Final Exam – Question 7 (Tyrone)
Using the “building blocks” of expectancy theory, explain what is absolutely essential in developing an effective incentive pay system.
Several theories from psychology suggest that the linking of pay to performance should lead to increased performance. According to these theories, performance is increased because employee motivation is increased when pay and performance are linked. Motivation and ability are the primary determinants of performance.
The expectancy theory is an employee motivation theory that dates back to 1957, which looked at factors related to employee productivity. According to expectancy theory, motivation, or the face to act, results from a conscious, decision-making process undertaken by an individual. The decision to act depends upon three sets of perceptions known as expectancy, instrumentality, and valence.
Expectancy – refers to the individual’s perception that a certain level of effort is required to achieve a certain level of performance. It asks the question, if I work as hard as possible on a project, how likely is it that I will accomplish what is required.
Instrumentality – is the strength of the belief that a certain level of performance will be associated with various outcomes. It asks the question, so what? What’s in it for me if I do a good job?
Valence – is the attractiveness of these outcomes. It asks the question, how attractive are these outcomes?
Empirical support for expectancy theory tends to be stronger when the theory is focused on the individual rather than on groups of individuals.
Expectancy theory has a number of important implications for merit pay plans. In particular, expectancy theory suggests that merit pay is likely to motivate employees when the following conditions are met:

  1. Performance must be accurately measured – if it is not, then employees cannot make the perceived link between effort and performance and performance and rewards.

  1. Increased pay must be a valued outcome – for employees to pursue high levels of performance, the end result must be attractive or have a positive valence.

  1. The relationship between pay and performance must be clearly defined – the relationship between performance on the job and pay associated with performance must be clearly spelled out to ensure performance is perceived as instrumental in attaining a pay increase.

  1. Opportunities to improve performance must exist – if an employee does not have the opportunity to increase or improve performance, then it is futile for that employee to expand effort at a task.

In summary, expectancy theory suggests that merit pay is likely to motivate increased performance because performance is instrumental in the attainment of a pay increase. For merit pay to motivate increased performance, performance must be made contingent on performance, and the employee must have the opportunity to have an impact on performance.