Financial Incentives to Improve Staff Performance Revision Notes for Edexcel A-Level Business

Financial Incentives to Improve Staff Performance

Understanding financial motivation

Different motivational theories offer contrasting views on the role of money in motivating workers. The scientific management approach, particularly associated with Frederick Taylor, argues that financial rewards are the primary motivator for employees. This view assumes workers see employment as a means to an end and will respond positively to monetary incentives.

In contrast, the human relations view suggests motivation comes from multiple factors beyond pay. Workers may be motivated by teamwork, recognition, responsibility, and other non-financial elements. Understanding which approach applies to your workforce is crucial when designing reward systems.

infoNote

Key Contrast:

Scientific management = Money is the main motivator
Human relations = Motivation comes from multiple factors (teamwork, recognition, responsibility)

The approach you believe applies to your workforce will fundamentally shape how you design reward systems.

Types of financial incentives

Piecework (piece rates)

Piecework is a payment system where workers receive a fixed amount for each unit they produce or task they complete. This is a form of payment by results.

infoNote

How it works:

Workers are paid per item produced (e.g. $0.50 per parcel delivered, $1.00 per kilo of fruit picked)
Higher output directly results in higher pay
Only the individual worker's contribution affects their earnings

infoNote

Theoretical basis:

Frederick Taylor, founder of scientific management, strongly recommended piece rates. He believed they represented the ideal motivation system because workers who produced more earned more, creating a direct performance-reward link.

Advantages:

Clear link between effort and reward
Self-motivating for workers who want to earn more
Easy to measure and calculate
Encourages high productivity

chatImportant

Critical Disadvantages:

Only suitable where individual contribution is easily measured (not appropriate for secretaries or managers)
Health and safety concerns: Workers may take dangerous shortcuts to speed up production
Quality issues: Rushing may compromise product quality
Can create unhealthy competition between workers
Ignores the value of teamwork

chatImportant

Exam tip: When evaluating piecework, consider whether the job role allows individual output to be measured accurately and whether speed over quality is acceptable.

Commission

Commission is a payment system predominantly used for white-collar workers, particularly in sales roles. Workers receive payment for achieving specific targets.

infoNote

How it works:

Paid per successful transaction (e.g. $100 commission per car sold)
Can be the sole form of payment (100% commission)
Often combined with a basic salary plus commission on top
Directly ties pay to sales performance

Purpose:

Commission systems are designed to 'incentivise' workers by creating a direct connection between their output (sales achieved) and their income. The more successful they are at selling, the higher their earnings.

Advantages:

Strong motivation to achieve sales targets
Business only pays when sales are made
Rewards high performers
Aligns worker interests with business revenue goals

Disadvantages:

Income can be unpredictable and insecure
May encourage aggressive or unethical sales tactics
Can create intense pressure and stress
May discourage teamwork if individuals compete for sales

Bonus payments

A bonus is an additional payment made on top of basic wages or salaries. Bonuses are typically awarded when predetermined targets are met.

infoNote

Types of bonuses:

Individual bonuses:

Paid to individual workers for meeting personal targets
Example: Machinists receiving a bonus for weekly production targets

Team bonuses:

Paid to groups who collectively meet targets
Example: Sales team bonus when team target is achieved
Encourages collaboration and teamwork

Loyalty bonuses:

Paid annually (often at Christmas) for staying with the company
Not necessarily linked to productivity
Designed to improve staff retention and show appreciation

Advantages for businesses:

Cost-effective: Only paid when targets are met (money is earned before being paid out)
Provides motivation to reach specific goals
Can be adjusted based on business performance
Rewards loyalty and reduces staff turnover (loyalty bonuses)

Advantages for workers:

Opportunity to earn additional income
Clear targets to work towards
Recognition of achievement
Provides financial security through basic pay plus bonus potential

chatImportant

Exam tip: When analysing bonuses, consider whether targets are realistic and whether individual or team bonuses are more appropriate for the business context.

Profit sharing

Profit sharing occurs when a portion of company profits is distributed to workers rather than being paid entirely to shareholders.

How it works:

After calculating annual profits, the business allocates a percentage to be shared among employees
Distribution may be equal or proportional to salary
Workers receive payments in addition to normal wages
Amount varies depending on company profitability

Advantages:

Alignment of interests:

Profit sharing creates a common goal between shareholders and workers – both groups benefit from higher profits. This can:

Unite the workforce behind company objectives
Encourage workers to think like owners
Reduce conflict between management and employees

Meeting higher-level needs:

According to Maslow's hierarchy of needs, profit sharing can satisfy the need for love and belonging by showing workers they are valued members of the organisation.

infoNote

Case study: John Lewis Partnership

The John Lewis Partnership (John Lewis department stores and Waitrose supermarkets) is owned in trust for its workers. All profits after tax and retentions are distributed to employees.

Distribution is proportional to salary
In successful years, workers may receive over 20% of their salary as profit share
This represents a substantial financial benefit
Whether this directly motivates harder work remains debatable

Disadvantages:

Weak individual link:

Most individual workers have little control over overall company profits
Extra individual effort benefits all workers equally, diluting personal motivation
No direct connection between individual effort and individual reward
Can create 'free-rider' problem where some workers benefit from others' efforts

Variable and potentially small amounts:

Profit share may be too small to provide meaningful motivation
Amount depends on factors beyond workers' control (market conditions, management decisions)
Unpredictable income supplement

chatImportant

Exam tip: Evaluate profit sharing by considering company size – in smaller businesses, individual contribution may be more visible and motivating than in large corporations.

Performance-related pay (PRP)

Performance-related pay (PRP) is a payment system specifically designed to motivate staff by linking pay increases directly to individual performance.

History and use:

Introduced widely in the UK during the 1980s and 1990s
Now commonly used among white-collar workers
Particularly prevalent in financial services (banking) and the public sector

How PRP works:

Workers receive additional pay for achieving targets set through an appraisal system.

infoNote

Appraisal process:

Performance of individual staff is reviewed against specific criteria
Criteria may include: punctuality, teamwork skills, completing training, achieving task objectives
Conducted through performance appraisal interviews with senior staff (usually line managers)
Results determine the level of reward

Payment structure:

Extra pay may be a lump sum (e.g. $1,000) or percentage of salary
Often uses graded system:
- 'Excellent' performance: 10% bonus
- 'Good' performance: 5% bonus
- 'Satisfactory' performance: 0% bonus

Theoretical justification:

According to scientific management theory, PRP should effectively motivate workers because it creates a direct link between individual performance and financial reward. Workers are incentivised to achieve organisational goals to earn their bonus.

chatImportant

Criticisms of PRP:

Insufficient incentive:

Bonus amounts may be too small to genuinely motivate workers
Difference between performance grades may not justify extra effort required

Individual performance in team contexts:

Performance often depends on team output or system efficiency rather than individual effort
Example: A worker targeting 5% more forms processed may depend on others' work or equipment reliability
Where teamwork is important, team-based bonuses may be more effective

Unrealistic targets:

Workers may perceive targets as difficult or impossible to achieve
If targets seem unattainable, workers won't make effort to reach them
Demotivating rather than motivating effect

Perceived unfairness:

Few staff view appraisal as genuinely objective
Workers often attribute poor grades to interviewer bias rather than their own performance
Particularly problematic when pre-existing relationship issues exist
High achievers may be seen as 'favourites' by colleagues, creating resentment

chatImportant

Demotivation effects:

Failing to receive a PRP bonus can be seriously demotivating:

Impact on Maslow's hierarchy:

Physiological needs: Deprives workers of expected money
Love and belonging: Workers feel less valued by the organisation
Self-esteem: Knocks confidence and sense of achievement

Behavioural response:

Rather than improving performance, workers may simply give up trying to change their behaviour and attitudes, accepting they won't receive bonuses.

chatImportant

Exam tip: When evaluating PRP, consider the specific context – is individual performance easily measured? Are targets realistic? Is the appraisal process seen as fair? Strong answers will weigh these factors against the theoretical benefits.

Comparing financial incentives

Method	Best suited for	Main advantage	Main disadvantage
Piecework	Manual workers with measurable output	Direct link between output and pay	Safety and quality concerns
Commission	Sales roles	Strong sales motivation	Income insecurity and pressure
Bonus	Wide range of roles	Only paid when targets met	May not motivate if amount too small
Profit sharing	All employees	Aligns interests with company success	Weak individual link to effort
PRP	White-collar workers	Links individual performance to reward	Perceived unfairness and demotivation risk

bookmarkSummary

Key Points to Remember:

Financial incentives assume money motivates workers, based on scientific management theory

Main types of financial incentives:

Piecework pays per unit produced but raises safety and quality concerns
Commission is widely used in sales to incentivise revenue generation
Bonuses are cost-effective as they're only paid when targets are met
Profit sharing aligns worker and shareholder interests but has weak individual motivation links
Performance-related pay (PRP) uses appraisal systems but faces criticism for unfairness and potential to demotivate

Key terms:

Piecework/piece rates: Payment for each unit produced
Commission: Payment for achieving sales targets
Bonus: Additional payment beyond basic wage for meeting targets
Profit sharing: Distribution of company profits to workers as well as shareholders
Performance-related pay (PRP): Extra pay awarded based on performance appraisal
Appraisal: Review of individual performance against set criteria

Critical evaluation points:

Financial incentives work best when individual contribution is measurable
Team-based rewards may be more appropriate in collaborative work environments
The size of financial reward must be significant enough to motivate
Perceived fairness is crucial – unfair systems can demotivate
Different theories suggest money may not be the primary motivator for all workers

Financial Incentives to Improve Staff Performance (Edexcel A-Level Business): Revision Notes