Expectancy Theory

The most widely accepted explanation of why people are motivated to work, perform, learn, and change is rooted in what psychologists call expectancy theory. Expectancy theory argues that people are mostly rational decision makers who think about their actions, and act in ways that satisfy their needs and help them reach their goals.² The theory recognizes that we sometimes have misperceptions about reality, make mistakes in our assessment of the likelihood that something might happen, and badly misread situations. But overall the theory assumes, and research evidence confirms, that people generally try to deal rationally with the world as they see it. It views people as proactive, future oriented, and motivated to behave in ways that they believe will lead to valued rewards.

Expectancy theory is popular because it is useful for understanding how people are motivated in many aspects of their lives, including social relationships, family, and work. In fact, we earlier introduced some of its most important principles when we discussed satisfaction and turnover. The theory accepts Maslow’s view that there are large differences among people in their needs and, as a result, in the importance they attach to rewards. As the name implies, expectancy theory points to the fact that people are motivated by the promise of rewards. Simply stated, it assumes that people behave in ways they believe will lead to rewards they value.

Reward Attractiveness

The rewards offered by organizations are truly diverse and at times downright amusing. In addition to the usual ho-hum rewards of interesting work, recognition, fringe benefits, cash, stock options, and big offices, some corporations give out private rodeos with mechanical bulls, fly fishing on western ranches, flights in a fighter plane, river rafting, sabbaticals, forty-two kinds of free drinks, and a lifetime supply of Ben and Jerry’s ice cream. Any of these rewards can be effective motivators if they are valued by individuals.

The attractiveness of a reward depends on at least two determinants: (1) how much of it is being offered and (2) how much the individual values the particular type of reward being offered. The more an individual values the type of reward and the more of it that it is offered, the more motivational potential it has.

If you live in a state with a lottery, you can readily see that the amount of reward is a significant factor. Think about what happens when your state lottery prize goes up. A $100 million payoff attracts many more players than a $1 million payoff. When the prize is big enough, a surprising number of people are willing to endure traffic jams and standing in line for hours just for a miniscule chance of being the next big winner.

Individuals vary significantly in terms of what they consider valuable, attaching different degrees of importance to such rewards as money, recognition from a supervisor, and a ride on a mechanical bull. This variation is the result of their needs, environment, culture, age, generation, and a host of other factors.

In Chapter Six we pointed out that b2change organizations need to give serious consideration to individual differences when they acquire talent. The talent must fit the reward system. The implication of this for the design of the reward system in a b2change organization is clear: as we stressed earlier, it needs to be coordinated with the talent acquisition strategy so that it offers rewards that the employees value.

Rewards and Performance

The purpose of an organization’s reward system should be to motivate people to behave in ways that support its strategic intent and performance requirements. Expectancy theory tells us that people are motivated by the promise of future rewards; therefore, a critical need in developing a motivating reward system is to establish a clear connection between the reception of a reward and the behavior required to obtain it. This is often referred to as a line of sight, although calling it the line of influence is probably more accurate. Using the word influence highlights the fact that to be motivated in a work situation, people must see how their behavior influences a performance measure that, in turn, drives the receipt of a reward they value.

Whichever term is used, the concept is the same: if people see valued rewards as being tied to a particular performance or behavior, the organization is likely to get more of that behavior. The complement is equally true: if a particular behavior is not rewarded, the organization is likely to get less of it.

Establishing a line of sight requires a combination of trust and transparency. Individuals have to trust what they are told by their managers about how the reward system operates and what they will be rewarded for. To some degree, trust can substitute for transparency, but in today’s world it is rare that individuals will trust what they are told about how rewards are managed without being allowed to see what is actually happening. We are clearly in a “show me” era. Thus trust develops only when transparency is present. Employees must be told what their organization’s policies and practices are and then have the chance to see and experience a system operate as they were told it will.

Having transparency and establishing trust is particularly important in b2change organizations. To support change they often have to modify their reward systems. When they make reward changes it is important that employees believe what they are told about how the new system will operate. If they have to see it operate before they believe it has changed, there is a good chance changes in their behavior will be too late and the change effort will fair.

A high level of openness and visibility also creates a high level of accountability. Decision makers are much less likely to “bend the rules” if they know that their decisions will be visible. The bottom line, therefore, is that transparency contributes to the effectiveness of reward systems.

In many organizations, pay amounts and pay decisions are closely guarded secrets. Not surprisingly, this often leads to confusion about how the compensation system works—and to the loss of a potentially powerful motivator of performance and change.

The Impact of Goals on Motivation

Motivation theory strongly emphasizes the importance of goals in motivating people. Research backs this up by showing that when individuals commit themselves to a goal, they are highly motivated to achieve it.³ One reason often is that their self-esteem and sense of self-worth are tied to accomplishing the goal. When they achieve the goal, they experience feelings of achievement and success, or what in psychology are called intrinsic rewards. People may also be motivated to achieve goals because there are financial or other extrinsic rewards tied to them.

As we mentioned earlier, a perennial debate exists about how difficult goals should be: Can goals be set too high and become too difficult for people to meet? Can they be too easy? Expectancy theory provides an interesting way of thinking about this. It argues that if the goal seems too difficult, people may see a low probability of achieving it. This in turn destroys their motivation to work toward the goal, because receipt of the reward becomes very unlikely.

This is not to suggest, however, that people never try to achieve very hard goals and as a result they cannot motivate change. As long as two conditions exist, people may be motivated to reach for a difficult goal. First, the connection between achieving the goal and receiving the reward must be strong; in other words, the line of sight or line of influence must be clear. Second, the amount of reward associated with accomplishing the goal needs to be very large (remember the lottery example). Conversely, if there is a low probability of achieving a goal and the rewards for achieving it are small, people are highly unlikely to put forth the effort required.

The research on goal difficulty leads to a somewhat contradictory and paradoxical conclusion related to the impact of intrinsic rewards on motivation. Some evidence suggests that as goal difficulty rises, people feel a greater sense of accomplishment when they achieve it. As a result, they become more motivated to achieve difficult rather than easy goals, even though the probability of achieving them is low. In essence, what may be happening is that the intrinsic rewards associated with accomplishing something difficult become so large that people are willing to put out extraordinary effort to achieve them.

As a final point, we need to once again raise a caution flag about very difficult goals. When very difficult goals are combined with very large rewards for achieving them, some people will do whatever it takes to reach them. Unfortunately, “whatever it takes” sometimes includes cheating, unethical behaviors, and falsifying performance measures.

Consider the scandals that enveloped Enron, WorldCom, Adelphi, and other companies in which corporate fraud has occurred. In these companies, the executives had extraordinarily large stock option grants whose worth depended on their producing ever higher levels of corporate performance. When for a number of reasons these levels became unachievable, executives chose not to forgo the rewards but instead to falsify the books, cash in their stock options, and reap millions of dollars. Obviously organizations need to be particularly vigilant when they set difficult goals, and high rewards are at stake. They also need to ask whether the goals are too high.

Job Satisfaction, Performance, and Change

Many managers believe that job satisfaction is an important determinant of motivation and performance. This is more a myth than a truth. In fact, the opposite may be true.⁴

In the view of expectancy theory, motivation is based on anticipated rewards and future satisfaction, not on present satisfaction. Anticipated satisfaction causes people to view a reward as important and thus is a potential source of motivation. Job satisfaction may be the result of performance when performance leads to rewards, but job satisfaction does not cause performance.

Job satisfaction can influence the ability of organizations to change in part because it is an important determinant of retention. Over time, people tend to gravitate to work situations that meet their needs, and as a result their overall job satisfaction goes up. This bodes well for organizations that try to retain their people and develop a virtuous spiral relationship. On the negative side, satisfaction with the status quo is also a major reason why it is difficult to change older successful organizations. Simply put, most people are satisfied with their situation; otherwise they wouldn’t be there.

To motivate change in an organization, it is necessary to have some dissatisfaction with how things are. In the case of a b2change organization, there doesn’t have to be a high level of dissatisfaction, but there does need to be the belief that change is desirable because it will lead to a better future. Thus, increasing job satisfaction is unlikely to have a positive effect on either performance or the willingness to change. In fact, it may have a negative effect because, at least temporarily, people will cease to seek additional rewards and focus on maintaining their current rewards.

Satisfaction and Organizational Performance

Even though satisfaction does not drive individual motivation and performance, it does not mean that satisfaction does not influence organizational performance. When employees are dissatisfied with their jobs, they are saying that they do not see positive consequences associated with remaining part of the organization as it presently operates. It is therefore hardly surprising that, as we discussed in Chapter Seven, dissatisfied employees typically begin to look elsewhere for employment and leave if they find a situation that offers a better mix of rewards.

If dissatisfied employees do not leave, they become disgruntled employees who often seek to change their current situation by organizing and voting for a union, becoming activists, filing lawsuits, or engaging in other actions that they think will improve their lot. In b2change organizations it is critical to focus the desire for change that results from dissatisfaction on organizational performance improvements that will create a virtuous spiral. This is why b2change organizations are designed to make strategy adjustments and strategy-driven change easy to accomplish. It is also why b2change organizations strive to become companies of leaders.

Organization Structure and Rewards

A b2change organization needs to link and coordinate reward practices to its structure. There are essentially two issues when it comes to linking structure and rewards. The first involves how structure influences which reward system designs are effective. The second involves the impact of the reward system on how the structure operates and how effective the system is in supporting organizational performance and change. Let’s first look at the issue of how structure influences reward system possibilities.

How Job Design and Structure Affect Rewards

We began our discussion of structure and rewards in Chapter Two, when we pointed out that in a b2change organization reward practices should be dynamically aligned with the other elements of the designing process. To complete that discussion, we need to consider the impact of structure on the intrinsic rewards that are available to individuals, and how structure influences the ability to deliver such extrinsic rewards as pay and promotions.

Research shows that how individual jobs and teams are designed plays a critical role in the degree to which an individual experiences intrinsic rewards as a result of good performance. Such rewards as feeling a sense of accomplishment when a task is successfully performed and a feeling of competency as one performs one’s job well are highly dependent on the structure of the work itself.

As mentioned in Chapter Four, research on job design shows that individuals are motivated when they do work that involves meaningful tasks that require them to use abilities they value and provides them with feedback about how well they perform.⁵ When these conditions exist, individuals experience a sense of intrinsic reward when they perform well. Not surprisingly, doing simple tasks well doesn’t lead to feelings of accomplishment. How good can you feel about yourself when you do something everyone can easily do? Doing tasks that don’t provide feedback doesn’t lead to rewards either. How rewarding is it to bowl if you can’t see the pins fall?

Originally much of the research on the relationship between an individual’s work and motivation focused on the impact of enriching jobs. It led to change efforts that combined work activities or tasks so that individuals were responsible for an entire customer interaction, or, in some cases, for producing an entire product.

Following the research work on individual job enrichment, research on teams became popular. The same general principles were found to produce an intrinsically motivated team. This research showed that teams are motivated when they are given control over an entire product or customer relationship, perform a task that is meaningful, and get feedback about their performance.⁶ This discovery has guided the design of numerous high-performance factories where teams are responsible for creating products, and the design of customer service operations where teams are responsible for servicing customers.

The research on teams has had a particularly strong impact on process production plants, such as paper mills, chemical plants, and food-processing operations. In process production plants, because of the nature of the technology, it is impossible to give an individual responsibility for a whole production process. It is not, however, impossible to give a team of up to twenty individuals such responsibility. When teams of this size are given responsibility, the results are very similar to those obtained when individuals are held responsible. These teams typically perform well and are motivated to improve their performance.

Assigning work to teams that are responsible for whole production processes is, of course, more complicated than assigning work to an individual. It requires a variety of selection and training processes that help develop the team as well as a continuing focus on the effectiveness of the relationships among the team members. Teams are the Ferraris of work design—expensive to build and maintain, but capable of very high levels of performance. And because some technologies simply don’t allow for the creation of individually enriched or meaningful jobs, creating teams, complicated as the effort it is, can be the best (and sometimes only) option for b2change organizations. One way or another, they need to design work that is motivating and rewarding.

How Reward System Designs Affect Structure and Performance

B2change organizations need to consider several factors in the designing extrinsic reward systems to match work structures. We have already emphasized that for rewards to be motivating, they need to be tied to measures of performance. These measures can be measures of individual, team, or organizational performance. What they can’t be are metrics that an employee can’t understand or influence. These kinds of measures will not motivate either performance or change. The measures that an organization can collect and report to individuals are strongly determined by the organization’s structure.

As noted in our discussion of structure in Chapter Four, organizations that are designed around their functions (for example, marketing, finance) are particularly poor when it comes to producing metrics that capture the performance of their parts. All too often, they must rely on budgets that capture only a small part of what determines organizational effectiveness and, in many cases, are badly out-of-date and inappropriate by the time the budget period is complete. Employees in these organizations have little feel for how their company is performing and experience little sense of their performance being rewarded. As a result, if their organization’s performance declines, they are not motivated to make changes that will improve it.

Reward systems are best at motivating performance and change when organizations have designs that allow the development of metrics that validly capture the strategic performance of key units. In other words, a structure that features business units is generally best for b2change firms, not just for the reasons mentioned in Chapter Four but also because this structure makes it easier to align rewards. If metrics for business unit performance can’t be created, then it is critical that the organization use metrics that are based on its overall performance (for example, profit) as the basis for rewards. To be effective, b2change organizations need to give individuals valid, understandable, and timely information about how they and their organization are performing and to reward them based on performance. It is basic to motivating them to perform and to change.

The Impact of Rewards on Structure

Extrinsic rewards can have a powerful impact on how individuals think about and react to the structure of an organization. This is particularly true when it comes to hierarchy. In traditional organizations, the rewards individuals get are strongly related to the position they occupy in the hierarchy—generally speaking, the higher up the hierarchy, the more financial and nonfinancial extrinsic rewards individuals receive.

Many of the nonfinancial rewards that go along with hierarchy are not only valuable but are also highly visible. For example, senior executives typically get company cars, prime parking spaces, large offices, and country club memberships. We could go on: in many cases, the perquisites include such highly visible rewards as private jets and helicopter service to and from company locations.

One impact of hierarchical rewards is to clearly differentiate individuals who are higher up in the organization from those at lower levels. Hierarchical rewards often have a strong impact on the desire of people to move up in the organization. Inevitably, success in the organization becomes defined as moving upward and obtaining the rewards that go along with promotions. One result is that employees will often resist structural changes that affect their upward mobility and the rewards associated with it. Another is that individuals will resist career moves that are not upward.

The more hierarchical an organization becomes, both in terms of structure and culture, the more likely it is that decisions will be made higher up in the organization. This, in turn, means that individuals lower down feel less personally responsible for the success, or for that matter the failure, of the organization. This can affect their motivation to perform and lead change because they do not feel that they have an influence on the organization’s success. It also can lead to their resisting change because they are not motivated to improve the organization’s performance.

The alternative to a hierarchical, perquisite-laden organizational environment is one that is egalitarian. Southwest Airlines, Jet Blue, Lincoln Electric, and Whole Foods are examples of companies that have few visible reward differences between the top members of the organization and the other members. Egalitarian treatment includes similar offices for management employees, similar dress, and an absence of the kind of eating, parking, and recreational perks that are associated with senior management in most organizations. In a few cases, it also includes less hierarchical pay levels. Whole Foods, for example, has about a 16-to-1 top-to-bottom pay ratio, whereas the average for Fortune 100 firms is over 500-to-1.

Having a low degree of hierarchical differentiation creates an egalitarian culture in which it is easier to move decision making to the most appropriate place. It also can send a message of shared leadership and shared responsibility for the success of an organization. This in turn can lead to high levels of motivation throughout the organization and to employees’ identification with the mission of the organization, conditions that are essential to the success of a b2change organization.

Rewards can also affect the degree to which the parts of an organization are integrated, particularly the degree to which different business units and functions see themselves as separate entities. Separation and even some competition are created when parts of an organization have different reward systems. For example, if two business units have different bonus plans, it most likely will lead to them act independently. This can be either a positive or a negative depending on the organization’s strategy. If one business unit is new and the other is well established, this is most likely a positive, because success requires different behaviors. However, if the two units need to cooperate to serve a customer, separate reward systems can be very dysfunctional.

Organizational Identity and Rewards

Reward systems should be a powerful reflection of a b2change organization’s identity. What is measured and rewarded has a strong effect on what people believe are the right things to do and the right way to do them, what the organization values, and what kind of people are the right ones for the organization to employ. For this reason, a critical issue for b2change firms is the degree to which their reward systems reflect and reinforce values, behaviors, performance levels, and change orientation that are consistent with their identity.

All too often, executives are better at describing what they would like their identity to be than they are at aligning reward systems to support it. In most situations, reward systems speak louder and more clearly than do senior executives because they affect people much more directly than do speeches about what the organization wants from its people. Clearly it is not easy to design a reward system that supports the high-performance, change-oriented identity of a b2change organization, but, as we will see in the next chapter, such designs are possible and critical to their success. An organization cannot maintain—or, in the case of a transformation, change—its identity without aligning its reward system to support that identity.

Teamwork is one of the key areas most powerfully influenced by an organization’s reward system. Often the organization’s work design and identity call for teams. Reinforcing an identity that includes teamwork, however, takes more than simply designing work for teams. Teamwork must be rewarded in a clear and visible manner. Individuals need to see a clear line of sight between their team-oriented behaviors and the rewards they receive.

One way to achieve a line of sight is to reward groups of individuals based on their collective performance. A second way is to reward individuals for team-oriented behaviors. The latter tends to produce and maintain a focus on individuals and is therefore less effective in producing cohesive, supportive teams, but even this approach takes a giant leap beyond a focus simply on individual performance.

The reward practices that an organization adopts early in its life cycle are particularly important in shaping its identity. They reinforce certain behavior patterns and signal how the organization values different individuals. They also attract and retain a certain type of employee and in a host of little ways indicate what the organization stands for and values.

Once an identity has been established, the reward system can be particularly difficult to change. This is one of the major reasons why identity change is difficult. People become married to existing reward practices and thus are hesitant to see change. Often they have been attracted to the organization because of the reward system and identity, and have stayed because of them. The idea of change thus becomes scary, and all too often employees end up resisting it. Unfortunately, there is no substitute for changing a reward system if it is not contributing to dynamic alignment and is out of synch with the identity of a b2change organization. Failure to revise the reward system will create a failure to change.

Strategic Intent and Rewards

The reward system should play a key role in implementing a b2change organization’s strategic intent. Executives need to pay a great deal of attention to the key elements of their firm’s strategy when they design its reward system.

First, the reward system must focus on the performance outcomes the organization needs in order to execute its strategy. Any number of metrics can indicate the success of the strategy—for example, new product introductions or revenue growth of certain customer segments. Once these metrics have been identified, the organization then needs to focus on the key issue: how to dynamically align the rewards that teams and individuals receive with the appropriate metrics. Individuals who can influence the indicators of success must have their rewards tied to those indicators. This is a key step in translating the strategic intent of a b2change organization into organizational performance.

Closely related to the practice of measuring and rewarding the outcomes that strategy calls for is that of focusing on the organizational capabilities and core competencies needed to execute strategy. Because competencies and capabilities evolve and change, linking rewards to the creating value process of a b2change organization is a great way to build dynamic alignment. As was mentioned in Chapter Five, b2change organizations need to measure and evaluate their capabilities and core competencies on a regular basis, as they are critical to the company’s strategic performance.

But simply measuring and evaluating capabilities and competencies is not enough. Rewards for individuals and groups in b2change organizations need to be based on their ability to maintain and develop new competencies and capabilities. For example, if quality is a key capability, it must be measured as a capability, and rewards must be tied to its level of development. In a b2change organization, it is particularly important to reward the development of new competencies and capabilities that support changes in strategic intent.

Conclusion

Overall, a reward system needs to attract, retain, and motivate individuals who are capable of developing and implementing a strategic intent. One implication of this is that if strategy changes, the reward system needs to be examined and most likely will have to be altered. It also means that if the reward system can be adjusted to encourage behaviors that support a new strategy, it can serve as a lever for change. It can create an organization that is motivated to change and can push the skills and capabilities of the organization in a direction that supports change.

Because rewards have such a strong impact on motivation and satisfaction, they are a key design element of every organization. Failure to have a well-designed reward system can create an organization that is poorly staffed, that fails to change in the face of a strong need to change, and that over time becomes a corporate dinosaur. The implication of this for b2change organizations is clear: they must have reward systems that support change. We will see in the next chapter that, not surprisingly, the reward systems of b2change organizations need to look different, operate differently, and drive different behaviors than those of traditional organizations.