Management Incentive Compensation

Incentive compensation may be defined roughly as a form of pay geared to output or effort. This output or effort is assumed to be measurable, and such measurements are assumed to have sufficient precision as to be useful in determining the amount of compensation. Incentive payments may be built around either measures of individual output or those relating to a group or even to an entire organization.

Base pay plans, though usually giving a passing nod to supply and demand in the labor market, are really designed to produce a relatively stable base income. This is accomplished by use of some form of ranking system intended to provide internal orderliness by relating one job to another in the salary and job structure, the orderliness often taking precedence over realities of the labor market. The system includes machinery for periodic reviews and changes in salary related to the growth and development of the individual (often theoretical) and the quality of his performance as measured, where possible, against standards.

We should keep in mind, however, that the extent to which incentive compensation systems provide recognition is very limited. While it is true that a man who receives an unusually high bonus is made aware that top management thinks well of him, the secrecy of the system prevents him from basking in the envy of his colleagues. They are not supposed to know how much he receives, and he is not supposed to tell them. Though his reward may be a source of personal pride, it cannot be an objective for his colleagues to aim at. Corporate officers, however, like bargaining unit employees, are exempt from this rule of secrecy.

Thompson V. A. , “Bureaucracy and Innovation,” Administrative Science Quarterly, X:1 (June 1965), 10. Professor Thompson states: New organizations are sometimes begun by highly creative individuals who attract like-minded people, maintain an atmosphere conducive to innovation, build up a powerful esprit de corps and achieve a very high level of organizational creativity. Often these are small engineering or research organizations started by an engineer or scientist assisted by a small group of able and personally loyal peers. The organization is new and small and not yet bureaucratized. Many able young people may be attracted to it because of the opportunity provided for professional growth. As these organizations grow larger and particularly after the charismatic originator is no longer there, the monocratic stereotype asserts itself and they become bureaucratized.

Ibid., p. 2. “Management consists of functions and processes for perfecting the tool for this purpose, that is, controlling intraorganizational behaviors so that they become completely reliable and predictable, like any good tool.”

Slichter H. Healy J. Livernash E. , The Impact of Collective Bargaining on Management (Washington, D.C.: Brookings Institution, 1960), pp. 514–515. … as workers are more and more assisted by machines and as machines take over substantial parts of the heavy work, there may well be less objection on the part of workers to incentive. To an important extent it is the machine that gets the speed-up treatment rather than the worker. In the second place, and related to the first point, getting good production from equipment is less a matter of heavy physical effort than it is one of good teamwork and coordination. There are situations where heavy and fast work is required under difficult working conditions, but in many ways technology has broken down the relationship between degree of worker effort and quantity of production.

Luthy H. , “De Gaulle: Pose and Policy,” Foreign Affairs, XLIII:4 (July 1965), 561–573. Even the sphinx-like pose which he (De Gaulle) is fond of assuming is deliberate and calculated; from his earliest writings, he has been consciously creating the ideal portrait of le grand chef, who must, as he wrote in 1927, “possess something indefinable, mysterious. …” According to a more recent formulation of his (De Gaulle's), this mystery resides, too, in the political art of “not crystalizing in words that which the future is going to demonstrate,” of not defining goals before being assured of their success, and then always appearing to have desired what comes to pass.

Dunnette M. D. , “A Behaviorial Scientist Looks at Managerial Compensation,” Managerial Compensation (Ann Arbor, Michigan: Foundation for Research on Human Behavior, April 1965), p. 37. Dr. Dunnette says: I believe it is well established that managers, in comparison with men in general, show greater desire for achievement, for power, for advancement, for income and material advantages. Though not ranked first, money has definite appeal for managers. It is also well established that among managers, needs such as food, shelter, safety and comfort are already well satisfied. In contrast, the needs for such factors as Achievement, Recognition, Advancement and Intrinsic Job Interest may often be unsatisfied. This suggests, rather strongly, that if money is to serve as a “motivator” for managers, it must be seen as leading to outcomes associated with such outcomes as increased Achievement, Power, Status, or Recognition. [In addition, on page 39, he states:] For most people the desire for money per se tends to be satiable. Beyond a certain amount of buying power, we cease to strive for extra money for its own sake. But where the additional money ties in directly with a relatively insatiable need such as the need for achievement, then money becomes something more than just money. It becomes a tangible recognition for achievement.

Ibid., p. 39. “The compensation system for each manager must be truly individualized. … The relationship between each manager's job behavior and his salary must be specified very explicitly.”

Ibid., p. 38.

To operate effectively as an incentive, pay must be perceived as importantly related to job performance. This principle was confirmed in a study by Lawler ( Lawler Edward E. , “Managers' Job Performance and Their Attitudes Toward Their Pay,” unpublished doctoral dissertation, University of California, Department of Psychology, 1964) who found that those managers who thought that pay was importantly affected by job performance tended to do better work than managers who did not perceive such a relationship.