Lawler, E. E. (1971) Pay and Organizational Effectiveness: A Psychological View. New York, NY: McGraw-Hill.

Pay and Performance

Assuming that monetary rewards are going to be used to stimulate employee performance, evidence of compatible motivational theories is needed. Accordingly, the first part of this chapter is devoted to discussion of motivational theories and supporting research evidence. The administration of rewards presents a number of problems, beginning with the form of pay–adding to base pay versus one-time bonuses, for example.

Administration of rewards also means that there is a system of evaluation and criteria of performance so we can know how and what to measure. Many other issues are involved in rewarding, complicated further by their administration in a governmental setting where various contextual conditions can change underlying assumptions about motivation, the administration of monetary rewards, and measurement and criteria.

For a sense of these issues and contextual conditions we will recapitulate governmental experience in general with individual merit pay. In this context, the term morale will denote the degree to which a worker feels great regarding his or her job and its environment. Morale is differentiated from motivation, which signifies the readiness to perform. More substantial case studies, involving quasi-experiments using individual and other forms of merit pay, will be discussed in the next chapter.


Monetary rewards by organizations involve several psychological and practical questions. The more important ones are concerned with relationships among variables such as pay, pay instrumentation, motivation, satisfaction, and performance. Economic theory emerging out of the U.S. industrial revolution assumed that satisfaction (happiness) was the outcome of a positive association between pay and performance–more performance, more pay, more satisfaction. This was exemplified by the manufacturing organization piece-rate systems implemented in the 1920s and 1930s. Labor unions were quick to oppose this system as employers

began to break the explicit pay-and-performance contract by raising standards when too many employees achieved them.

Performance and satisfaction were the first variables to run into trouble as correlates. J. D. Wofford defined satisfaction as an “overall attitude of well-being with regard to the job and its environment” (p. 502) and motivation as the tendency of workers to perform or expend effort. 1 His conclusion was that a motivated employee is not necessarily a satisfied employee. Seven major theories have attempted to explain what conditions would produce a motivated and satisfied employee.

According to John B. Miner and Peter H. Dachler, three of the theories deal with the process of motivation and satisfaction (expectancy theory, goal-setting and intentional-behavior theories, and equity theory), and four with the content of motivation (need-hierarchy and self-actualization theory, the two-factor theory, job-enlargement theory, and theories of occupation-related motives). 2 The expectancy theory, the two-factor theory, and the equity theory have perhaps the most to say about the relationship between pay and motivation and satisfaction.

Motivational Theories

The expectancy theory 3 postulates that the willingness of employees to work or produce is a function of the interaction between the individual’s personality and his or her general environment. Motivation is determined by the relationship of three elements: the expectancy that successful performance is possible if effort is expended, the expectancy that successful performance will lead to an outcome, and the attractiveness of the outcome.

Accordingly, motivation will result if an employee expends sufficient effort, the employee expects to perform successfully, and that performance to provide an outcome for the employee will be sufficiently attractive to have justified the expenditure of effort. An intervening variable for Edward Lawler is ability–the effects of effort expenditure are obviously limited by the ability to perform.

For Lawler, satisfaction influences motivation to perform only indirectly because of its power to affect the attractiveness of rewards such as pay. It is the desirability of the reward that influences motivation. Performance influences satisfaction when it leads to rewards that directly affect satisfaction.

The two-factor theory 4 separates job variables into two factors: hygiene factors and motivators. Hygiene factors are those aspects of the work environment that act as potential sources of dissatisfaction but are not sources of positive work attitudes. Pay and benefits, supervision, and physical working conditions are examples of extrinsic or hygiene factors. The motivators are sources of positive work attitudes presumably contributing to work satisfaction and are the key factors associated with performance. Intrinsic factors or motivators are associated with work itself, such as degree of job responsibility and the opportunity for advancement.

Equity theory 5 hypothesizes that an employee seeks a just or equitable return for his or her contribution to the job. When an employee is paid at a level above or below the level that he or she perceives to be equitable, tension will be produced, and the employee will attempt to reduce that tension by changing either inputs (effort) or the outcome (pay). According to equity theory, an employee evaluates the pay not only in terms of its absolute level but also in relation to the actual or perceived pay of other employees.

Behaviorists, in contrast to social scientists associated with these three theories, have little concern for unobserved constructs such as attitudes and motives. Rather, their area of interest is studying and manipulating the actual behavior associated with rewards and punishments. This school is concerned with the effectiveness of reinforcers (rewards and punishments), which they have found to be dependent on size, quality, degree to which associated with other reinforcers, and reinforcer scheduling.

Thus, these psychologists would argue that even if receipt of the paycheck were contingent on certain behavior, pay is usually too far removed in time from the behavior for the connection to be successful in increasing this behavior. The usual result, then, is that regular pay has the effect of reinforcing whatever general behavioral habits have been established, making them increasingly difficult to change.