Proceedings of the American Society for Engineering Management 2018 International Annual Conference

E-H. Ng, B. Nepal, E. Schott, and H. Keathley eds.

INFLUENCE OF REWARD SYSTEMS ON MOTIVATION-PROS AND

CONS BASED ON CURRENT LITERATURE
Aysen K. Taylor and Sujatha Alla
Old Dominion University
Systems Engineering and Research Building
Norfolk, VA 23529
Akahy001@odu.edu

Abstract
Motivation of an employee is both intrinsic and extrinsic. Every worker's compensation is linked in some way to
their performance. Intrinsic motivation is more responsive to less quantifiable work environment factors such as
making tasks that stimulate our intellect and creativity. A similar factor involves giving the workers more autonomy
in their efforts as seen in participative management initiatives. A limitation of money as a reward is that it can lower
intrinsic motivation in some cases (Deci, 1973). Today’s workers are more likely to have jobs that require
creativity, initiative and “thinking outside the box”. Similarly, companies that want to bring these qualities out of
their employees need to evaluate their reward systems. Pink (2009) posited that there is a disconnect between what
science knows about motivation and what businesses typically do to motivate their employees and he suggests
paying a fair wage and using non-monetary approaches to improve workers intrinsic motivation. Scientific research
shows extrinsic rewards have a neutral or negative effect when intrinsic motivation is high (Arnold, 1976). Do
workers really focus on their income when excreting effort on behalf of their company? Where does intrinsic
motivation come from? Do some extrinsic rewards decrease intrinsic motivation? Are non-financial extrinsic
rewards more effective? What controversies exist in the research area of motivation? Are current managers aware
of what science says about rewards and motivation? These questions are discussed in this paper based on the current
literature.

Keywords
Motivation, reward systems, performance

Introduction
Reward systems are made up of two components. The first component consists of extrinsic rewards such as salary,
benefits and incentive payments. The second component is made up of intrinsic rewards such as self-satisfaction,
recognition and other rewards given to employees that are not monetary based. Both of these reward components
are commonly used for increasing the motivation and performance of the employee. From the employees’ vantage
point, motivation of the employee could be two ways as well; intrinsic and extrinsic. Every worker's compensation
is linked in some way to their performance. Intrinsic motivation is more responsive to less quantifiable work
environment factors such as making tasks that stimulate our intellect and creativity. A similar factor involves giving
the worker more autonomy in their efforts as seen in participative management initiatives. A limitation of money as
a reward is that it can lower intrinsic motivation in some cases (Deci, 1973).
An anecdotal story is often used to emphasis how extrinsic rewards can reduce intrinsic motivation. In this
story, some children start to play a ball game in a man's yard. The man does not want them in his yard and devises a
plan. To the children's surprise, he offers to pay them for each game they play. They are delighted to play their
game and get paid for it. After a few weeks, the man stops paying them. The children announce that without
payment, they will not play anymore on his property. Their focus was altered by the extrinsic reward of money.
The clever man achieved his goal of getting the kids to stop playing in his yard (Mawhinney, 1990).
In 1995, one of the today’s leading technology company set out to publish an encyclopedia on CD discs
that would be vast in its scope and linked to an online version. They called this product Encarta. Thousands of
professional writers were paid to develop rich content for this ambitious project. Years later, an online
encyclopedia called Wikipedia would be developed that had articles written by thousands of people for free. No one
was paid for content. Although the usefulness of Wikipedia as a resource is debatable, there is no debate on the

Copyright, American Society for Engineering Management, 2018

 Taylor & Alla

power of intrinsic motivation in the right circumstances. The company terminated the Encarta project in 2009 and
Wikipedia grows daily. Working for fun prevailed over working for a paycheck. If one asked most economists in
1995 which of these type models for an encyclopedia would be successful, most would have given the wrong answer
(Pink, 2009).

Research Objectives
Ostensibly, one would think that offering extrinsic rewards in the form of monetary compensation linked to reaching
performance objectives would be a reliable and consistent method to improve employee motivation to work harder
and provide more benefit to the company. However, one must consider the impact of monetary extrinsic rewards
on the employee's intrinsic motivation. This effect is less intuitive and more difficult to understand. Do workers
really focus on their income when excreting effort on behalf of their company? Where does intrinsic motivation
come from? Do some extrinsic rewards decrease intrinsic motivation? Do different classes of employees in
different industries respond differently to extrinsic rewards? Are non-financial extrinsic rewards more effective?
What controversies exist in the research area of motivation? Are current managers aware of the what science says
about rewards and motivation? How does performance feedback affect motivation? How do cultural differences
affect reward systems? Has the current economic downturn impacted the administration of reward systems? These
questions are discussed.

Background
Money is one of the fundamental reasons that people spend their time working in an organization. Due to its
importance to people and the company, considering a monetary reward system would be prudent. Having a
monetary reward system can allow organizations to create a merit system, or pay for performance system, where the
incentive is based on how well the individual does. Depending on how well the person does with their job/project,
determines if there is a base pay increase or possibly an added bonus to the initial base pay (Holston & Kleiner,
2015). Although extrinsic rewards (monetary rewards) seem like they would be appealing to the individual in an
organization, it does not necessarily mean that the individual is productive. Bartol & Srivastava (2002) noted in
their research that extrinsic rewards have a negative impact on intrinsic motivation. This is because the individual is
simply completing the goals that will get them the reward but does not mean they get any personal value or joy from
doing the job.
Performance feedback is provided through the interaction of employees and their supervisors over time.
Employee deficiencies are pointed out and the employee can also inform the manager about issues and constraints
that are limiting their performance. It is essential to present expectations and standards early in the employee’s hire
so their performance can be measured against a known standard. Much research has been conducted on employee
motivation but these usually do not examine how feedback may impact intrinsic motivation. The research in this
area is more focused on the way extrinsic rewards and positive reinforcement effect employee motivation.
Predictably, research confirms that negative feedback lowers intrinsic motivation. Organizations that rely primarily
on extrinsic rewards tend to have employees who work harder until the threshold of reward is met. Studies using
financial rewards to motivate people to adopt healthier lifestyles can result in an initial positive change that will fade
once the reward is withdrawn.
When designing a reward system that involves intrinsic rewards or nonmonetary rewards, there should be
other considerations taken into account other than the initial objectives of reward systems, which are (Holston
&Kleiner, 2015):

1. Rewards should be displayed publicly.

2. Rewards should not be offered too often.
3. Recipients of the reward should be deserving and selection process should be fair

Literature review
Katz and Kahn (1966) stated a reward system will benefit the employees and the company if it effectively combines
the interconnected practices and procedures established by the company’s leaders. The reward system operates
under the principles of systems theory, therefore entities such as interdependence, relationships, and structure within
the organization are considered and analyzed (Armstrong, 2010). Miller and Rice (1967) described reward systems
as an open system where organizations are shaped and influenced by their environment in a continuous process.
Many components comprise a reward system. Benefits are generally considered to be things like sick pay, pensions,
and health insurance. These are usually viewed by employees in a more abstract way than take home pay. More

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immediate rewards include bonuses, base pay, contributions and various recognition programs. Most workers
consider non-financial rewards to be made up of items that focus on their need for achievement, autonomy, and
personal growth. These can be considered intangible rewards that somehow relate to the requirements of their job.
These types of rewards can be both extrinsic, such as praise and intrinsic in the form of satisfaction one gets when
successfully completing a challenging assignment (Armstrong, 2010).
Since organizations are ever-changing and the emphasis of teamwork is commonly encouraged, the
question of who should be rewarded becomes important, how those individuals should be rewarded and whether
they should be rewarded based on individual performance, team-collaborative performances or organizational
contribution (Garbers & Konradt, 2014) However, Brata and Juliana (2014, citing Bonner & Sprinkle) found that
prior research has revealed mixed results concerning how effective performance based reward systems are when
creating motivational avenues for employees.
Most workers consider non-financial rewards to be made up of items that focus on our need for
achievement, autonomy, and personal growth. These can be considered intangible rewards that somehow relate to
the requirements of our job. These types of rewards can be both extrinsic, such as praise and intrinsic in the form of
satisfaction one gets when successfully completing a challenging assignment. External rewards are considered
extrinsic motivators when the workers value them. Examples include promotion and risk of termination or pay cuts
(Stringer, Didham and Theivananthampillai, 2011).
Intrinsic motivation, according to Deci (1975) becomes less when employees have lowered feelings of
competence and control. It increases in parallel with a rise in these feelings. These emotions of competence and
control are two important influences in Deci’s Cognitive Evaluation Theory. Bem (1967) compared self-
determination to a freedom felt when the work had been carried out and decisions made with little interference from
other people. People will learn over time how much discretion that have in their work and attribute this to their
environment (Fisher, 1978). Hassan and Shea (1997) described intrinsic motivation as something that emanates
from within each of us. Anything that makes us feel good creates an emotional preference. A working environment
that allows the employee to develop a sense of autonomy and freedom will promote their intrinsic motivation. With
a non-monetary reward, careful consideration should be taken when choosing who will receive the reward. If an
unworthy employee is chosen to receive a non-monetary reward, other individuals may disagree completely and
internal issues can arise within the organization (Holston & Kleiner, 2015).
Managers and employees trade information in a continuous process known as performance feedback. This
compares the work the employee did versus what the manager expected. The performance standards established
initially should be used to provide constructive feedback based on the workers performance (“Performance
Feedback”, 2006). Most research has not considered the effect of feedback on task performance on the subject's
intrinsic motivation and instead only look at the results of extrinsic rewards. Some researchers have considered the
impact of positive reinforcement alone on their subject's intrinsic motivation. Many found that there is a correlation
between intrinsic motivation and performance feedback, with the expected result that positive feedback leads to
higher intrinsic motivation and vice versa (Arnold, 1976). In companies that have the most overt extrinsic rewards,
the workers are more likely to exert effort only until the point that activates their reward. They mentally “put the
brakes on” after this point is reached. Several studies have showed that using monetary rewards to motivate people
to improve their health by stopping smoking or exercising produces nice results at the beginning but the desired
behavior change does not persist if the incentives are taken away (Pink, 2009).
With reward systems, there are pros and cons that will present themselves. Hamukwaya & Yazdanifard
(2014) provided a clear outline of the advantages and disadvantages that can come from implementing a
performance related reward system.

Exhibit 1: Pros and cons of the reward systems

Pros
Motivation of individuals
Retention and addition of exceptional employees
Saves money for the organization
Cons
Performance appraisal issues
Unrewarded tasks will be completed with little
motivation or none at all
Less motivated employees that are not rewarded or
low rewarded

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Reaching organizational goals through employee Sense of bias or favoritism

commitment
Willingness of employees to take on more High cost
challenging assignments

Discussion
Reward systems that were appropriate for the 20 th century may not be suitable for today's employees. Modern
technology has changed the requirements of the “average” job greatly. Today's workers are more likely to have jobs
that require creativity, initiative, and thinking outside the box. Similarly, companies that want to bring these
qualities out of their employees need to evaluate their reward systems. Pink (2009) posited that there is a disconnect
between what science knows about motivation and what businesses typically do to motivate their employees and he
suggests paying a fair wage and using non-monetary approaches to improve workers intrinsic motivation. Scientific
research shows extrinsic rewards have a neutral or negative effect when intrinsic motivation is high (Arnold, 1976).
In many people’s professional experience, including authors’, a monetary reward system tended to narrow the focus
and diminish creativity while reducing enthusiasm towards the job. When working for a fixed income such as with
base salary without any extra monetary rewards, employees may work longer hours even if not paid for overtime.
This may bring more creative output for the company since the employee is focusing only on the job not how much
they will get at the end of the day. White collar jobs seem to have more benefit from extrinsic motivators such as
self-esteem, being proud of completing a job with success, overcoming any obstacles, and receiving simple
recognition from their superiors. In contrast, the same population may suffer if they are only recognized by
monetary rewards since that is not what their real expectations are. Extrinsic rewards would be more beneficial for
blue collar employees whose tasks usually do not require critical thinking and creativity but are commonly
repetitive. These jobs require more motor skills rather than thinking. Managers should take into consideration what
they are expecting from their employees based on the tasks they are performing and how closing they align with
white or blue collar job descriptions.
Individuals may have poor workplace behavior because of time pressures for projects, being under
promoted, or having role conflicts within the organization (Michie, 2016) A main organizational goal is to instill
motivation into their employees to have them behaving and acting like the highly motivated individual type. Reward
systems in an organization has the potential to be a key factor in producing motivated, creative, and constructive
individuals from the lazy and average employees (Michie, 2016).
What innovative reward methods are being used to increase employee's intrinsic motivation? A software
company in Australia started a practice whereby twice a year they would give their programmers 24 hours to work
on whatever they wanted as long as it somehow related to one of the companies’ products. At the end of the 24-hour
period, they would present their work to each other at the company and vote for the best efforts. No formal criteria
are used to determine a winner but the company suggests considering some subjective ratings such as the usefulness
or flair of a particular idea or solution. Trophies and plaques are awarded. There is a party atmosphere at these
presentations where beer, pizza, and ideas flow freely. The company's directors noted that some of their most
innovating solutions came from this effort. The event has become to known as “Fedex Days” because the results
had to be delivered “overnight” (“Atlassian Fedex days”, 2010). The company was inspired to start Fedex days by
one of the largest tech companies’ famous “engineers 20% play time” whereby their engineers have 1 day a week to
work on what they are passionate about. This company claims some of their best ideas were born from this practice
(“Engineers Life”, n.d.). Their formal name for this policy is “innovation time off” and this company has claimed
that half of the products launched in the later part of 2005 were born from this 20% time (Mayer, 2006). These types
of programs have had their critics who have suggested that non-technical employees can have innovative ideas and
these programs should not be limited to engineers Clearly it is not appropriate for all work situations.
Do employees have to be physically present to be productive and motivated? Some companies use a
results-only work environment or ROWE that gives employees broad autonomy as long as desired results are
achieved. Employees come and go as they please rather than using a set schedule. Best Buy has used this in their
corporate offices with success. Their goal is to rate performance not on hours worked but on end results (“Smashing
the clock”, 2006). Does a ROWE workplace have any downsides? It can be hard to measure output for some types
of jobs and not all employees can be effective without frequent personal contact with their coworkers. Managing a
ROWE workforce can be cumbersome (ROWE, 2011).
Haasen, et al (1997) noted that the new theories developed in the 1970's regarding intrinsic motivation are
not exploited by current management to improve their reward systems. People have an innate motivation to be

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competent when interacting with their environment. Tasks that provide us with competence are considered
enjoyable by most people. Workers are reinforced by a feeling of efficacy when they have exerted control over their
environment (White, 1959). There exists a relationship between rewards and behavior and the notion of
competence. Before we get intrinsic rewards, we must achieve our goals. Hackman and Oldham's (1975)
description of “internal work motivation” as the level of employee self-motivation to do well at their job and the
positive or negative feelings that result from doing well or badly is similar to the competence component of Deci's
theory of intrinsic motivation (Fisher, 1978). Stringer, et al (2011) reported a positive correlation between pay and
intrinsic motivation and between job satisfaction and extrinsic motivation. Pay satisfaction was closely aligned with
job satisfaction. These results would encourage managers to pay their front-line workers well if they want them to
have high job satisfaction. In contrast Pinto (2011) found that monetary compensation did not influence subjects’
motivation or satisfaction with their job and he asserted the fragile nature of wages on an individual's motivation.
De Gieter, in her 2015 paper, examined reward satisfaction in terms of turnover and performance. She
found a pattern between satisfaction with material, financial, and psychological rewards and employee turnover
intentions. She focused on three particular values: financial security, personal recognition, and interpersonal contact.
She found a significant variation between people which led her to conclude that it is inappropriate to assume that all
rewards have the same level influence on the behavior, motivation and attitudes of employees.
Employees prefer activities where they can seek out three things; autonomy, mastery, and purpose. People
want some say over their work, they want to improve at what they do and also have a need to be part of something
bigger than they are. When a company fosters these objectives, intrinsic motivation increases. Immediate
supervisors are in the best position to provide this but upper management must establish basic compensation and
benefits that are consistent and fair. Without this, intrinsic motivation will not manifest. If we try to use monetary
rewards to get people to perform as we wish, you may get the opposite result. Extrinsic and intrinsic motivation are
different and intrinsic is more powerful (Pink, 2009). According to Biddle (2015), every motivator inspires related
emotion and response.

Exhibit 2: Motivators and their related emotions and responses

Motivator Related emotion and response
Push motivators Avoiding hunger, achieving security and stability, being a good provider.
Pull motivators Reacting to incentives, achieving improvements in living standards and comfort and
conditions.
Sensation motivators Seeking out novelty and excitement, and variations in behavior, avoiding boredom
and routine
Social motivators Desire to belong to a group, peer pressure, feelings of self-worth and self-image.
Achievement Status, social positioning, avoiding failure and embarrassment.
motivators

Implications and Limitations

Understanding reward systems is essential to running a successful company. More than ever, jobs require more
creativity and novel thinking that may not be promoted using traditional reward systems. There has been a lot of
research over the last 40 years in the area of extrinsic rewards and how they affect workers intrinsic motivation but it
seems most companies have failed to adjust their policies to reflect what science has learned.
What could be more difficult that analyzing what motivates us? The myriad of psychological and
environmental dynamics which influence our behavior is vast and partially understood at best. Controversies exist
in the study of reward systems, usually regarding the basic presumptions researchers make regarding behavioral
theories. Mawhinney (1990) reviewed some of the issues surrounding competing theories on extrinsic rewards in
light of advances in behavior analytics. He concludes that alternative behavioristic understanding for cognitivists
theories in the Deci school of thought have hardly been considered by the cognitivists. He also acknowledged that
few researchers argue that monetary rewards are always warranted when trying to motivate employees.
Performance is not the only area of potential benefit from monetary reward systems. Some potential benefits of a
good reward system are not always apparent. A properly designed reward system can also improve pay equity
amongst many employees working collaboratively to reach a goal. More research on reward systems needs to be
done in real world environments as well as clinical settings. Some companies that have tried the ROWE system
report much lowered turnover rates for employees which translates it to significant savings in training costs and in
improved efficiency (“ROWE program at Best Buy”, 2011). The global economy demands that companies take a

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world view and expand their operations when possible. Cultural differences must be considered in these
international endeavors. Best Buy recently closed its stores in China and Turkey and it seems likely that part of
the reason was its failure to adjust reward systems for local conditions (“Best Buy to Close China Stores”, 2011).
Pink (2009) makes a stark contrast between extrinsic motivators (bad) and intrinsic motivators (good). In
actual practice, things are more complex and nuanced. Both types of motivators and their effects are interconnected
and interact with one another.
The current economic downturn has impacted employee's perception of nonmonetary incentives.
Companies have reduced their expenditures through the use of these types of incentives while at the same time
improving employee engagement and motivation. However, companies face some risks in doing this unless they
pay close attention to how the workers perceive the fairness of these plans. Managers must act transparently when
explaining the companies’ financial condition and quickly ameliorate workers’ concerns about equity
misperceptions. Workers tend to compare themselves to employees in similar positions at other companies when
determining if their pay and benefits are commensurate with their efforts. In the age of the internet, it is easy for
people to check online reference sites such as salary.com to get salary ranges for their job and can even break the
information down by particular geographic regions (Morrell, 2011).
Caza’s (2015) paper examined the benefit of letting the employee’s choose their rewards. Caza stated that
the research shows that not only does allowing employees to choose their rewards positively influences their
attitudes and behaviors but that it also has an effect beyond their level. Having a choice is a reward in and of itself.
Any reward system must not only be fair, but it must also be perceived as fair by the participants. Employees who
receive a monetary reward will not be appreciative if they feel they have been treated unfairly. (Adams J. S., 2017)

Conclusions
When it comes to motivating our employees with rewards, we cannot take a “one size fits all” approach. In general
terms, most workers in the developed countries will respond better to intrinsic motivating methods because of the
nature of their work. Although the generality of this principle is refuted by some (Mawhinney, 1990), there is a
general consensus that extrinsic monetary rewards are neutral at best and negative at worst in modern work
environments. However, jobs that are repetitive in nature and require a narrow focus, will still benefit from extrinsic
(monetary) reward approaches (Pink, 2009). Individual personalities will vary and thus their response to extrinsic
rewards will also vary. When companies expand overseas they must be sensitive to the local customs and mores
and how this may require them to modify their reward practices. Intrinsic reward approaches may help a company's
bottom line in difficult economic times but they must use caution to ensure that employees do not perceive
inequities in how they are treated. A results-only work environment can create significant intrinsic motivation but
requires managers who are adept at leading team members who may not be physically present in the office and who
are expecting more autonomy. Some workers cannot function without more structure and thus will need to be
separated from the company, but on the whole, this approach has many benefits. It appears that most businesses are
not aware of the science of motivation and are still using simple and superficial reward systems. More research
should be done in actual business settings but I think the essential findings will be the same. The work environment
will only get more technical and abstract. The days of building “widgets” are over except in the developing world.
The educational system has already adapted by promoting critical thinking and creativity. It is time for business
leaders to update their reward systems to reflect this reality. Managers and team leaders would be well served by
taking the time to understand their employees' individual characteristics and the tasks they are to perform and then
designing a reward system accordingly. Companies that fail to do so will have a hard time surviving these trying
economic times.

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About the Authors

Aysen K. Taylor is a PhD candidate at Old Dominion University in the Engineering Management and Systems
Engineering department. She received her Bachelor degree from Istanbul Technical University Textile Engineering
in Mechanical Engineering department. Following this, she earned her degree of Masters of Science in Industrial
Engineering from Istanbul Technical University. After working in industry for ten years in several pioneering
companies as manager and project leader, she received her Masters of Engineering Management degree from Old
Dominion University. Her research interests include human-machine interaction, machine learning, decision
making in complex environments, naturalistic decision making and cockpit automation.

Sujatha Alla is a Ph.D. Student and Graduate Teaching Assistant in Engineering Management and Systems
Engineering Department at Old Dominion University. She earned her Master’s Degree from the same department.
She holds a BS degree in Computer Sciences. Her research is focused on applications of Artificial Intelligence (AI)
in healthcare and challenges in human-machine interaction

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