Elena Vetluzhskikh
www.seminar.sky.ru
Trainer & Consultant of some leading consulting Russian companies
Professional Coach
Efficiency Criteria and Limitations of Material Motivation System
When working out and introducing a motivation system any company strives to increase its efficiency.
What do we mean by efficiency?
Let’s look at the definition of efficiency in economy: efficiency is a ratio of the financial outcome (e.g. the
value of profit gained due to the application of this motivation system) and the expenses incurred by the
introduction of the above system.
What are the criteria of the motivation system efficiency? Does the increase of the motivation system
efficiency always help achievement the company goals?
What are the limitations of the motivation system and compensation package efficiency ?
Criterion 1. Influencing the Achievement of the Company Goals
One of the efficiency criteria is its impact on the achievement of the company’s strategic goals. Hence,
prior to the development of a company’s motivation system one should clarify the company goals and
strategy, and then develop a motivation system in a way that allows employees to achieve the results
contributing to the achievement of the company’s goals. According to Norton & Kaplan, «when employees
realize that
compensation ( reward) depends on the achievement of strategic goals then strategy
becomes an everyday job of every employee” [1]. This means that when introducing a result-oriented
motivation and compensation system it is vital that every subdivision, department and employee has a
goal which is based on the company goals, i.e. to ensure the so-called de-composition of goals.
Even in that case it is necessary to take into account a limitation arising from the use of a compensation
system that has become common in some companies where departments and department managers are
paid bonuses for achieving local goals set for those departments, and employees are paid for achieving
the individual goals.
Let’s relate that to a production-commercial company. The workshops meet the production goals but the
sales (marketing) department shows unsatisfactory performance. According to the above system workers
get a bonus but salespeople don’t. And does the company get it?
The company has not achieved its prime goal -it has not got the planned profit .
Should workers be given a bonus in this case? Most probably they should (if workers are not paid a
bonus they won’t have any motivation to make the plan in the future), but we should introduce some
limitations. For example, instead of a 100 per cent salary bonus employees should get a 70 per cent
bonus for meeting the local goals and another 30 per cent on condition that the company as a whole
achieves its goals.
In other words the motivation system will be efficient if we impose some constraints.
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The same applies to the situation when one or two employees meet the sales goals and the rest do not.
In this case it is necessary to pay 60-80 per cent of bonus to those who met the individual goals and the
other 20-40 per cent of bonus if the department as a whole meets the goals.
Consequently, prior to the development of a motivation and payment system it is necessary to identify the
company’s strategic goals and KPI ( key performance indicators)
which allow us to determine the
contribution every subdivision (department, employee) in achievement company goal and then to check
whether there are any limitations.
This brings us to the following conclusion: the motivation system introduced in one subdivision and
efficient for that subdivision does not necessarily contribute to the achievement of the company’s strategic
goals.
Criterion 2. The Complex Character of the Motivation System
A system cannot be efficient without being complex.
Along with material financial incentives one has to take into account the motivation factors and develop a
system of material non-monetary motivation: benefits system and a system of non-monetary motivation:
professional and career growth, participation in new projects, emotional support, positive feedback on
performance results, diversity of work activity. For example participation in new projects allows
employees to meet their need for self-fulfillment.
But chances are great that a material financial incentive (salary, bonuses) may not motivate the
employees. Depending on the company and the employee the material financial incentive
today it is a variable factor that may change from a motivating one to the so called “hygiene factor”.
When a material incentive of employees in a company is a “hygiene factor” (according to Herzberg) it
does not motivate employees to improve their performance. But at the same time if the performance is
not reinforced with appropriate consequences employees are not going to make any effort to perform
even their standard functions.
Besides, it is important to observe the factors which are motivators for employees, especially for top
performers and valuable talent employees, and to combine such components of a compensation package
(including the benefit package) that can in effect motivate employees to achieve better results.
Let’s consider a large commercial center in Moscow as an example. The compensation package
includes: salary, monthly bonus, and a package of benefits including meals refund, monthly public
transport ticket and children’s summer camp voucher (within the Russian Federation). One of the top
managers, a Head of sales department, is not willing to have lunch in the cafeteria belonging to the
shopping center (the reason could be her need for a special diet or a more diverse menu), she drives her
own car (she would prefer to have her gasoline bills paid for) and has no children.
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As a result, the top manager is not satisfied, moreover she is de-motivated with such compensation
package, and the last thing she is thinking about in this situation is achieving greater results.
Another common situation is when company managers encourage their employees to attend a swimmingpool and offer them to pay the expenses. What result does it bring? If you monitor the swimming-pool
attendance you will most probably find out that the paid lane is often vacant with the effect that the
company’s money is spent ineffectively. And this is not an isolated incident.
In a highly competitive environment of today’s world can a company afford such a waste of resources?
What could be done about it? To begin with (let’s relate to the above example with the Head of sales
department of a shopping center) let us manager what components of the compensation package could
motivate her to achieve better results.
It is only logical to assume that it would be a tangible bonus tied with performance KPI and the benefits
package – a refund of the gasoline expenses, mobile phone bills, and a personal vacation voucher (to the
extent of a monthly salary).
The action to be taken is to introduce “a cafeteria package” in the company. At the end of the year one
should distribute the benefits among 2 to 3 menus of the same value but with different components on the
basis of employees’ needs and the company’s resources (See table 1 as an example). Give your
employees a chance to choose the most desirable menu, hence the most motivating benefit package
(you may not give this package to non-performing employees).
Table 1. “Cafeteria package”
Menu 1
Menu 2
Menu 3
Lunches
Gasoline bills in the amount
Medical insurance
of____________
Monthly
public
transportation
tickets
Children’s
Mobile phone calls in the amount
Fitness center expenses
of_____________
summer
voucher
camp
Sanatorium
voucher
for
the
Sanatorium voucher
employee (in the amount of a
monthly salary)
In our case the Head of sales department would choose Menu 2 and would be satisfied with it and even
more loyal to the company.
Thus, the motivation system should be include different components and based on motivation factors,
needs and expectations of employees. Another restriction that we should bare in mind is the following: in
order to determine the components of a compensation package we have to find a balance between the
employee’s main preferences and the company expenses.
Another conclusion we may draw is that the material monetary motivation system alone is not sufficient
for achieving high performance efficiency.
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Criterion 3. The Payroll Fund Growth Should not Exceed the Growth of the Company Turnover
In the majority of companies the payroll fund is calculated as a turnover share (per cent).
When introducing an effective motivation and payroll system with the increase of the company turnover
and profitability the absolute amount of payroll fund may grow but the relative one should stay at the
same level or go down.
And this is still another limitation of the motivation system efficiency as the developers of the motivation
and payroll system have to “adjust” the compensation package to the existing payroll fund.
As we look at a result-focused payroll system we will see that we always need to set the “upper limit” for
the bonuses tables, i.e. when the fulfillment of KPI (Key Performance Indicators) is 100 per cent and over,
employees get the same amount, for example, 50 per cent of the salary, that does not seem to motivate
employees to exceed the planned assignments or to use their potential. It seems only logical for the
production companies: for what should employees work to fill the storage?
And in the wholesale trade it would be good if the bonus share was bigger when the KPI is reached:
with 100 per cent KPI - a half-salary bonus (50 per cent)
with 120 per cent KPI - 60 per cent of the salary, etc.
In any case managers (in sales) will be limited by the market capacity and competition.
At the same time to have the “results breakthrough” there should be a chance to overdraft the planned
payroll fund, for example, if you want to significantly increase the market share or to win over your
competitor an experienced top manager or professional who would develop new products, technologies,
etc. In this case you have to analyze and compare the payroll fund limitation with the influence of this
limitation on the achieving the company goals.
As we have mentioned the market, let’s proceed to the fourth criterion…
Criterion 4. The Average Salary of the Employee Must not be Lower than the Average Salary in
the Market for a Specialist of Similar Qualification.
Whilst elaborating a motivation and payment system it is important to monitor the salary market in the
industry. If the employee’s salary is lower than the salary in the market it will cause labor force fluctuation
in the company (if the company is not the only one
in the area). If the salary is higher than the market
average (and the company is not a monopolist) it is important to make an analysis and find the reason
and necessity of such expenses for company.
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Following the latest advice of a management guru it is worth arranging managers and employees in
categories A, B and C.
A – outstanding managers and professionals achieving high and record-breaking results, the so called
“human capital”;
И – good managers and professionals achieving average results (within the standard);
C – mediocre managers and mediocre employees, not result-focused, always giving many valid reasons
for nonperformance, the so called “staff”.
Jack Welch, while managing The General Electric Corporation used to be present during the assessment
of his managers: “This guy is a first-class player, let’s give him a promotion and a chance to buy an
essential amount of shares at a special “price”, and that guy is a strong “second rate” player with a good
potential; we have to identify the qualities he needs to develop and provide him with a coach; and this guy
is a looser, a useless “third rate” player, it’s time to get rid of him”[2].
Again we deal with a limitation of the motivation system efficiency arising from use (especially in large
companies) of a unified approach, salary market situation, lack of enough high professional resultfocused employees and top managers.
Criterion 5: Relative Points Growth at Personnel Assessment (in dynamics).
The today’s personnel assessment includes:

Results assessment (we assess the indicators, such as KPI);

Competence assessment (possessing the necessary knowledge, skills, professional and
personal qualities);

IDP Fulfillment (Individual Development Plan).
Therefore, an effective motivation system should motivate an employee to achieve better results (financial
targets) and also to grow personally, be more loyal, committed, client-oriented, etc.
Another limitation here lies in the fact that there is no such thing as an ideal motivation system which
could increase the performance efficiency and professional skills of employees along with the growth of
their loyalty and commitment to the company the same time.
It is common knowledge that having gained some experience and increased his or her efficiency (the
company tried hard to motivate the employee) and competence (the company invested in training and
developing the employee) the employee may leave the company for higher salary or a larger corporation
in the market.
Therefore while developing a motivation system we always have to analyze the future consequences. In
this case the system efficiency is limited by the potential negative consequences for the company.
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And finally, criterion 6 (naturally it is not the last one but we’ll limit ourselves to six). Flexibility of
the Elaborated Motivation System, Possibility of an Efficient System Updating with the Intercompany Environment or Market Changes , Adjustment of Company Goals without Changing the
Bonus-Giving Mechanism.
The above
esult-oriented pay system based on KPI - key performance indicators (or efficiency) of
subdivisions and employees is fully satisfied this criterion .
With the changes in the market we just change the goals, indicators, amount criteria premium leaving the
mechanism as a whole without changes.
According to statistics the implementation of such system increases the company’s efficiency by 15-20
per cent .
And again we deal with a limitation: you may implement the above system in the company and it will in
fact be efficient and will improve the financial indicators, if the environment is more or less stable at that
time: no new strong competitors in the market, no substitute product; exactly according to Porter and his
matrix of 5 forces influencing the market: competitors, potential competitors, substitute product, suppliers,
customers.
In my opinion, one rather important element is missing in the matrix in Russia – the influence of political
and local government forces.
Thus the efficiency of the motivation and payroll system is limited by the unstable situation.
To ensure the efficiency of the system we have to update it to the current changes, at least every two or
three years.
I’d like to conclude that there is no ideal bonus system, so before you implement any system you have
developed you should identify its limitations (constraints) for your company in particular. Consider how it
influences the motivation system efficiency and then to make changes in the motivation and payroll
system you developed.
1. S. Robert, D. Norton. Strategy-Oriented Organization, 2004.
2. Jack Welch “Straight From the Gut”, 2001.
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