in money
or in kind. Psychologists view employment as an exchange of behavior and
attitudes for money and other sources of satisfaction. Sociologists approach
employment as a broad exchange of tangible and intangible inputs and
outputs among people whose behavior influences one another and in turn
influences and is influenced by other segments of society. The parties to the
exchange most commonly are the individual and the organization. If a union
is involved, the exchange is between the union and the organization. The
parties do not have to have equal power, but they must be able to influence
the other party for the exchange to take place.
Exchange is a double input-output system in that each party is contributing
something to the exchange and in return is receiving something. The input of
one party is the output to the other, and vice versa.
The exchange process works because it is perceptual: each party perceives
the value of the rewards received as greater than the contributions made.
There can be varying perceptions of the exchange by the two parties.
However, the exchange still takes place, because the two parties place
different values on what is being exchanged. Individuals enter the
employment exchange because they perceive their rewards as greater in value
than their contributions. Likewise, the organization enters the exchange
because what the organization receives has more value to it than what it
contributes.
Exchanges intended to be short term tend to be carefully specified;
continuing exchanges tend to be less well defined. Most employment
exchanges are expected to be long term. Although in some exchanges hours
of work and sometimes production standards are specified on one side and
pay rates and benefits on the other; in most the definition of work is left to
job descriptions, supervision and work rules, and the definition of rewards to
starting pay. In most exchanges there are long-term expectations by both
parties that extra inputs will eventually result in extra rewards.
Often, what we have been calling the employment exchange is referred to as
an employment contract. The contract is implicit except in the case of a labor
agreement. But in all cases compensation in its various forms (cash, benefits,
and non-financial rewards) is central to it. We assume that neither party
enters into or continues in the employment exchange unless it perceives that
the rewards are equal to or exceed the required contributions. Logically, the
exchange includes contributions (anything provided that is recognized and
considered relevant), rewards (anything received that is recognized and
considered relevant), a comparison process (comparing rewards with
contributions and with some standard), and results (attitudes and behavior).
Although it is possible to study the employment exchange in terms of
rewards, contributions, comparison standards, and results pertinent to both
parties, our major focus is on the rewards to employees.
Required Employee Behaviors
Although the employment contract usually leaves the definition of work to
job descriptions, supervision, and work rules, it is useful to specify the kinds
of behavior organizations require from employees. Organizations require that
individuals (1) join and remain with the organization (membership), (2) carry
out job assignments dependably, (3) achieve organization objectives beyond
the job assignment through innovative and spontaneous behaviors, (4)
cooperate with others, (5) protect the organization against disaster, (6) make
creative suggestions, (7) carry out self-training, and (8) create a favorable
climate. Unfortunately, organizations appear to believe that they obtain all
these behaviors merely by hiring the employee. Although compensation
could be used to encourage all these behaviors, it typically concentrates on
the first two. As we will see, organizations would be wise to focus separately
in compensation administration on attraction, retention, and performance; it
can obtain other specific behaviors through compensation policies and
programs.
Perhaps the most explicit statement of the distinction between membership
and performance behaviors required by organizations and the quite different
sources of these behaviors was made by March and Simon. They carefully
distinguish the motivation to acquire and keep organizational membership
(their term is motivation to participate) from productivity (the motivation to
perform). Membership motivation results from a favorable inducements-
contributions balance. That is, applicants must perceive that what they get
from the organization at least balances what they must give to it. Employees
must perceive a continuing favorable balance if they are to remain members.
The motivation to perform represents a much more complex psychological
contract between the individual and the organization involving perceived
alternatives, perceived consequences of these alternatives, and individual
goals.
Organizations have no choice but to provide membership motivation if they
wish to remain organizations. But if providing motivation to perform is too
costly or too much trouble, the organization may choose other routes to
organizational goals, such as designing jobs so that prescribed job
performance is sufficient.
MOTIVATION THEORY
The most visible contribution of behavioral scientists to compensation theory
is motivation theory. Motivation theory seeks to explain all kinds of
motivated behavior in all kinds of situations, including behavior in
organizations. In the following discussion of motivation theory, we will
argue that some theories seem to fit better with organization-required
behaviors, especially membership and performance.
Compensation administration is an application of motivation theory. For this
reason, motivation theory can be considered a form of compensation theory.
Although motivation is complex and much remains to be learned about it,
enough may be known to guide organizations in designing and managing
compensation programs.
Most behavior is in some sense motivated. People are strongly influenced by
their environment. This means that organizations can influence people’s
behavior by changing environments and rewards. But motivation is not the
sole determinant of behavior. Ability and knowledge of what one is supposed
to do combine with motivation in determining behavior in organizations.
Also, an organization’s tasks vary in their requirements. Thus motivation can
make little or much difference in performance, depending on the task.
Psychologists studying motivation have focused on two psychological
processes: arousal and choice. The first is concerned with why people do
anything at all. The second involves the choices they make in what to do. A
similar way of classifying motivation theory is to distinguish content and
process theories. Content theories focus on the factors that motivate behavior.
Process theories explain how these factors operate.
CONTENT THEORIES
Content or arousal theories center on needs or drives. Several physiological
and social needs have been identified and studied. Need classifications have
been offered. A need for competence in mastering the environment is
supposedly aroused when individuals are faced with new, challenging
situations; it dissipates after mastery. Closely related are curiosity or activity
needs: people need and enjoy a stimulating environment, but they differ on
this need and become adapted to certain levels of stimulation.
The need for achievement and the work of McClelland on it are well known.
Individuals have been found to differ in their need for achievement. The need
can be increased by training. People with a high need for achievement prefer
moderate risks and immediate feedback and enjoy doing tasks for a sense of
accomplishment. Productivity is posited to be related to this need.
A need for affiliation has been suggested but not carefully studied. There
may be an innate need for contact and a tendency for people to congregate
during a crisis. Separately identifying this need appears to be a problem.
A need for power has been suggested as a requirement for success in
organizations. Effective managers may have a high need for power.
One problem with predicting behavior from individual needs is that people
seem to have differing degrees of needs at different times of their lives.
Classifications of needs can be considered a response to this finding.
Maslow’s hierarchy of needs represents the first major attempt to classify
needs that are relevant to organizational behavior. His classification,
physiological, safety, belonging, esteem, and self-actualization, is well
known. Maslow argues that these needs constitute a hierarchy. Most normal
people move upward in the hierarchy as lower level needs are satisfied. Thus,
the greater the fulfillment of a particular need, the less it is a motivator.
Because in American society the first two needs are presumably satisfied,
higher-order needs should be better motivators. Empirical tests of the theory
have not supported the categories, their order, or the suggestion that one need
must be satisfied before the next one is activated. But the implications of the
theory that there are higher-order as well as lower-level needs and that
different people want different things were major contributions.
Alderfer’s ERG theory postulates three categories of needs: existence,
relatedness, and growth. Although this classification also represents a
hierarchy, the theory does not state that one need is more important than
another or that only unsatisfied needs arouse behavior. All three motives may
be working to some degree at one time, and the growth needs may increase
with satisfaction. Although empirical data seem to fit this classification better
than Maslow’s, little research has been done to test the theory.
McGregor’s theory X-theory Y and Herzberg’s motivators and hygienes flow
from Maslow’s higher- and lower-order needs. The empirical evidence does
not support Herzberg’s conclusion that only the motivators provide job
satisfaction and motivated employees. Hygienes and motivators don’t operate
in the same way for everyone. Moreover, his results are influenced by his
method of data collection. But Herzberg’s work contributed to an
understanding of the conditions that lead to job satisfaction and the reasons
that different people are motivated by different rewards.
An evaluation of the motivation theories based on needs would probably
focus on their limitations. Empirical studies have provided only modest
support for them, and the proportion of the variance in performance
explained has been low.
Another content motivation theory is the job characteristics model. In this
model characteristics of the job (skill variety, task identity, task significance,
autonomy, feedback) cause psychological states that in turn cause motivation
and performance. The model suggests that enriched jobs motivate people
with high growth needs. Empirical tests of the model suggest that job
enrichment affects satisfaction more than performance and quality more than
quantity. Also, growth needs affect satisfaction more than performance.
Consistency theory suggests that people choose jobs and behaviors based
upon the consistency between their self-image and the demands of the job or
the expectations of friends. Arousal is caused by inconsistency.
A final content theory suggests that social cues stimulate behavior as a result
of (1) the presence of others, (2) wishes to be evaluated favorably by others,
and (3) desires to conform to the opinions of co-workers. Empirical work
shows that social cues do affect performance.
PROCESS THEORIES
Process or choice theories explain the operation of motivation, or the factors
that influence an individual to choose one action rather than another. Process
theories can be subdivided into cognitive and non-cognitive approaches.
Cognitive theories see behavior as involving some mental process. Non-
cognitive theories see behavior as caused by environmental contingencies.
COGNITIVE THEORIES
The major cognitive theories are equity theory, goal-setting theory, and
expectancy theory. All of them focus on perceptions of the outcomes that
flow from behavior.
Equity Theory
This theory suggests that motivated behavior is a form of exchange in which
individuals employ an internal balance sheet in determining what to do. It
predicts that people will choose the alternative they perceive as fair. The
components of equity theory are inputs, outcomes, comparisons, and results.
Inputs are the attributes the individual brings to the situation and the
activities required (investments and costs). Outcomes are what the individual
receives from the situation. The comparisons are between the ratio of
outcomes to inputs and some standard. Results are the behaviors and attitudes
that flow from the comparison. In Adams’s application of the theory to
organizations, the comparison is with co-workers. But other standards of
comparison, including oneself in a previous situation, seem equally probable.
The idea is that people look at their inputs and the payoff they receive and
compare the latter with what they think their comparison standard is getting.
If a state of equity exists, that is, if they perceive the situation as in balance
(fair), then they are comfortable with the situation and no change is predicted
to occur.
When, however, inputs are seen as too great relative to outcomes, under-
reward inequity is experienced. To remove this inequity people can (1)
reduce their inputs (actually or perceptually), (2) increase their outcomes
(actually or perceptually), (3) change their comparison standard, or (4) leave
the situation. If outcomes are too great compared with inputs, a state of over-
reward inequity exists. To correct this situation the individual may (1)
increase inputs, (2) decrease outcomes, or follow step 3 or 4 above.
Empirical tests of equity theory have in general accorded with predictions
regarding over and under reward. In addition, perceptions of inequity have
been shown to be related to absenteeism and turnover. Reduced performance
following feelings of inequity resulting from lower compensation for the
same job has also been reported.
But equity theory, at least as stated by Adams, contains several unsolved
problems. Little is known, for example, about how people select a
comparison standard. It is also difficult to define inputs and outcomes. How
people combine inputs and outcomes and how these factors change over time
are likewise unexplained.
Also, the definition of equity employed by individuals has been challenged.
Salaried employees have been found to prefer equality rather than equity;
hourly employees prefer equity. In some cases, people follow a winner-take-
all strategy. Finally, equity ratios and resolution strategies have been found to
vary with culture, family orientation, and personal values.
Another version of equity theory was developed by Elliot Jaques of Great
Britain. Jaques’ theory of equitable payment holds that individuals have an
intuitive knowledge of their capacity, the level of their work, and the fairness
of their pay. When their capacity is properly utilized in their work and when
their pay matches their level of work, they achieve psychological
equilibrium. When, however, pay is less or more than that justified by the
level of their work, individuals perceive inequity and react to it.
Jaques believes that level of work can be measured by determining an
individual’s time span of discretion ? the maximum period of time the
individual’s work is permitted to go unreviewed. He reports measuring time
span of discretion at all levels of work and measuring felt fair pay, the
amount of pay the individual perceives as fair for his or her level of work.
Using the theory requires measuring the individual’s level of work and
providing the proper pay for that level of work. Equity is achieved when felt
fair pay equals actual pay or deviates from it by less than minus 10 percent or
plus 20 percent.
Measuring time span of discretion is the major problem with the theory.
Although Jaques, however, reports no difficulty and has offered several
methods of doing this. His present method is apparently that developed by
Atchison, asking supervisors the duration of the most extended task assigned
to subordinates. Atchison and Richardson were able to measure both time
span of discretion and felt fair pay, but others question the stability and
measurability of both of these concepts.
A number of studies of equity in operating organizations have been made by
the authors. These studies use concepts from both streams of equity theory.
An instrument has been developed that reliably measures the perceived
importance of a rather large number of potential rewards and contributions. It
also measures the perceived discrepancy between the existing rewards and
contributions and respondent preferences. In addition, it measures
comparison standards and preferred response to perceived inequity.
The rationale of these studies has been to test the validity of equity theory as
an aid in designing organization compensation programs. Although they are
subject to the limitations of survey research, the results support equity theory
and its components and yield suggestions for improving compensation
programs. People can and do perceive a large number of inputs and outcomes
as relevant. They can compare what exists and what they want. Both the
rewards desired and contributions seem to be culturally based and to vary
occupationally and demographically. From the studies it seems useful to
classify outcomes as (1) extrinsic rewards, (2) intrinsic rewards, and (3)
rewards provided by the organization that it is not aware of providing.
Likewise, inputs can be usefully classified as (1) job-related contributions,
(2) performance-related contributions, and (3) personal inputs ? contributions
that are not obviously required by the job but that individuals believe are
relevant to the organization.
We lean heavily toward equity theory as a useful explanation of membership
motivation. If individuals perceive the situation as equitable, they are likely
to join the organization and continue their membership. An individual’s
decision that equity exists seems to represent the attitudinal counterpart of
March and Simon’s inducements-contributions balance.
Goal-Setting Theory
This theory argues that employees set goals and that organizations can
influence work behavior by influencing these goals. The major concepts in
the theory are intentions (targets), goals (performance standards), goal
acceptance (the degree the goal becomes the conscious intention), and goal
commitment (effort expended). These concepts are assumed to be the
motivation. Hard goals, when accepted, are postulated to be better than easy
ones. Participation in goal setting should increase commitment and
acceptance. Individual goal setting should be more effective than group goals
because it is the impact of goals on intentions that is important. The more
specific the goal, the greater its impact.
In goal-setting theory the crucial factor is the goal. Although the incentive or
reward may affect goal acceptance and commitment, neither are the critical
element. They are important only as they affect the goals. Tests of the theory
show that using goals leads to higher performance than situations without
goals, and that difficult goals lead to better performance than easy ones. But
participation in goal setting, though it may increase satisfaction, does not
always lead to higher performance. Assigned goals may work as goals set
with employee participation. Rewards and social pressure have been found to
affect performance independent of goals. Difficult, accepted, specific goals
combined with feedback and rewards for goal attainment should result in
highly motivated employees.
Expectancy Theory
This theory argues that people choose the behavior they believe will
maximize their payoff. It states that people look at various actions and choose
the one they believe is most likely to lead to the rewards they want the most.
The elements in the theory are expectancies that certain outcomes will occur
and the valence (anticipated satisfaction) of those outcomes. Although the
formal elements are expectancies and valences, in most formulations
expectations are divided into two types: expectancy (the expectation that
effort will lead to performance) and instrumentality (the expectation that
performance will lead to reward).
The earliest statement of expectancy theory was made by V.H. Vroom, who
developed a model both to predict choice of occupation and how much effort
will be expended on the job. In this model each expectancy is multiplied by
its valence and the products are summed. The theory predicts that the
individual will choose the alternative with the highest expected return.
Later formulations, by E. Lawler, summed the product of expectancy (E?P)
and the sum of the products of each instrumentality (P?0) and its valence (V).
Therefore, a person will behave in whatever way results in the highest score
in this equation: (S[(E?P) X S[(P?0)(V)]]). This means that there is only one
probability of effort leading to performance but several possible outcomes
from performance, each with a separate valence.
Expectancy theory has been tested extensively. The usual approach is to
obtain expectancies, instrumentalities, and valences by questionnaire or
interview and to relate these responses to self-reported or measured choices,
such as occupational choice, job satisfaction, effort, or performance. It has
been found that expectancy theory can do an excellent job of predicting
occupational choice and job satisfaction and a moderately good job of
predicting effort on the job. Expectancy theory implies that the anticipation
of rewards is important as well as the perceived contingency between the
behaviors desired by the organization and the desired rewards. The theory
also implies that since different people desire different rewards, organizations
should try to match rewards with what employees want.
Although these implications suggest that following the requirements of
expectancy theory will lead to performance motivation in organizations,
organizations should be aware of possible difficulties. For example,
employees may not want more of the rewards offered by organizations. Or
they may believe that in order to get more of one reward (pay) they must give
up another reward (security or pleasant social relationships). Again,
employees may not believe that good performance does in fact lead to more
desired rewards, and convincing them may require more changes than the
organization is prepared to make. Or employees may not believe that
performance always reflects their efforts. Many factors that are beyond
employee control may affect performance. Poor selection and training of
employees, for example, even with maximum effort, results in poor
performance.
It should be apparent that the possibility of securing performance motivation
through the application of expectancy theory varies by employee group and
the technology of the organization. Although for most people more money is
better, there may be some who don’t value it highly. Some employees may
want other rewards the organization doesn’t want to provide (autonomy for a
file clerk, for example). In some jobs, the relationship between effort and
performance is beyond the control of employees. For many types of
employees (and in many organizations) the relationship between performance
and rewards is in fact very low and it is impossible to convince employees
that high performance leads to high rewards.
Finally, it should be noted that the components of expectancy theory are
beliefs that require a good deal of information and a rather complex cognitive
process in determining action. Some employee groups do want the rewards
the organization has to offer, do want to believe that greater effort results in
improved performance, and do want to believe that better performance leads
to greater rewards. For such groups expectancy theory seems the preferred
route to performance motivation. But for groups who lack these beliefs
because of lack of information or whose behavior is guided by habitual
actions or by what they see others do, a non-cognitive approach would seem
superior.
NON-COGNITIVE THEORIES
Non-cognitive theories do not dwell on what goes on in the person’s head.
Instead, they claim that it is the environment that determines the behavior of
the person. Therefore, to control behavior, one must control the person’s
environment.
Behavior Modification
This theory of operant conditioning is such an approach. The components of
the theory, which is based on the work of Skinner, are the ideas of
reinforcement and environmental determinism. Human beings are assumed to
emit two types of behavior: respondent and operant. Respondent behaviors
are controlled by instincts and direct stimulation; sneezes are an example.
Operant behaviors are emitted in the absence of any apparent external
stimulation. But whenever an operant behavior is followed by a consequence
that changes the likelihood that the behavior will recur, the event or
consequence is called a reinforcer. Consequences that increase the frequency
of behavior are called positive reinforcers. Ones that decrease the frequency
are negative reinforcers. When it is discovered that a consequence serves as a
positive or negative reinforcer for a particular behavior, the frequency of the
behavior can be manipulated by using the reinforcer. Skinner argues that no
cognitive processes are involved. The behaviorist believes that operant
behavior is caused by environmental events. Current behavior is caused by
the history of their reinforcement.
One of the issues in the use of operant conditioning is the optimal schedule of
reinforcement. Skinner suggests that continuous reinforcement produces
more immediate change but that variable reinforcement produces changes
that are more lasting. A study by Latham showed a 33 percent increase for a
continuous schedule and none for the control group. Studies using variable
schedules have conflicting results. Tests of the theory show that there is little
difference in performance between the types of schedules, but a big
difference between reinforcing and not reinforcing.
Implementing a behavior modification program involves a number of steps.
The first one is specifying the behavior to be changed. Next, its present
frequency (the base rate) must be measured. Then various outcomes
contingent on the desired behavior are administered and changes in
frequency observed. Most programs include frequent reports and feedback.
The result is a determination of the rewards that work best and the best
reinforcement schedule. Operant conditioning and approaches based on
expectancy theory are similar. Both argue that the contingency between the
behavior and the reward is crucial. The major difference is the presence or
absence of mental processes: cognition.
One criticism of the operant approach is that the results found are due not to
reinforcement but to the feedback used, to the goals, or to some other
confounding variable. A practitioner and a former student of the authors
applied behavior modification over five years and found that feedback can
produce a performance improvement of up to 18 percent, but that
reinforcement results are much greater.
Recently the issue of whether behavior modification is entirely non-cognitive
has arisen. It has been suggested that behavior can be (1) traced to beliefs or
perceptions (expectancy theory), (2) traced to reinforcement (operant
conditioning), or (3) learned from the experiences of others. Called social
learning theory, this proposal seems to bridge cognitive and non-cognitive
motivation theory.

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