Establishing a strong, positive relation between rewards and performance is critical to bringing about value-creating organizational change. Effective compensation system improves the motivation and productivity of employees, promote productive turnover, mobilize value specific knowledge and overcome opposition to change. Compensation system encompasses both monetary and non-monetary incentives. Monetary rewards provide more flexibility than other rewards as the employees can spend it according to their needs.
Monetary compensation is not the only factor that brings about effective and lasting change, it is necessary to bring about changes in human behaviour. The examples of Cooper Cameron and Cytec shows compensation systems facilitate productive organizational change. Unless designed properly, compensation systems can also back fire. Reward systems can also lead to counterproductive behaviour e.g. committing fraud.
Senior managers often do not have a full understanding how their compensation system is actually functioning e.g. Hay compensation system creates incentives for managers to increase personnel and other resources under their control.
Hawthorne experiment show that social aspects of work are more important to productivity than economic rewards or physical aspects of the work environment whereas some researchers are of the opinion that increases in productivity are attributable to economic rewards rather than to the social aspects of work. Another steam of researchers thinks that extrinsic motivation such as monetary drive out intrinsic motivation. However it is well established that both intrinsic and extrinsic motivation contributes positively to productivity.
Postponing the implementation of new compensation systems forces manager to live with the counterproductive effects of the incumbent system on productivity and self-selection. The new compensation system relies heavily on bonuses tied to objective performance goal and on equity-based compensation. This system has three components: salary, annual bonus and long term compensation. Long term compensation plan run for three years and is based on targeted earnings and cash flow. Awards under this consist of grants of restricted stock (performance shares) and cash payouts (performance cash).
Managers must pay attention to the details of the design, implementation, and administration of the compensation systems. Well designed compensation system has impact on costs of decentralization that provides better decision making due to improved utilization of specific knowledge. A well designed compensation system increases the effectiveness of effective communication, a learning oriented work environment, and effective problem-solving by increasing motivation and incentives. It is also a valuable tool for management tackling the problem of resistance to change.
Many organizations are unable to adapt to new economic circumstances. Effective adaptation takes place when an analysis of long-run costs and benefits dictates that change is optimal. Effective compensation helps to generate a “crisis” or a “sense of urgency” that facilitates productive change.
