Sallie Mae’s Employee Incentive Program Evaluation

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Introduction

Organizations are continually faced with the task of motivating their employees for increased motivation and productivity. Job and organization dissatisfaction, high burnout among employees, work-induced stress, and high rates of employee turnover are signs that employees in a firm are not motivated enough to be as productive as the firm desires. As a result, various schemes have been implemented by firms in different industries to enhance their employees’ productivity and ultimately achieve their bottom line goals. The use of incentive programs to motivate employees has been around for ages. Firms use different types of incentives and may include material-based or non-material-based incentives. The effect of incentive programs on employee motivation and productivity however differs depending on various personal and organizational factors. The aim of this paper is to conduct a literature review on incentive programs used by different firms and their impact on employees’ productivity. The literature review will form the basis upon which the Sallie Mae’s employee incentive program will be evaluated.

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Literature Review

Chuang, Yin and Dellmann-Jenkins (2009) conducted a study to examine “the factors that affect the job satisfaction of casino hotel chefs,” (p. 323). This study was motivated by the fact that chefs play a significant role in the performance of the hospitality industry and thus their job satisfaction levels should be closely monitored to ensure high productivity levels. Chuang et al. (2009) were thus interested in finding out what intrinsic and extrinsic factors influence chefs’ job satisfaction. Chuang et al. found that intrinsic factors which most affected the chefs’ job satisfaction were the job itself, followed by growth and recognition accorded them by the management. The extrinsic factor which was most significant to the chefs’ job satisfaction included supervision. The researchers argue that the findings support the value that most employees attach to recognition by management and the establishment of customized incentive programs. Chuang et al. concluded that job satisfaction can be enhanced significantly if hospitality organizations create customized incentive programs that are tailored to the different cadres of chefs working in different types of settings. The incentive programs should also be accompanied by the assignment of different managerial and supervisory duties to the chefs.

The study by Chuang et al. (2009) focuses on incentives accorded to individual employees. However some studies assert that group incentives also improve the morale and ultimately the productivity of employees. Liu and Batt (2010) are of this view and support the establishment of group incentives. The researchers conducted a study to examine the influence that supervisors have on employee performance through coaching and group management. Their study was based on technology-oriented firms, specifically call centers. The participants included agents who work in call centers and whose nature of work involved taking calls and task chores which are arbitrarily allocated through automated technology. Liu and Batt found that improvements in employees’ objective performance were significantly influenced by the level of coaching the employees got from their supervisors every month. Employees who are coached and guided regularly by their supervisors achieve higher levels of performance than their counterparts. This is because coaching enhances the motivation of employees. Employees know where they go wrong and what they should do to perform better and to solve difficult situations. Coaching also provides employees with feedback which is important in performance. In addition, the researchers also found that employees portrayed greater performance where group tasks rather than individual tasks were emphasized by the supervisors and where more automated technology was used. Most importantly, higher performance levels were recorded where group incentives rather than individual incentives were used.

The study by Liu and Batt (2010) is closely related to the study conducted by Libby and Thorne (2009). The aim of this study was to examine how group performance is affected by the structure of incentive programs, namely: individual, group, and mixed incentives. The justification given by Libby and Thorne for the study is that many prior studies showed that group performance is positively influenced by group incentives. However, the researchers noted that this conclusion was contradicted by the study conducted by Young, Fisher and Lindquist (1993) who found that group incentives did not enhance the group performance of employees. It is based on this contradiction that Liu and Libby and Thorne (2009) conducted their study. The researchers used subjects from assembly lines, a setting in which interaction among the employees is highly discouraged. According to the goal interdependence theory, the use of individual incentives would be more appropriate to assembly lines because they would motivate the workers to concentrate on their individual tasks and produce more output. Contrary to this perspective, Libby and Thorne found that the group performance of the assembly line workers did not differ with the structure of the incentive programs. However, the researchers found that the group performance of the workers increased when group incentives based on teams were used. This implies that if workers are allowed to work in teams, the use of group incentives can increase their performance (Cooke, 1994). The study is however limited and has weaknesses which originate from the nature of industry examined and the nature of work executed by the participants. Future similar studies should be conducted using firms from different industries.

Group incentives and their effect on employee performance have also been examined by Upton (2009). In his study, Upton also takes into consideration the impact of social value orientation (SVO) which encompasses three types of personalities namely: “prosocials (who value cooperation and equality in outcome); individualists (who focus on their own rewards); and competitors (who seek relative advantage over others even at their own expense)” (Upton, 2009, p. 293). The researcher also examines three different types of incentives: a piece-rate incentive program in which all workers are paid an equivalent allocation of the group’s output; an incentive program in which workers are paid an equivalent allocation of bonus if they meet the budget target; and an incentive program in which workers are paid an equivalent share of bonus if they surpass the budget target. The researcher classified the employees into groups according to their SVO and then implemented one incentive program type in each of the groups. Upton (2009) found that group performance is greatest in groups which have prosocials and lowest fro groups that have competitors. In addition, group performance was highest in cases where a medium rather than a high budget target was implemented. Upton concluded that although incentive programs help to enhance employee performance, firms should take into consideration the personality types of the employees.

Husain and Jiwani (2008) carried out a study to examine the influence of contingent incentive programs on the performance and productivity of employees working in microfinance institutions. The study was motivated by the fact that microfinance institutions are labor-intensive and thus employees need to be motivated to be more productive. Husain and Jiwani (2008) also argue that “intrinsically motivated loan officers are mission-driven, and self-motivated,” (p. 195). The researchers assert that pay-for-performance is the most effective incentive program for loan officers because the incentives given have the potential of propelling the growth of loan portfolio, widen the scope of clients, and increase the quality of loan portfolio, customer satisfaction and the quality of necessary documents. However, the pay-for-performance incentive programs can be disadvantageous to a microfinance institution because they can easily alter the social objective of the institution. Specifically, the loan officers can fail to reach the poor clients and instead target the rich clients because “loan officers try to increase the size of their portfolio if their performance is tied with loan portfolio dollar size,” (Husain & Jiwani, 2008, p. 197).

Incentive programs are not only used by private firms but are also common in public firms. Various researchers such as Burgess and Ratto (2003) and Koonmee (2009) have studied the role played by incentive programs in the public sector. Burgess and Ratto (2003) focused their study on the effect of incentives on public servants in the United Kingdom. They argue that incentive pay is critical to the overall improvement of the UK public sector. Nevertheless, they found that the implementation of incentive programs particularly the performance-based contracts is more difficult in the public sector than in the private sector. This is because of issues such as “multi-tasking, multiple principals, the difficulty of defining and measuring output, and the issue of intrinsic motivation of workers” (Burgess & Ratto, 2003, p. 290). Because of these issues and based on the principal-agent theory, the researchers suggest that the public sector should implement low-powered incentive schemes together with task assignment and work organization strategies which would enhance civil servants’ productivity more effectively than high-powered material incentives.

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Koonmee (2009) carried out a study to determine the effects of performance management and incentives on public service officers in Thailand. Data were collected through interviews and questionnaires. The researcher found that the performance of units and individual employees was significantly influenced by goal setting and performance appraisal. However, “the influence on unit was higher than the influence on individual employees” (Koonmee, 2009, p. 166). Second, the researcher found that incentives also affected the units and employees differently with greater effects on the organization than on employees. The explanation given for these results lies in the perception of employees concerning the fairness (justice) of the incentives. The performance of the civil servants is not likely to increase with incentives if the employees perceive the incentives as being unfairly distributed. It is thus important for firms to take into consideration the aspect of fairness when implementing incentive programs for their employees. In addition, control mechanisms such as budgets also play a key role in motivating employees’ performance and productivity.

The effect of control mechanisms on employee performance and productivity has also been examined by McDonald, Harrison and Checkland (2008). The main aim of McDonald et al.’s study was to examine the effects of control mechanisms and perceptions after the establishment of pay-for-performance contracts on employees’ performance. The study was undertaken in a healthcare organization. The justification for the study is that the quality of care provided by healthcare organizations is important and thus financial incentives are being used to ensure high quality of care (Roland, 2004; Cole, 2005). However, researchers argue that financial incentives affect employees’ performance in a complicated way and may end up negatively affecting employees’ intrinsic factors that influence their motivation (Davies et al., 2004; Benabou and Tirole, 2003). This raises questions about control mechanisms and employees’ perceptions about the same. In their study, McDonald et al. (2008) used two case studies with differences in practices: big practice and medium practice settings. The researchers found that the pay-for-performance contract had negative effects on employees in both settings with a greater effect in the medium practice setting which practiced a top-down approach with more intensive supervision on employees. The researchers concluded that employees’ performance is affected by not only incentive programs but also by the control mechanisms put in place by firms and organizations. Performance-based incentive programs are indeed common and have attracted the attention of so many scholars. In addition to the above-mentioned studies, other studies which have examined these types of incentive programs are the ones conduced by Peter (1995), Piekkola (2005), Miyamoto and Higuchi (2007). Peter (1995) examines the effect of performance-based pay on employees’ morale levels. He argues that the morale of an employee is influenced by his comparable pay status. As a result, an incentive program that is based on individual performance can easily weaken the morale of workers with least expertise and thus negatively affect their productivity. Then again, the productivity of highly skilled employees can be enhanced significantly by competition for comparable pay status. Thus, the total impact on employee productivity is dependent on the constituents of an organization’s employees. The researcher argued that if the employees are heterogeneous in nature, the use of a profit-sharing scheme as an incentive program can substantially increase the morale of the least experienced and skilled employees because such a scheme minimizes pay differential among the employees. This helps in increasing the general productivity and performance of a firm.

Piekkola (2005) examined “the effect of performance-related pay (PRP) on firm performance in Finland,” (p. 18). The researcher utilized the fixed effect analysis tool to examine the productivity effects of introducing PRP program using employer-employee data collected between 1996 and 2002. The researcher controlled fro the skill structure of employees. From the analysis, Piekkola found that PRP increases the productivity and profitability levels of firms by approximately 6 percent. However, this was achieved only if the incentives were large enough and surpassed an average of 3.6 percent of employees’ salaries. On the other hand, there is no significant effect of the PRP on firm performance if the incentives were little. The introduction of incentive programs such as the PRP thus enhances firm performance but mainly because the introduction of such initiations goes hand in hand with the institution of a new human resource management regime.

The aim of the study by Miyamoto and Higuchi (2007) was to examine the effect of performance-related pay contracts on firm performance in Japanese firms. In Japan, these incentive programs were initiated in the late 1990s. The researchers found that it is not the initiation of the incentive programs per se which influences the performance of firms, but rather the fairness surrounding their implementation. This implies that if the employees perceive that the incentives have been given justly their performance is likely to increase. On the other hand, if the employees perceive the incentive programs to be unfairly implemented, dissatisfaction with the job and the firm is likely to grow which in turn has a negative effect on the overall performance and profitability of the firm. This finding is contradictory to the study by Piekkola (2005) above who found that a mere introduction of the performance-based programs enhances firm performance. Second, Miyamoto and Higuchi found that communication plays a key role in the effectiveness of pay-for-performance contracts. The researchers found that even in cases where information disclosure is executed as a component of procedural fairness, the firm performance does not improve if communication is insufficient. This implies that if adequate communication is not included in the incentive program, it may lead to employee dissatisfaction. This observation has also been made by Drake, Wong and Salter (2007).

Drake et al. (2007) carried out a study to determine the effect of feedback and incentives on employees. They argue that employees are motivated by two constituents of control systems namely: empowerment-performance feedback and performance-based incentive programs. Their study looks into the effect of different types of performance feedback and performance-based contracts on three empowerment dimensions of employees namely: competence, self-determination and task motivation. The researchers found that performance feedback and performance-based contracts are not significantly or positively correlated with the three dimensions of empowerment. However, they found that performance feedback is significantly related to task motivation while performance-based contracts negatively affect competence and self-determination. Giving performance feedback to employees enhances their motivation by increasing their perceptions about their contributions to the firm. On the other hand, performance-based contracts are likely to reduce the employees’ general opinion about empowerment. The findings of this study, particularly those concerning performance-based contracts contradict other prior studies, for instance, the study conducted by Spreitzer (1996). Spreitzer found that performance-based contracts had a significant and positive correlation with the three dimensions of employee empowerment. The difference in the results may be as a result of the type of participants used in the studies. Whereas Drake et al. (2007) studied non-management employees, the study by Spreitzer (1996) was focused on managers.

Although there has been a great focus on the effect of group incentives on employees’ performance, some studies also assert that individual incentives are equally, if not more, important in enhancing employee productivity. Some of the researchers who hold this view include Shaw, Gupta and Delery (2002). The aim of the study by Shaw et al. was to examine how pay dispersions affect organizational outcome. The researchers argue that pay dispersion may enhance efforts of employees and offer motivation for increasing the performance levels of employees. On the other hand, it can hinder cooperation and goal achievement in workers. Based on these assertions and an analysis of the trucking industry, Shaw et al. found that the level of individual incentives affects the ratio between pay dispersion and accident frequency. Specifically, when the individual incentives are low, the ration is high and vice versa. The accident frequency represents the performance in the trucking industry. That is, a higher frequency of accidents shows that the industry is performing poorly while a low frequency accident indicates a good performance of the industry. Thus, the results imply that the performance in the industry increases if individual incentives are low but pay is dispersed.

Conclusion

In general, employee incentive programs affect employees’ productivity and the overall performance of the firm. However, the effect is rather complex and is influenced by a multitude of both personal and organizational factors. In some firms, the mere introduction of incentive programs, particularly by a new management regime, increases employees’ productivity because it shows the new management’s efforts in improving the wellbeing of employees. In other firms, however, the introduction of incentive programs is not enough to boost employees’ productivity. The perception of fairness in the execution of incentive programs is more critical in these firms. Another factor that needs to be taken into consideration is the personality type of employees. Are the employees competitive, individualistic, or cooperative? In any firm, it is likely to find all these types of personalities. Firms should thus evaluate the type of incentive program that would serve the best interests of employees based on their personality types. Most importantly, incentive programs are of different structures: group, individual, and mixed incentives. The effect of incentive programs varies according to their structure. Each of these incentive structures works well in different organizational and work settings. It is thus the responsibility of a firm’s human resource management to assess critically the nature of their firm, the personalities and needs of their employees, as well as the employees’ perceptions towards any incentive program it wants to implement.

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Reference List

  1. Benabou, R., & Tirole, J. (2003). Intrinsic and extrinsic motivation. Review of Economic Studies, 70(3), 489-520.
  2. Burgess, S., & Ratto, M. (2003). The role of incentives in the public sector: Issues and evidence. Oxford Review of Economic Policy, 19(2), 285.
  3. Chuang, N., Yin, D., & Dellmann-Jenkins, M. (2009). Intrinsic and extrinsic factors impacting casino hotel chefs’ job satisfaction. International Journal of Contemporary Hospitality Management, 21(3), 323.
  4. Cole, A. (2005). UK GP activity exceeds expectations. British Medical Journal, 331(536), 21.
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