Financial motivation relates to the way in which an organization uses compensation structure to motivate workers to high performance. Companies use a variety of pay structures depending on the type of work environment and the nature of the work being performed. Different pay types add different elements to the financial motivation provided by compensation.
Though experts and studies debate the relative weight of money in motivating employees, general consensus exists that pay definitely contributes to the level of motivation of employees. A simple way to understand the basic motivating power of money is to recognize that most people likely would not work the jobs they have if they were not paid for them. Even employees who enjoy their work would often pursue other interests if pay were not a factor.
Types of Pay
A number of common pay formats are used, including straight salary, pay per hour, pay per production, commission, performance bonuses, profit sharing and stock options, pension benefits and benefits-in-kind, which are employee discounts and other non-cash financial benefits. Some companies use a particular pay format, while others combine several types to offer financial motivation in multiple ways. For instance, sales jobs often offer a base salary pay but encourage sales performance by paying commission and sometimes bonuses.
Several prominent motivational theories relate to the impact of financial motivation. One is the 1943 Maslow's Hierarchy of Needs. Psychologist Abraham Maslow outlined a still prominent motivational theory with five levels. He indicated that people are first concerned with physiological needs. Once they meet those, they move on to safety and security needs, social belonging, self-esteem and self-actualization. Based on Maslow's structure, financial motivation can impact level one physiological needs in the sense that people need money for basic survival needs. Others may want money for safety and security. Social status enters at level three. At self-esteem and self-actualization, pay is more likely motivating only if it lends credence to the employee's success with work.
Frank Herzberg later introduced his Two-Factor theory, which had some parallels with Maslow's theory. Herzberg essentially indicated the first two levels on Maslow's Hierarchy are Hygiene Factors, meaning they are demotivating if missing but are not strong motivators when present. He labeled Maslow's higher-order needs Motivator Factors and suggested they can inspire employees to better performance. Income-related factors were included as Hygiene Factors. Herzberg noted that in the long run, pay does not motivate better performance, especially what is expected, such as with straight salary. He encouraged job rotation and job enlargement as better motivators as they keep employees active and gives them diversified work.