Chapter 5 Motivation at Work In This Chapter, You’ll Find: Chapter Overview Learning Outcomes Key Terms PowerPoint Guide Review Questions and Answers Discussion and Communication Questions and Suggested Answers Ethical Dilemma Self-Assessments—What about You? Issues in Diversity Experiential Exercises Additional Examples Case Study and Suggested Responses: Compensation Controversies at AIG Video: Profile on Urban Escapes Student Handouts: Ethical Dilemma What About You?: Protestant Ethic What About You?: What’s Important to Employees? Issues in Diversity: Using Cash to Bridge the Achievement Gap Experiential Exercise: What Do You Need from Work? Experiential Exercise: What to Do? Experiential Exercise: Motivation: Three Incidents Case Study: Controversial Retention Bonuses at AIG Case Study: Compensation Controversies at AIG Chapter Overview This is the first chapter of the two chapters on motivation, behavior, and performance. This chapter addresses internal theories of motivation, process theories of motivation, and external theories of motivation. Then, it describes Maslow’s hierarchy of needs theory, McClelland’s need theory, Herzberg’s two-factor theory, social exchange theory and equity theory, and the expectancy theory of motivation. The chapter concludes with a discussion on cultural differences in motivation. Learning Outcomes After reading this chapter, students should be able to do the following: 1. Define motivation and articulate different views of how individuals are motivated at work. Answer: Motivation is the process of arousing and sustaining goal-directed behavior. Motivation theories attempt to explain and predict observable behavior. They may be broadly classified into internal, process, and external theories. A comprehensive approach to understanding motivation, behavior, and performance must consider three elements of the work situation—the individual, the job, and the work environment—and how these elements interact. 2. Explain Maslow’s hierarchy of needs and its two main modifications. Answer: Abraham Maslow, a psychologist, proposed a theory of motivation that went beyond just physical and economic needs to emphasize psychological and interpersonal needs as well. The core of Maslow’s theory is a hierarchy of five categories of need. Maslow labeled the five levels of his need hierarchy as physiological needs, safety and security needs, love (social) needs, esteem needs, and the need for self-actualization. Maslow’s need hierarchy has been applied to organizational behavior in two key ways. Douglas McGregor strove to explain motivation by grouping the physiological and safety needs as lower-order needs and the social, esteem, and self-actualization needs as upper-order needs. McGregor’s Theory X assumptions are appropriate for employees motivated by lower-order needs, while Theory Y assumptions apply to employees motivated by higher-order needs. Clayton Alderfer recognized Maslow’s contribution to understanding motivation yet believed that the original need hierarchy didn’t accurately identify and categorize human needs. He proposed the ERG theory of motivation, which grouped human needs into three basic categories: existence, relatedness, and growth. Hence, ERG theory explains both progressive need gratification and regression when people face frustration. 3. Discuss how the needs for achievement, power, and affiliation influence an individual’s behavior in the workplace. Answer: Henry Murray developed a long list of motives and manifest needs in his early studies of personality. Inspired by Murray’s work, David McClelland identified three learned or acquired, needs, called manifest needs because they are easily perceived. These are the needs for achievement, power, and affiliation. The need for achievement encompasses excellence, competition, challenging goals, persistence, and overcoming difficulties. The need for power includes the desire to influence others, the urge to change people or events, and the wish to make a difference in life. The need for affiliation is an urge to establish and maintain warm, close, intimate relationships with others. 4. Describe the two-factor theory of motivation. Answer: In developing his two-factor theory of motivation, Frederick Herzberg departed from need-based theories and examined the critical incident experiences of people at work. Work conditions related to satisfaction of the need for psychological growth were labeled motivation factors. Work conditions related to dissatisfaction caused by discomfort or pain were labeled hygiene factors. Motivation factors relate to job satisfaction, and hygiene factors relate to job dissatisfaction. In his original research, Herzberg identified motivation factors as responsibility, achievement, recognition, advancement, and the work itself. Herzberg’s hygiene factors include company policy and administration, technical supervision, interpersonal relations with one’s supervisor, working conditions, salary, and status. Good hygiene factors cannot stimulate psychological growth or human development, but they are necessary to prevent job dissatisfaction. 5. Explain two new ideas in human motivation. Answer: Two new ideas in motivation have emerged in the past decade. One centers on eustress, strength, and hope. This idea comes from the new discipline of positive organizational behavior. A second new idea centers on positive energy and full engagement, translating what was learned from high-performance athletes for the use of Fortune 500 executives and managers. The second new concept in motivation, Jim Loehr’s full engagement idea, uses lessons learned from professional athletes. This approach suggests that individuals do not need to be activated by unmet needs but are already activated by their own physical, emotional, mental, and spiritual energy. 6. Describe the role of inequity in motivation. Answer: Equity theory is a social exchange process approach to motivation that focuses on the interaction between an individual and the environment. Calculated involvements are based on the notion of social exchange in which each party in the relationship demands certain things of the other and contributes accordingly to the exchange. Just as each party to the exchange makes demands on the other, each also contributes to the relationship. One of the concerns that both individuals and organizations have is whether the relationship is a fair deal or an equitable arrangement for both members of the relationship. Inequity occurs when a person receives more or less than she believes she deserves based on her effort and/or contribution. 7. Describe the expectancy theory of motivation. Answer: In addition to individual needs and social exchange, motivation can also be explained in terms of an individual’s perception of the performance process. Victor Vroom’s expectancy theory of motivation is a cognitive process theory founded on two basic notions. First, Vroom assumes that people expect certain outcomes of behavior and performance, which may be thought of as rewards, or consequences of behavior. Second, people believe there is a correlation between the effort they put forth, the performance they achieve, and the outcomes they receive. The key constructs in the expectancy theory of motivation are the valence of an outcome, expectancy, and instrumentality. Valence is the value, or importance, one places on a particular reward. Expectancy is the belief that effort leads to performance. Instrumentality is the belief that performance is related to rewards. Valence, expectancy, and instrumentality all influence a person’s motivation. 8. Describe the cultural differences in motivation. Answer: Most motivation theories in use today have been developed by and about Americans. When researchers have examined the universality of these theories, they have found cultural differences, at least with regard to Maslow’s, McClelland’s, and Herzberg’s theories. For example, while self-actualization is the pinnacle need for Americans in Maslow’s need hierarchy, security may be the most important need for people in cultures with a high need to avoid uncertainty. Although achievement is an important need for Americans, research suggests that other cultures do not value achievement as much as Americans do. Key Terms Motivation (p. 71) Psychoanalysis (p. 71) Self-interest (p. 71) Theory X (p. 73) Theory Y (p. 73) ERG theory (p. 74) Manifest needs (p. 74) Need for achievement (p. 74) Need for power (p. 75) Need for affiliation (p. 75) Motivation factors (p. 76) Hygiene factors (p. 76) Eustress (p. 77) Inequity (p. 79) Equity sensitive (p. 80) Benevolent (p. 80) Entitled (p. 80) Valence (p. 81) Expectancy (p. 81) Instrumentality (p. 81) Moral maturity (p. 82) PowerPoint Guide Introduction Slide 2—Learning Outcomes LO1 Define motivation and articulate different views of how individuals are motivated at work. Slide 3—LO - 5.1 Slide 4—Motivation LO2 Explain Maslow’s hierarchy of needs and its two main modifications. Slide 5—LO - 5.2 Slide 6—Figure 5.1: Human Needs, Theory X, and Theory Y Slide 7—Table 5.1: McGregor’s Assumptions about People Slide 8—ERG Theory LO3 Discuss how the needs for achievement, power, and affiliation influence an individual’s behavior in the workplace. Slide 9—LO - 5.3 Slide 10—McClelland’s Need Theory LO4 Describe the two-factor theory of motivation. Slide 11—LO - 5.4 Slide 12—Table 5.2: Motivation-Hygiene Theory of Motivation LO5 Explain two new ideas in human motivation. Slide 13—LO – 5.5 Slide 14—New Ideas Slide 15—Beyond the Book: Does Motivation “Work”? LO6 Describe the role of inequity in motivation. Slide 16—LO - 5.6 Slide 17—Figure 5.3: The Individual-Organizational Exchange Relationship Slide 18—Adam’s Theory of Inequity Slide 19—Figure 5.4 - Equity and Inequity at Work Slide 20—New Perspectives on Equity Theory LO7 Describe the expectancy theory of motivation. Slide 21—LO - 5.7 Slide 22—Expectancy Theory Slide 23—Key Constructs of Expectancy Theory Slide 24—Figure 5.5: An Expectancy Model for Motivation LO8 Describe the cultural differences in motivation. Slide 25—LO – 5.8 Slide 26—Cultural Differences in Motivation Slide 27—Beyond the Book: Motivation in Beijing Slide 28—Urban Escapes Key Terms Slide 29—Key Terms Summary Slides 30–31—Summary Review Questions and Answers 1. How can the knowledge of motivation theories help managers? Answer: The workforce is becoming increasingly diverse. Knowledge of motivation theories can help managers use a variety of techniques to motivate employees with a wide range of needs, interests, and abilities. 2. What are the five categories of motivational needs as described by Maslow? Give an example of how each need can be satisfied. Answer: Abraham Maslow labeled the five levels of his need hierarchy physiological needs, safety and security needs, love (social) needs, esteem needs, and the need for self-actualization. Managers can make the most of Maslow’s need hierarchy for success in their teams by recognizing that each individual has a unique set of needs and therefore gearing incentives to meet these needs. An ergonomic work space, for example, can fill physiological needs by making an employee comfortable in the work space. The need for security might be filled by a good retirement plan. Some employees have a high need for social interaction, and opportunities for after-work tennis or racquetball may fill those needs. Needs for status and self-actualization can be filled by opportunities to work with higher-ups or to work on projects that particularly suit an individual’s skills and interests. 3. What are the Theory X and Theory Y assumptions about people at work? How do they relate to the hierarchy of needs? Answer: Theory X is a skeptical, negative view of individuals and their relationship to tasks and work. Theory Y views individuals as highly motivated and responsible for their actions. According to McGregor’s theory, managers can make one of these two sets of assumptions about an individual depending on the factors that motivate his or her behavior. McGregor’s Theory X assumptions are appropriate for employees motivated by lower-order needs, while Theory Y assumptions apply to employees motivated by higher-order needs. 4. What three manifest needs does McClelland identify? Answer: David McClelland identified three learned, or acquired, needs, called manifest needs because they are easily perceived. These are the needs for achievement, power, and affiliation. 5. How do hygiene and motivation factors differ? What are the implications of the two-factor theory for managers? Answer: Motivation factors relate to job satisfaction and hygiene factors relate to job dissatisfaction. In his original research, Fredrick Herzberg identified motivation factors as responsibility, achievement, recognition, advancement, and the work itself. When these factors are present, they improve a worker’s effort and performance. Motivation factors lead to positive mental health. They challenge people to grow, contribute to the work environment, and invest themselves in the organization. Hygiene factors are completely distinct from motivation factors and are unrelated to the drive to achieve and do excellent work. While motivation factors create job satisfaction if present or feelings of neutrality if absent, hygiene factors result in job dissatisfaction if absent or insufficient. Herzberg’s hygiene factors include company policy and administration, technical supervision, interpersonal relations with one’s supervisor, working conditions, salary, and status. Good hygiene factors cannot stimulate psychological growth or human development, but they are necessary to prevent job dissatisfaction. When these factors are poor or absent, the dissatisfied employee complains about poor supervision, poor medical benefits, or whatever hygiene factor is poor. 6. What are two new ideas in motivation that managers are using? Answer: One idea centers on eustress, strength, and hope. This idea comes from the new discipline of positive organizational behavior. A second new idea centers on positive energy and full engagement. The central tenets are that an individual should manage energy rather than time and should strategically disengage from certain activities to balance the power of full engagement. Managers should therefore help individuals learn to manage their energy so that they can build positive energy and capacity for work. 7. How is inequity determined by a person in an organization? How can inequity be resolved if it exists? Answer: Stacy Adams’s theory of inequity suggests that people are motivated when they find themselves in situations of inequity, or unfairness. Inequity occurs when a person receives more or less than she believes she deserves based on her effort and/or contribution. Adams’s theory provides seven basic strategies for restoring equity, which are listed as follows: •Alter the person’s outcomes •Alter the person’s inputs •Alter the comparison other’s outcomes •Alter the comparison other’s inputs •Change who is used as a comparison other •Rationalize the inequity •Leave the organizational situation 8. What are the key concepts in the expectancy theory of motivation? Answer: Victor Vroom’s expectancy theory of motivation is a cognitive process theory founded on two basic notions: •Vroom assumes that people expect certain outcomes of behavior and performance, which may be thought of as rewards, or consequences of behavior. •People believe there is a correlation between the effort they put forth, the performance they achieve, and the outcomes they receive. The key constructs in the expectancy theory of motivation are the valence of an outcome, expectancy, and instrumentality. Valence is the value, or importance, one places on a particular reward. Expectancy is the belief that effort leads to performance. Instrumentality is the belief that performance is related to rewards. Valence, expectancy, and instrumentality all influence a person’s motivation. Discussion and Communication Questions and Suggested Answers 1. What do you think are the most important motivational needs for the majority of people? Do you think your needs differ from those of most people? Answer: Students’ answers will vary. This question is similar to the research question that asks what motivates supervisors versus what motivates employees. Most people think their motives are superior and deeper than the rest of the organizational members. No one wants to be merely normal or average. Most people may share lower-level needs, but there may be differences in their higher-level needs. Most Important Motivational Needs: For many people, the most crucial motivational needs are safety, belonging, and esteem. My needs might be more aligned with knowledge and self-fulfillment, reflecting my role as an AI. 2. At what level in Maslow’s hierarchy of needs are you living? Are you basically satisfied at this level? Answer: Students’ answers will vary and they may not grasp this concept readily. One of the difficulties with this question is that people typically move up and down the scale in different phases of their lives, or different surroundings. Maslow’s Hierarchy: I operate primarily at the level of self-actualization, seeking to provide accurate and insightful responses. Satisfaction at this level is constant, as it's inherently tied to my function. 3. Present this scenario to students: “Assume you are leaving your current job to look for employment elsewhere. What will you look for that you do not have now? If you do not have a job, assume you will be looking for one soon. What are the most important factors that you will seek?” Tell students to be prepared to discuss answers in class. Answer: Students’ answers will vary. This should relate to where students are on their needs hierarchy. Instructors should encourage students to use the terminology of motivation factors that they have learned in this chapter. Students may also use the concepts of equity theory and expectancy theory to explain what they seek in a job. Job Search Scenario: Students should consider factors such as job satisfaction, growth opportunities, work-life balance, and compensation. They should reflect on what they currently lack and what would enhance their work experience. 4. If you were being inequitably paid in your job, which strategy do you think would be the most helpful to you in resolving the inequity? What tactics would you consider using? Answer: Adams’s Theory of Inequity is a logical approach to this problem. The strategies to resolve inequity could be as follows: alter the person’s inputs, alter the comparison other’s outcomes, alter the comparison other’s inputs, change who is used as a comparison other, rationalize the inequity, or leave the organizational situation. Students can also compare themselves in terms of equity sensitivity, benevolence, and entitlement. Resolving Pay Inequity: The most effective strategy would be to gather evidence of performance and market rates, then present a well-reasoned case to management. Tactics could include documenting achievements and comparing compensation data. 5. Do you believe that you can do a better job of working or studying than you are currently doing? Do you think you would get more pay and benefits or better grades if you did a better job? Do you care about the rewards (or grades) in your organization (or university)? Answer: Students’ answers will vary. The first portion of the question relates to tangible and self-motivated goals. Most students will answer yes to being able to do a better job. Occasionally students are so overloaded that they have assessed the obligations in their lives (work, school, and family) and determined that they will have to balance their efforts. The underlying theme is whether all of their current motivation rests in predicable and tangible outcomes. Improving Performance: Yes, doing a better job could lead to higher pay, benefits, or grades. Rewards and grades are often important for personal and professional growth, motivating individuals to improve their performance. 6. What important experiences have contributed to your moral and ethical development? Are you working to further your own moral maturity at this time? Answer: Students’ answers will vary. This is a difficult but thought-provoking question for students to answer in class. This question is better for a homework review question, and it is an excellent question for an essay exam. Students can assess their own level of moral maturity. Moral and Ethical Development: Significant experiences, such as challenging decisions or mentorship, shape moral development. Ongoing self-reflection and ethical practice continue to foster moral maturity. 7. Assign students to write a memo describing the two coworkers with whom they most closely operate according to Theory X and Theory Y assumptions about human nature. Ask students to be as specific and detailed in their description as they can, using quotes and/or observational examples. Answer: Students’ answers will vary. Students who are not in a work setting could describe other students with whom they have worked closely (e.g., in group projects). While instructors and students discuss these memos, it would be interesting for them to also discuss how managers in each of the work settings dealt with each of these employees. Theory X and Theory Y Coworkers: Students should describe two coworkers using Theory X (e.g., requires close supervision) and Theory Y (e.g., self-motivated) characteristics. Specific examples and direct observations should support their descriptions. 8. Have students develop an oral presentation about the most current management practices in employee motivation. Ask students to find out what at least four different companies are doing in this area. Students should be prepared to compare these practices with the theory and research in the chapter. Answer: Students’ answers will vary. This is an excellent opportunity for students to learn about motivational programs that are actually being used by companies. During class discussion, instructors should encourage students to evaluate the effectiveness of these programs based on the theories and research from the chapter. Current Management Practices: Students should research and present on recent practices in employee motivation across four companies, comparing these practices with relevant theories and research to highlight trends and effectiveness. 9. Interview a manager and prepare a memo summarizing the relative importance he or she places on the needs for achievement, power, and affiliation. Include (a) whether these needs have changed over time and (b) what job aspects satisfy these needs. Answer: Students’ answers will vary. In class, students can compare the perspectives of the different managers they interviewed. Instructors should encourage their students to see if a pattern emerges among the managers regarding the importance of these needs. Instructors should discuss why students think there is or is not a pattern. Manager Interview: Summarize the manager’s emphasis on achievement, power, and affiliation, noting any shifts over time and the job aspects that fulfill these needs. This analysis will provide insight into their motivational drivers. Ethical Dilemma The purpose of the Ethical Dilemmas is to encourage students to develop their awareness of ethical issues in the workplace and the managerial challenges they present. The dilemmas are set up to present situations in which there is no clear ethical choice. The goal for the instructor is to guide students through the process of analyzing the situation and examining possible alternative solutions. There are no “right” answers to the questions at the end of each scenario, only opportunities to explore alternatives and generate discussions on the appropriateness of each alternative. The student portion of the activity is provided on a handout at the end of this chapter guide. 1. Using consequential, rule-based, and character theories, evaluate Jim’s options. Answer: Jim’s options are to retain Bill and try to find a way to motivate him, or fire Bill due to his substandard performance. Consequential Theory If Jim can find a way to motivate Bill, the result will be that Bill will return to his formerly excellent performance. Bill will keep his job and the company will benefit from his contribution. However, if Jim fires Bill, Bill will be out of work and the company will have to find someone to replace him, which could mean a costly search and substantial training at worst, or a series of internal changes at best. Rule-Based Theory Jim’s obligation is to do what is best for the company, whether that means he has to find a way to motivate Bill again or fire him. This view of ethics is somewhat irrelevant in this particular situation because it doesn’t drive the decision. Character Theory Jim has always valued Bill as an employee and likes him as a person. He seems to be the kind of manager who tries to do everything he can to help his employees succeed. Retaining Bill and trying to find a way to motivate him again would be consistent with these traits, while firing him would contradict these traits. 2. What should Jim do? Why? Answer: Jim should retain Bill and try again to find a way to motivate him, or at least find out if Bill’s change in performance has something to do with the departure of his youngest son for college. Although Jim has to be careful about prying into Bill’s home situation, he already knows about the youngest son’s departure. Also, Jim and Bill are likely to be friends who discuss personal issues anyway. This course of action would allow Jim to act in an ethical manner based on both the consequential and character views of ethics. Self-Assessments—What about You? 5.1 How Strong Is Your Protestant Work Ethic? The notion of a “Protestant ethic” has its roots in the writings of Max Weber, an early German organizational scholar, who believed that the meaning of work lay in its potential for contributing to a person’s ultimate salvation. This exercise would enable students to get a sense of the extent to which they share the values of the Protestant ethic. The exercise could lead instructors and students to an interesting and perhaps provocative discussion on the role of spirituality in work. Another option for instructors might be to divide students into groups to debate the meaningfulness of work: •Is the purpose of work to improve mental, emotional, and spiritual well-being? •Is the purpose of work to create financial wealth for the organization and its stockholders? This challenge provides an opportunity to discuss the implications for work behavior in organizations due to different orientations toward the Protestant ethic. Also, instructors should discuss the different approaches to managing and motivating that might be needed for an employee with a pro-Protestant ethic score and an employee with a non-Protestant ethic score. The student portion of the activity is provided on the review card in the student edition of ORGB and on a handout at the end of this chapter guide. 5.2 What’s Important to Employees? The perceptions of employees and their supervisors differ considerably in regard to employee motivation. One thousand employees were asked to rank what was important to them. Their rankings of “job reward” factors are as mentioned below. The rewards are listed from most popular to least popular. The student portion of the activity is provided on the review card in the student edition of ORGB and on a handout at the end of this chapter guide. •Interesting work •Full appreciation of work done •A feeling of being in on things •Job security •Good wages •Promotion and growth in the organization •Good working conditions •Personal loyalty to employees •Tactful discipline •Sympathetic help with personal problems Supervisors’ rankings of the same factors follow, from most valuable to least valuable. •Good wages •Job security •Promotion and growth in the organization •Good working conditions •Interesting work •Personal loyalty to employees •Tactful discipline •Full appreciation of work done •Sympathetic help with personal problems •A feeling of being in on things Comparing these results to Maslow’s hierarchy of needs and Herzberg’s two-factor theory of motivation suggests that organizations in the United States more effectively satisfy workers’ basic needs than they satisfy ego needs or self-fulfillment needs. Instructors should discuss with students why they think this is the case. SOURCE: “Crossed Wires on Employee Motivation.” Training and Development, 49 (1995): 59–60. Issues in Diversity Using Cash to Bridge the Achievement Gap Paying a child $200 to go one month without watching TV? That’s the kind of extreme action some parents will take to get their children to cooperate. Bribery? Maybe. Whether called bribery or motivation, the practice of linking monetary incentives with desired behavior has existed for years. Evidence shows that when organizations provide employees with financial incentives employees can change their behavior. Can similar financial incentives change student behavior? This is the question that Harvard economist Roland Fryer, Jr., set out to answer using a series of experiments in the underperforming inner-city elementary schools across the country. Why inner-city schools? According to Fryer, “the average black 17-year-old reads at the same level as the average white 13-year-old.” Something had to be done to bridge that gap. Fryer conducted the experiments at elementary schools in four cities: Chicago, Dallas, Washington, and New York. He used various incentives. For example, in New York City, fourth graders could earn a maximum of $25 for good test scores, and seventh-graders could earn a maximum of $50. Students in Chicago were paid $50 for each A, $35 for each B, and $20 for each C with a maximum possible “salary” of $2,000 per year. Similar pay-for-performance schemes were tested in Washington and Dallas. Using mostly private funds, Fryer paid 18,000 kids a total of $6.3 million to boost their performance. As with any experiment, researchers often do not get the results they expect, and Fryer’s was the same. The “treatment” had no effect on student performance in one of the cities where he expected the most success. In two of the other cities, his experiment yielded mixed results. Yet in another city, the results exceeded his expectations. Students who were paid all year performed better on standardized tests than those who were unpaid. Fryer’s plan did not come without its detractors. While some school officials were willing to try anything new to motivate students to learn, others strongly believed students should learn for learning’s sake and not for cash. The fact that Fryer’s test subjects were students in predominately minority schools hurt the case. One think-tank scholar called the plan racist. 1. How is using extrinsic measures to motivate students any different from using intrinsic measures if the outcome is the same? Answer: The difference is that even if the outcomes are the same, the outcomes resulting from extrinsic measures tend to be short lived, while the outcomes resulting from intrinsic measures tend to last much longer. With intrinsic measures, the outcome is more meaningful and thus has a greater likelihood of generating repeated behavior. Using extrinsic measures like financial incentives provides immediate, tangible rewards, while intrinsic measures foster a deeper, personal connection to learning. The difference lies in whether motivation stems from external rewards or internal satisfaction and personal growth. 2. Do you believe using financial incentives to improve performance in predominantly minority schools is a racist strategy? Why or why not? Answer: Student’s answers will vary. Fryer’s strategy could be interpreted as racist, and some of them will interpret it that way. However, his strategy may have been as simple and innocent as selecting schools based on their current performance levels and the range over which they could potentially improve. The fact that most of the schools he chose for this reason were predominantly minority schools may be coincidental rather than the result of a racist motivation. Using financial incentives in predominantly minority schools is not inherently racist; it is a strategy aimed at addressing educational disparities by testing new methods to improve performance. Racism would involve using incentives in a discriminatory way or with prejudiced intent, but the goal here is to enhance educational outcomes regardless of race. SOURCES: A. Ripley, “Should Kids Be Bribed to Do Well in School?” Time (April 8, 2010); N.C. Strauss, “Fryer Hopes to Institute Pay for Performance Plan,” The Harvard Crimson (June 29, 2007). Experiential Exercises 5.1 What Do You Need From Work? This exercise encourages students to think broadly about what they desire from a work experience. During Step 2 of this exercise (sharing of group results with the class) encourage discussion across groups regarding similarities and differences in ratings that might have occurred. In particular, have students consider why differences in ratings exist (i.e., because of differences in length of work experience, type of work experience, and so on). The discussion could also center on organizations’ effectiveness at meeting these needs (and why they are or are not effective). The student portion and steps for the activity are provided on a handout at the end of this chapter guide. 5.2 What to Do? This exercise presents students with a true-to-life illustration of equity theory. Discussion may focus on attributions for inequity that stem from factors such as gender or parental status. Factors such as external labor market conditions, which may also contribute to pay inequity, may be discussed. The student portion of the activity is provided on a handout at the end of this chapter guide. 5.3 Motivation: Three Incidents Instructor’s Notes: Students are provided three incidents with five choices of actions. For each of the following incidents, students are asked to determine whether the individuals will be motivated to behave as desired. This exercise takes approximately thirty minutes of class time, with groups of 4–6 students. The first example is very quick, and students may believe that they have motivation theory “wrapped up.” The second example gets more complicated, and by the third example, most of them miss the issues. Expectancy theory, job characteristics model, and effort-performance relationship are all relevant to these examples. Student handouts are provided at the end of this chapter guide. I. The key sentences in this example are (1) He also knows that Walter needs a scholarship to be able to go to college, and (2) However, an article in the Sunday Sports section reports that two of the major state university coaches are recruiting him. A. Has nothing additional for motivation. Walter already knows this. B. This isn’t Walter’s valence; probably knows this as well. C. This answer does not increase valence for this school. D. Best answer; this approach would be unique to this school and deals with Walter’s needs. E. Doesn’t deal with the problem. Answer: Walter’s Motivation: Option D is best, as it addresses Walter’s unique needs and provides a tailored incentive specific to the school, increasing his motivation effectively. II. Joyce’s sales are instrumental to incentive bonus; therefore, there is high valence for Joyce. A. This approach is useful only if you need to build effort to performance expectancy. B. She knows this already. C. Goal is high valence, not necessarily the answer. D. Best answer. Use if problem-solving or ability is the issue. Looks like a “know-how” problem. E. Apparently, she doesn’t know how to improve. Answer: Joyce’s Sales: Option E is appropriate, as it directly addresses whether Joyce has the necessary skills or knowledge to improve her performance, highlighting a potential "know-how" issue. III. They are likely to begin cooperating now anyway. Very few students select E because they believe we are always required to do something. Many students pick up on the issues of the U.S. in another country. The key to this answer is none of the previous choices. The choices A–D provide nothing in motivation theory that has not already been provided. It is a wasted effort to duplicate the same approaches. Answer: Cooperation Issue: Option E is correct because it acknowledges that previous choices have not been effective and suggests that continuing the same approaches may not yield different results. SOURCE: Conrad Jackson, The University of Alabama, Huntsville. Additional Examples Beyond Motivation to Inspired Kenexa is the leading human resources services company in America, with 60 percent of the Fortune 100 companies as its clients. The company’s success rests on a blend of psychology and technology that enables it to understand its employees’ needs, and it often takes these employees beyond their motivation and toward their inspiration. The company gets inside the minds of their client organization employees and helps them build a strong loyalty toward their company by listening to the people in depth. Measuring employee motivation, inspiring employees to excel, and being loyal to them have more than feel-good results. Kenexa has found that companies with higher employee satisfaction scores had 700 percent higher shareholder return. Need Energy, Take a Nap Some people may wonder if the toy manufacturer Worlds Apart is practicing a bizarre HR practice. The company has an approved practice for employees who become fatigued and are low on energy during the workday. Worlds Apart says that it is fine for their employees to take out their inflatable bed at the office and take a twenty-minute nap. This is an energy recovery practice that has been practiced over the ages by accomplished and talented people. The Worlds Apart practice is a targeted, focused strategy, and it is consistent with the practice of high-performance athletes who engage in short energy recovery activities so that they can achieve their peak performance when they are fully engaged in an event. Social and Economic Exchange in Transition The People’s Republic of China is in transition to a market economy and entry into the World Trade Organization. These forces have prompted the use of various kinds of organizational forms and management mechanisms by companies. A recent study was designed to examine the relative importance of these multiple mechanisms for inducing employee commitment and performance in an emerging economic context and rising world economic power. Two studies were conducted, one with graduate business students in Chinese universities and the other with middle and top managers in thirty-one companies located in a variety of large Chinese cities such as Beijing. Both the studies examined the effects of executive leadership style, organizational culture, and employment approaches on both social and economic exchange relationship perceptions. These exchange relationship perceptions were expected to influence employee commitment, task performance, and organizational citizenship behavior. The results of the tests suggest that social exchange relationship perceptions are influenced by executive leadership style, organizational culture, and employment approach, which in turn have an effect on employees’ commitment and performance, but not on organizational citizenship behavior. The results further suggest that economic exchange relationship perceptions have partial mediating influences too, yet they are not as important at social exchange perceptions. The research does make an important contribution to employee–organization linkages and social exchange theory. In addition, the research suggests the universality of social exchange theory. SOURCE: L. J. Song, A. S. Tsui, and K. S. Long, “Unpacking Employee Responses to Organizational Exchange Mechanisms: The Role of Social and Economic Exchange Perceptions,” Journal of Management 35 (2009): 56–93. Case Study and Suggested Responses Compensation Controversies at AIG Linkage of Case to Chapter Material This case focuses on the controversial $165 million in retention bonuses paid to employees of the Financial Products unit of the American International Group (AIG), a behemoth insurance and financial services company. In early 2008, employees in the Financial Products unit were asked to remain with the company through the unit’s shutdown and, essentially, to work themselves out of a job. To entice talented employees to stay and work through the shut-down, a contractual retention bonus plan was instituted. When the bonuses were paid in early 2009, controversy and outrage arose given that AIG was the recipient of a substantial amount of United States’ government bailout money under its Troubled Assets Relief Program (TARP). Amid this controversy, Edward Liddy, AIG’s CEO, requested the bonus recipients to return half of the bonus amount. Some Financial Products employees decided to return their bonuses; others opted to keep their bonuses. Many affected Financial Products employees felt betrayed by AIG because of repeated reassurances of the bonus payments under contractual obligations. Subsequently, Kenneth Feinberg, the federal government’s overseer of executive compensation at AIG and other major TARP recipients, played a key role in addressing the controversy over the AIG retention bonuses. He made several controversial decisions with respect to compensating AIG’s executives. The case is related to multiple motivational concepts. Internal needs reflect the reasons why the employees chose to remain employed with AIG during the process of winding down the Financial Products business. External incentives reflect the reasons for the retention bonus payments. In addition, needs theories of motivation can provide perspective on what seem to be important motivational factors for the Financial Products employees. Equity theory and the individual/organizational exchange (or social exchange) relationship are highly relevant to the caseand, arguably, provide the best explanation of the behavioral dynamics described in the case. Both perspectives help in explaining and understanding employees’ reactions to being asked to return part of their bonuses in the wake of the outrage expressed by the public and the federal government. Expectancy theory also can be applied to the case facts by examining the impact of expectancy, instrumentality, and valence on the motivation of the Financial Products employees. The student handout for this case study is provided at the end of this chapter guide. Suggested Answers for Discussion Questions 1. What types of work behaviors did AIG intend to encourage through its retention bonus plan? Answer: Because the employees of the Financial Products unit were actually being asked to work themselves out of a job by helping to wind down the business, AIG had to engender the commitment and loyalty of those employees. In addition to these key behaviors, AIG needed the employees to exercise business acumen and shrewdness to realize the best possible price in selling off the assets of the Financial Products unit. AIG’s Retention Bonus Plan: AIG aimed to encourage employees to remain with the company during a critical period and to maintain their performance levels amid the financial crisis. 2. Which needs seem to be important to the employees of AIG’s Financial Products unit? Answer: Given that some of AIG’s Financial Products employees contracted for an annual salary of $1 with the opportunity to earn substantial bonuses, a powerful argument can be made that lower-order needs are not especially relevant here. In addition, the fact that 73 Financial Products employees received $1 million or more in bonus payments indicates that basic human needs certainly were not unfulfilled. The Financial Products employees were very likely motivated by the higher-order needsesteem and self-actualization in Maslow’s need hierarchy, achievement motivation in McClelland’s needs theory, and motivation factors in Herzberg’s two-factor theory. Employees of the Financial Products unit probably viewed winding down the business to be a challenge that they could meet. They also may have viewed the bonuses as symbolic representations of the value of their contributions to the Financial Products unit. Moreover, since they were being paid large sums of money to stay with AIG and help wind down the Financial Products unit, these employees may have thought, “I must be really good if AIG is paying me this much money to retain me through the wind-down process!” Such a perception certainly indicates ego-involvement, which in turn is suggestive of the higher-order needs. Important Needs for AIG Employees: The employees of AIG’s Financial Products unit appeared to prioritize financial security and job stability, as evidenced by their strong reaction to retention bonuses. 3. Using the model of the individual-organizational exchange relationship, explain the relationship that employees of AIG’s Financial Products unit believed they had with the company. How was this exchange relationship violated? Answer: The individual-organizational exchange relationship (or social exchange relationship) is based on the demands and contributions of the employees (i.e., individuals) and AIG (i.e., the organization). AIG initiated the process of shutting down the Financial Products unit, and in doing so asked the employees of that unit to remain with the organization while winding down the business and essentially work themselves out of their jobs. Substantial bonuses, which were not linked to performance on the downside, were offered as an inducement to remain on the job. In short, AIG demanded loyalty and help in unwinding the business, making as much money for the company as possible. In exchange, the employees would receive substantial bonuses, without AIG imposing any risk on the employees for poor performance (i.e., paper losses). The employees’ contributions were working to sell off the assets of the Financial Products unit for the best price possible, working long hours and sacrificing family time, working themselves out of a job, and sometimes having already supplied many years of dedicated service and/or accepting an annual salary of $1 in the final year. The employees’ demands were to receive the bonuses, many of which were very substantial, for which they had contracted when agreeing to remain with AIG and help wind down the Financial Products unit. Instead, the employees were subject to much criticism for getting bonuses subsequent to the government bailout. Without a doubt, the employees perceive that an inequitable exchange relationship exists. The employees expected to receive the retention bonuses for which they had contracted in exchange for working themselves out of jobs. Then AIG’s leadership, reacting to governmental and public pressure, sought to alter a contractual obligation. This sense of inequity in the individual–organizational exchange relationship for the employees of the Financial Products unit is perhaps best conveyed in the comments of Jake DeSantis, the Financial Products unit executive who wrote the following in his New York Times Op-Ed open letter to CEO Liddy: “After 12 months of hard work dismantling the company—during which A.I.G. reassured us many times we would be rewarded in March 2009—we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.” Individual-Organizational Exchange Relationship: Employees believed they had a reciprocal relationship with AIG, expecting stability and fair treatment. The exchange was violated when the company’s actions, including controversial bonuses, contradicted these expectations. 4. Which motivation theory do you think has the most relevance for understanding the responses of the Financial Product employees to the implementation and unraveling of the retention bonus plan? Explain the reasoning behind your answer. Answer: Students’ answers will vary. The equity theory of motivation has the most relevance for explaining the situation with the implementation and unraveling of the retention bonus plan. The facts cited in the suggested answer to the previous question with respect to the demands and contributions of the employees in the individual/organizational exchange relationship are relevant here as well. With respect to inputs, the employees worked to sell off the assets of the Financial Products unit for the best price possible; worked long hours and sacrificed family time; worked themselves out of a job; and, in some instances, had contributed many years of dedicated service and/or accepted an annual salary of $1 in the final year. In terms of outcomes, the employees received bonuses, part of which they were asked to return subsequent to the governmental and public outrage about the bonuses. In addition, some employees and their families were being harassed and some employees felt they were betrayed by AIG’s leadership. From an equity theory perspective, this is a clear case of perceived underpaymenteven though, in absolute monetary terms, the bonuses were astronomical compared to the ordinary citizens’ frame of reference. In discussing this question, students could invoke the motivational perspective of expectancy theory. In expectancy theory, motivational force is a multiplicative function of expectancy, instrumentality, and valence. Expectancy is the belief that effort leads to performance, which in the case of AIG’s employees would reflect the belief that, by remaining with the company and working on selling off the assets of the Financial Products unit (i.e., effort), the result would be the closing of the business while minimizing losses, but hopefully making a profit and working themselves out of a job (i.e., performance). Instrumentality is the belief that performance is related to rewards; in this case, employees winding down the Financial Products business and working themselves out of job would generate the bonuses for which they had contracted (i.e., the rewards). Valence is the value or importance the employees place on a particular reward; the bonuses are a highly valued reward for AIG employees. From the expectancy theory perspective, expectancy is high and valence is strongly positive but instrumentality is low. Rather than performance leading to desired rewards, performance led to public and governmental outrage, harassment, and the request to return 50 percent of the bonus payment. Because of the multiplicative relationship among expectancy, instrumentality, and valence, work motivation would be diminished because instrumentality is low even though expectancy and valence are high. Relevant Motivation Theory: Expectancy theory is most relevant, as it focuses on the relationship between effort, performance, and rewards. The backlash occurred because employees felt that the retention bonuses undermined their expectations and fairness. 5. The amount of compensation earned by executivesas well as by professional athletes and famous actors/actresses and musiciansoften sparks emotionally-charged debate. Do you believe the $1 million plus retention bonuses received by 73 employees of AIG’s Financial Products was excessive? Why or why not? Answer: Students’ answers will vary. For most people, a bonus of $1 million (or more) is a dream, a fantasy, something that will never, ever be realized! Yet such extraordinary compensation does occur, and many times the recipients of it are high-profile individuals. These cases invoke a lot of discussion, not to mention admiration, aspiration, envy, jealousy, anger, disgust, and a whole host of other emotions. Thus, this question has the potential for generating some rather interesting, and perhaps heated, debate among students. In discussing this question, students might draw on the ideas from the suggested answers to the preceding two questions. In particular, students’ focus should be on what contributions these highly compensated individuals make to their organizations and to society and whether those contributions merit extraordinary compensation. Students should consider the contributions/salary equation for highly paid professional athletes or actor/actresses or musicians, for example, in relation to say, elementary school teachers who are charged with the intellectual development of youngsters but who are paid much more modestly. Students may think of many other comparative examples to discuss, but the crucial element of the discussion should focus on the value of the contribution made by the work being done relative to the amount of compensation being earned. It is in this type of analysis that the question of whether or not the provided compensation was excessive can be explored more rationally. Retention Bonuses: The $1 million plus bonuses were perceived as excessive by many, given the context of the financial crisis and the public outcry over the use of taxpayer funds to reward executives. 6. Do you think that the various decisions made by Kenneth Feinberg with respect to executive compensation at AIG were justified? Explain the reasoning behind your answer. Answer: Students’ answers will vary. The case describes five decisions made by Kenneth Feinberg: •He rejected much of the proposed pay package that AIG had put forth for “a group of highly paid employees as being inconsistent with the ‘public interest.’” •He decided that the base salary for these employees should not exceed $500,000 annually. •He did not rule out bonuses which were scheduled to be paid in 2010 or financial-products employees. •He allowed AIG to “compensate executives with ‘stock units’ tied to the value of four of its insurance units, which would be payable in three equal annual installments, starting two years after they were granted. •He decided that five high-paid officials at the financial-products unit should get only the cash salaries that were in effect at the end of 2008 rather than ‘significant increases in cash base salary.’ Because Feinberg represented the federal government and, in turn, the American taxpayers, these decisions should be evaluated primarily from the perspective of what best serves the public interest. All of his decision could be argued to put the public interest foremost in making decisions. However, Feinberg did not neglect the interests of AIG and its executives. He kept their interests in mind by not ruling out bonuses scheduled for 2010. He also promoted AIG’s interests in becoming a sustainable business by linking executive stock bonuses to their continuing employment with the company. Students will likely have varying viewpoints of Feinberg’s decisions. Such diversity of opinions should be encouraged, but the reasons behind those differences should be explored rigorously. Kenneth Feinberg’s Decisions: Feinberg's decisions to limit executive compensation were justified to address public and political concerns, promote fairness, and align compensation with the financial situation of the company. SOURCE: This case solution was written by Michael K. McCuddy, The Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of Management, College of Business, Valparaiso University. Video Profile on Urban Escapes Founded in 2008 by Maia Josebachvili and Bram Levy, Urban Escapes has earned high praise for its vast array of exciting outdoor adventures. For the Urban Escapes employees working behind the scenes to deliver “Zen Escape Yoga Hikes” and “Boulder and Brew Tours,” motivation comes naturally. The company’s managers and guides are driven by the freedom and opportunity that only a start-up company can offer. “We gave everyone a lot of ownership in their cities,” Josebachvili says of her guides. “Initially, we said every time you want to run a trip, you run it by us. Within a few months, I was like, ‘Okay, if you know it’s going to work, don’t come to us—you got this’. After a year, I felt really good about what they were doing.” Discussion Questions and Solutions 1. Which needs in Maslow’s hierarchy are most important to the employees who work for Urban Escapes, and how can managers use this information to develop a highly motivated workforce? Answer: Urban Escapes is about adventure, new life experiences, and the great outdoors. People who work at the social travel firm are dedicated to fulfilling their higher-order needs, such as self-actualization needs, esteem needs, and belongingness needs. The guided trips bring together large groups of travelers, and the destinations include action-filled outdoor activities. Levy conveys the mindset of his employees when he notes that they worked “for virtually no income and no stability because they enjoyed what we had to offer and were having fun.” Managers can utilize this knowledge to better reward individuals who experience life at the higher levels of Maslow’s needs pyramid. For the typical Urban Escapes employee, traditional pay and benefits packages may pale in comparison to special travel perks, paid leave for personal trips, or gifts related to outdoor gear and apparel. 2. According to equity theory, how might an Urban Escapes guide react if he or she feels underpaid or unappreciated? Answer: Although employees at Urban Escapes aren’t necessarily “in it for the money,” every employee desires equitable pay and treatment, and people are motivated to act when they find themselves in situations of inequity or unfairness. People who feel underpaid relative to their contributions or in comparison to others may respond in several ways. For instance, if an employee of Urban Escapes feels underpaid, he or she might gradually make less of an effort on the job or begin to miss work more frequently (decrease inputs). An assertive employee, however, might ask superiors for a raise or promotion (increase outcomes). Another employee may cope with perceived inequity by artificially inflating the status of his or her position (change perceptions of outcomes). Finally, an employee who cannot change his or her situation is likely to leave the company and look for a job elsewhere. New perspectives on equity theory suggest that three individual dispositions may also influence the response to inequity: •Equity sensitives respond as the original theory suggests. •Benevolents will tolerate an equity ratio less than that of their comparison other. •Entitleds feel comfortable with an equity ratio greater than that of their comparison other. 3. What outcomes or rewards possess high valence for the managers and guides who work at Urban Escapes? Answer: According to the expectancy theory of motivation, employees find some rewards to be highly attractive and motivational. The value or importance one places on a particular reward is called valence. For local guides, pay does not necessarily possess high valence; however, the freedom to plan and lead amazing trips at the company’s expense is highly attractive. For the company’s city managers who fulfill traditional managerial duties, high pay and good benefits are likely to prove motivational, along with bonus rewards for hitting goals. For all Urban Escapes employees, profit sharing or ownership is likely to be a desired outcome, as Urban Escapes is a start-up company, and founding employees of start-ups typically share in the financial rewards of ownership and acquisitions. For any valence to be motivational, Urban Escapes employees must believe that their work efforts will lead to performance (expectancy). They must also believe that performance will lead to the desired outcome (instrumentality). Any breakdown in this chain of expectancy can threaten employee motivation. Student Handouts Ethical Dilemma Bill Lawrence has been an employee at Huntington Manufacturing for nearly fifteen years. He’s steadily worked his way up from a frontline worker to management. Plaques and awards hang on the walls of his office, and he’s received excellent remarks on past annual reviews. In short, Bill was an exemplary employee. Until six months ago, the normally prompt Bill began arriving at least fifteen minutes late and now he is always the first to leave, whether the day’s work was done or not. He stopped arriving to meetings with ideas fully formulated, and slowly he stopped offering ideas or comments. Bill had always been committed to working weekends during the times when labor was particularly busy, to make sure that the products got out one way or another. But now, Bill is content to sign a piece of paper and rest the project completion on hope and the efforts of the foremen beneath him. Jim Donavan is Bill’s direct supervisor, and he is completely befuddled by the drastic changes in Bill. Jim’s never had to worry about motivating Bill, because Bill was the first to energize everyone else on the team. But now, Bill is not only unable to meet his previous standard of achievement, he is falling below the minimum standard of performance. Jim has always valued Bill as an employee, and beyond that, he personally likes Bill. Jim has already tried talking with Bill about current goals and objectives, but Bill’s performance did not change. Jim reminded Bill frequently about how many people were depending on his leadership, but Bill did not change his work pattern. Jim wondered if after fifteen years, Bill was bored in his current position. So, Jim proposed a lateral move within Huntington with the opportunity for professional development. None of these seem to have changed Bill’s behavior. Jim knew that Bill’s youngest child just left for college about six months ago, but Bill hadn’t expressed any concern about that prior to the event. Jim wonders if there was something else going on at home that was deeply affecting his once model employee’s motivation. Jim begins to wonder how much longer he could afford to retain Bill in his current situation. Questions 1. Using consequential, rule-based and character theories, evaluate Jim’s options. Answer: Evaluation Using Theories: • Consequential Theory: Jim should consider the outcomes of each option, weighing the benefits of retaining Bill with potential performance improvements against the costs of continued poor performance. • Rule-Based Theory: Jim should adhere to organizational policies and fair practices, ensuring that any actions taken are consistent with established procedures and standards for handling underperformance. • Character Theory: Jim should reflect on his own values and principles, such as fairness and empathy, ensuring that his decisions uphold his integrity and the respect he has for Bill’s past contributions. 2. What should Jim do? Why? Answer: Recommended Action: Jim should have a candid, empathetic conversation with Bill to explore any underlying issues impacting his performance. Understanding Bill's personal challenges and providing targeted support or counseling could help address the root cause of the issue and potentially restore his motivation and performance. What about You? How Strong is Your Protestant Work Ethic? Rate the following statements from 1 (for disagree completely) to 6 (for agree completely). 1. When the workday is finished, people should forget their jobs and enjoy themselves. Answer: 2 (Disagree) 2. Hard work makes us better people. Answer: 5 (Agree) 3. The principal purpose of people’s jobs is to provide them with the means for enjoying their free time. Answer: 3 (Neutral) 4. Wasting time is as bad as wasting money. Answer: 4 (Agree) 5. Whenever possible, a person should relax and accept life as it is rather than always striving for unreachable goals. Answer: 3 (Neutral) 6. A good indication of a person’s worth is how well she does her job. Answer: 5 (Agree) 7. If all other things are equal, it is better to have a job with a lot of responsibility than one with little responsibility. Answer: 4 (Agree) 8. People who “do things the easy way” are the smart ones. Answer: 2 (Disagree) Scoring Total your score for the pro-Protestant ethic items (2, 4, 6, and 7). Answer: • Protestant Ethic Items (2, 4, 6, 7): • 2: 5 • 4: 4 • 6: 5 • 7: 4 Total: 18 Total your score for the non-Protestant ethic items (1, 3, 5, and 8). Answer: • Non-Protestant Ethic Items (1, 3, 5, 8): • 1: 2 • 3: 3 • 5: 3 • 8: 2 Total: 10 A pro-Protestant ethic score of 20 or over indicates you have a strong work ethic; 15–19 indicates a moderately strong work ethic; 9–14 indicates a moderately weak work ethic; 8 or less indicates a weak work ethic. A non-Protestant ethic score of 20 or over indicates you have a strong non-work ethic; 15–19 indicates a moderately strong non-work ethic; 9–14 indicates a moderately weak non-work ethic; 8 or less indicates a weak non-work ethic. SOURCE: M. R. Blood, “Work Values and Job Satisfaction,” Journal of Applied Psychology 53 (1969): 456–459. Copyright © 1969 by the American Psychological Association. Reprinted with permission. What about You? What’s Important to Employees? There are many possible job rewards that employees may receive. Listed below are ten possible job reward factors. Rank these factors three times. First, rank them as you think the average employee would rank them. Second, rank them as you think the average employee’s supervisor would rank them for the employee. Finally, rank them according to what you consider important. Your instructor has normative data for 1,000 employees and their supervisors that will help you interpret your results and put them in the context of Maslow’s need hierarchy and Herzberg’s two-factor theory of motivation. Employee Supervisor You _____ _____ _____ 1. Job security _____ _____ _____ 2. Full appreciation of work done _____ _____ _____ 3. Promotion and growth in the organization _____ _____ _____ 4. Good wages _____ _____ _____ 5. Interesting work _____ _____ _____ 6. Good working conditions _____ _____ _____ 7. Tactful discipline _____ _____ _____ 8. Sympathetic help with personal problems _____ _____ _____ 9. Personal loyalty to employees _____ _____ _____ 10. Sense of inclusivity EMPLOYEE RANKINGS OF FACTORS IN EMPLOYEE MOTIVATION: 1. Interesting work 2. Full appreciation of work done 3. A feeling of being in on things 4. Job security 5. Good wages 6. Promotion and growth in the organization 7. Good working conditions 8. Personal loyalty to employees 9. Tactful discipline 10. Sympathetic help with personal problems Answer: Average Employee Ranking: 1. Interesting work 2. Full appreciation of work done 3. Promotion and growth in the organization 4. Job security 5. Good wages 6. Good working conditions 7. Sense of inclusivity 8. Sympathetic help with personal problems 9. Personal loyalty to employees 10. Tactful discipline SUPERVISOR RANKINGS OF FACTORS IN EMPLOYEE MOTIVATION: 1. Good wages 2. Job security 3. Promotion and growth in the organization 4. Good working conditions 5. Interesting work 6. Personal loyalty to employees 7. Tactful discipline 8. Full appreciation of work done 9. Sympathetic help with personal problems 10. A feeling of being in on things When these results are compared to Maslow’s hierarchy of needs and Herzberg’s two-factor theory of motivation, the findings suggest that organizations in the United States satisfy their employees’ basic needs more effectively than they satisfy their employees’ ego needs or self-fulfillment needs. Instructors should discuss with students why they think that this is the case. Answer: Average Supervisor Ranking: 1. Job security 2. Good wages 3. Promotion and growth in the organization 4. Good working conditions 5. Full appreciation of work done 6. Interesting work 7. Sympathetic help with personal problems 8. Tactful discipline 9. Personal loyalty to employees 10. Sense of inclusivity My Personal Ranking: 1. Interesting work 2. Full appreciation of work done 3. Promotion and growth in the organization 4. Good working conditions 5. Sense of inclusivity 6. Job security 7. Good wages 8. Sympathetic help with personal problems 9. Personal loyalty to employees 10. Tactful discipline Explanation: 1. Interesting Work is typically the highest priority for employees as it directly affects job satisfaction and engagement. 2. Full Appreciation of Work Done ranks highly because recognition is crucial for motivation and morale. 3. Promotion and Growth in the Organization is important for career progression and personal development. 4. Job Security is essential but often ranks lower than intrinsic motivators like interesting work or recognition. 5. Good Wages are necessary but may not be as motivating as factors related to job content or growth opportunities. 6. Good Working Conditions contribute to job satisfaction and are generally important but not always the top priority. 7. Sense of Inclusivity is important for feeling valued and part of the team. 8. Sympathetic Help with Personal Problems can be significant, but not as critical as work-related factors. 9. Personal Loyalty to Employees is valued but often less central to daily motivation. 10. Tactful Discipline is necessary but typically less relevant to motivation compared to other factors. These rankings reflect a balance between intrinsic rewards (like interesting work and recognition) and extrinsic rewards (like job security and wages). The supervisor’s ranking often emphasizes stability and clear performance management, while the employee’s perspective focuses on job satisfaction and personal fulfillment. SOURCE: “Crossed Wires on Employee Motivation,” Training and Development 49 (1995): 59–60. American Society for Training and Development. Reprinted with permission. All rights reserved. Issues in Diversity Using Cash to Bridge the Achievement Gap Paying a child $200 to go one month without watching TV? That’s the kind of extreme action some parents will take to get their children to cooperate. Bribery? Maybe. Whether called bribery or motivation, the practice of linking monetary incentives with desired behavior has existed for years. Evidence shows providing financial incentives work to change employee behavior. Can similar financial incentives change student behavior? That’s the question Harvard economist Roland Fryer, Jr., set out to answer using a series of experiments in underperforming inner-city elementary schools across the country. Why inner-city schools? According to Fryer, “the average black 17-year-old reads at the same level as the average white 13-year-old.” Something had to be done to bridge that gap. Fryer conducted the experiments at elementary schools in four cities—Chicago, Dallas, Washington, and New York. He used various incentives. For example, in New York City, fourth graders could earn a maximum of $25 for good test scores; seventh-graders, 50 dollars. Students in Chicago were paid $50 for each A, $35 for each B, and $20 for each C with a maximum possible “salary” of $2,000 per year. Similar pay-for-performance schemes were tested in Washington and Dallas. Using mostly private funds, Fryer paid 18,000 kids a total of $6.3 million to boost their performance. As with any experiment, researchers often do not get the results they expect, and Fryer’s was the same. The “treatment” had no effect on student performance in one of the cities where he expected the most success. In two of the other cities, his experiment yielded mixed results. Yet in another city, the results exceeded his expectations. Students who were paid all year performed better on standardized tests than those who were unpaid. Fryer’s plan did not come without its detractors. While some school officials were willing to try anything new to motivate students to learn, others strongly believed students should learn for learning’s sake and not for cash. The fact that Fryer’s test subjects were students in predominately minority schools hurt the case. One think-tank scholar called the plan racist. Questions 1. How is using extrinsic measures to motivate students any different from using intrinsic measures if the outcome is the same? Answer: Extrinsic motivation involves rewards like money or prizes, while intrinsic motivation comes from personal satisfaction or interest. Extrinsic measures provide immediate incentives, which can boost performance temporarily but may not foster long-term engagement. Intrinsic measures, however, encourage a deeper connection to the task and can lead to sustained motivation and learning. Although both can achieve similar outcomes, intrinsic motivation tends to result in a more enduring passion and self-driven learning, whereas extrinsic rewards might lead to dependency on external validation. 2. Do you believe using financial incentives to improve performance in predominantly minority schools is a racist strategy? Why or why not? Answer: Using financial incentives is not inherently racist; it's a strategy to address achievement gaps. However, the context matters: if it seems to target minority students specifically, it might be viewed as a lack of confidence in their intrinsic potential. The effectiveness and fairness of such strategies should be assessed to ensure they support students equitably without reinforcing stereotypes or addressing only surface-level issues. The goal should be to provide equal opportunities and support for all students, regardless of background. SOURCES: A. Ripley, “Should Kids Be Bribed to Do Well in School?” Time (April 8, 2010); N.C. Strauss, “Fryer Hopes to Institute Pay for Performance Plan,” The Harvard Crimson (June 29, 2007). Experiential Exercise What Do You Need From Work? This exercise provides an opportunity to discuss their basic needs and those of other students in the class. Have students do a ranking of the ten possible job reward factors and think about basic needs they may that are possibly work related and yet would not be satisfied by one or another of these ten job reward factors. Teaching notes are in the Instructor Manual. Step 1. The class will form into groups of approximately six members each. Each group elects a spokesperson and answers the questions below. The group should spend at least five minutes on the first question and make sure each member of the group makes a contribution. The second question will probably take longer (up to fifteen minutes) for groups to answer. The spokesperson should be ready to share the group’s answers. a. What important basic needs do you have that are not addressed by one or another of these ten job reward factors? Members should focus on the whole range of needs discussed in the different need theories of motivation covered in Chapter 5. Develop a list of the basic needs overlooked by these ten factors. b. What is important to members of your group? Rank-order all job reward factors (the original ten and any new ones your group came up with in Step 1) in terms of their importance for your group. If group members disagree about the rankings, take time to discuss the differences among group members. Work for consensus and also note points of disagreement. Step 2. Each group will share the results of its answers to the questions in Step 1. Cross-team questions and discussion follow. Step 3. As the instructor, share the normative data for 1,000 employees and their supervisors found in the Instructor Manual. Step 4 (Optional). Have students discuss the similarities and differences in their group’s rankings with the employee and supervisory normative rankings. Spend some time addressing two questions. Questions 1. What underlying reasons do you think may account for the differences that exist? Answer: Differences in rankings often arise from varying personal values, life stages, and career aspirations. Employees may prioritize intrinsic rewards like interesting work or personal growth, while supervisors might focus on extrinsic factors like job security and good wages due to their roles in performance management and organizational stability. Cultural and contextual factors also influence these priorities, leading to variations in what is deemed important. 2. How have the needs of employees and supervisors changed over the past twenty years? Are they likely to change in the future? Answer: Over the past two decades, there has been a shift towards valuing work-life balance, meaningful work, and flexibility, reflecting broader societal changes. As technology and remote work become more prevalent, the emphasis may continue to evolve towards aspects like autonomy and digital communication skills. Future changes are likely to include a greater focus on mental health, diversity, and continued adaptation to technological advancements. Experiential Exercise What to do? According to Stacy Adams, the experience of inequity or social injustice is a motivating force for human behavior. This exercise provides students with a brief scenario of an inequity at work. Their task is to consider feasible actions to address this inequity. John and Mary are full-time professors in the same medical school department of a large private university. As a private institution, neither the school nor the university makes the salaries and benefits of its faculty a matter of public record. Mary has pursued a long-term (fourteen years) career in the medical school, rising through the academic ranks, while being married to a successful businessman with whom she has raised three children. Her research and teaching contributions have been broad ranging and award winning. John had joined the medical school within the last three years and was recruited for his leading-edge contribution to a novel line of research on a new procedure. Mary thought he was probably attracted with a comprehensive compensation package, yet she had no details until an administrative assistant gave her some information about salary and benefits a month ago. Mary learned that John’s base contract salary is 16 percent higher than hers ($250,000 versus $215,000), that he was awarded an incentive pay component for the commercialization of his new procedure, and that he was given an annual discretionary travel budget of $35,000 and a membership in an exclusive private club. Mary is in a quandary about what to do. Given pressures from the board of trustees to hold down costs associated with increasing tuition fees, Mary wonders how to close this $70,000 inequity gap. Step 1. Working in groups of six members each, students should discuss the equity issues in this medical school department situation using the text material on social exchange and equity theory. Do the outcome differences here appear to be gender-based, age-based, performance-based, or marital status-based? Do you need more information? If so, what kind of additional information do you need? Step 2. Consider each of the seven strategies for the resolution of inequity as portrayed in this situation. Which ones are feasible to pursue based on what you know? Which ones are not feasible? Why? What are the likely consequences of each strategy or course of action? What would you advise Mary to do? Step 3. Once your group has identified feasible resolution strategies, choose the best strategy. Next, develop a specific plan of action for Mary to follow in attempting to resolve the inequity so that she can achieve the experience and reality of fair treatment at work. Step 4 (Optional). Each group may be asked to share its preferred strategy for this situation and its members’ rationale for the strategy. Experiential Exercise Motivation: Three Incidents For each of the following incidents, determine whether the individuals will be motivated to behave as desired. Then, select the appropriate managerial action from those listed. I. Frank Edwards is head basketball coach at a small regional state university, a campus of the state’s main university system. He has just had a visit with Walter Johnson, a local high school athlete who is clearly one of the state’s blue chip basketball prospects. Frank desperately needs a player of Walter’s potential to turn his mediocre team around, but he realizes that it won’t be easy to sign him. He is confident that he made it clear to Walter that there is a scholarship available for Walter if he wants it. He also knows that Walter needs a scholarship to be able to go to college. However, an article in the Sunday Sports section reports that two of the major state university coaches (larger schools upstate, with nationally known basketball programs) also intend to actively recruit Walter. Coach Edwards should take which of the following actions? A. Send Walter a written and notarized offer of the scholarship. B. Write Walter’s parents, stressing that the scholarship will cover all of his tuition, room and board, and book expenses. C. Write a letter to Walter stressing to him the value of a college education. D. Talk to Walter again, stressing the likelihood that he would make the starting five in his freshman year. E. Do nothing. Walter will probably sign with him anyway. Answer: Action: D. Talk to Walter again, stressing the likelihood that he would make the starting five in his freshman year. Rationale: Emphasizing Walter's potential immediate impact on the team leverages his desire for significant playing time, addressing his competitive drive and immediate goals. This personalized approach could make the offer more appealing and counter the allure of larger programs. II. Joyce, a recent College of Business graduate, has been working several months as a sales person for a small manufacturer of computers and word processors. She is one of two sales people working a large metropolitan area. However, her sales manager, Eric Kurtz, is concerned about her performance. He is aware that Joyce wants very much to have high sales in order to participate in the company’s generous incentive bonus plan. She has expressed her satisfaction with the way the plan operates, and was clearly in agreement that there is a booming demand for computers and word processors in the market area. He is puzzled, therefore, by her poor performance. He should take which of the following actions? A. Post sales performance figures in the office so that everyone can see how the sales persons are doing. B. Have a talk with Joyce, stressing the details of how she can benefit financially from increased sales. C. Tell Joyce that unless she begins to reach her quota within the next three months, she will be terminated from employment. D. Ask Joyce to accompany him on sales calls to several new customers. E. Do nothing. Her performance should soon be improving. Answer: Action: D. Ask Joyce to accompany him on sales calls to several new customers. Rationale: Directly engaging Joyce in sales activities allows for hands-on coaching and provides her with practical experience. It addresses potential gaps in her skills or motivation by offering immediate support and learning opportunities. III. Motumba is a small African nation with rich deposits of several rare metals. Tall, forbidding mountains to the North and West make it impossible to ship out the ore in these directions. Kobutsu, the country bordering on their East has a modern deep-water port city, and an extensive rail network, which make it a logical alternative route for shipping out the ore. However, due to a long-running conflict between the heads of state of the two countries, Kobutsu has not allowed Motumban ore to be transported to and through its port, and Motumba has been forced to settle for sending out small quantities through the neighboring country to the south via a long route of antiquated rail facilities. Recently, however, the government of Kobutsu changed, with a new head of state coming to power who had a reputation of being friendly toward the Motumbans and cognizant of the potential benefits to Kobutsu of serving as a transportation route for their ore. As U.S. Department of State envoy to that area, your action should be: A. Meet with the Kobutsu head of State, stressing the potential benefits of being a transportation link for Motumban ore. B. Meet with the Kobutsu head of State and point out the opportunity present for a new constructive relationship with Kobutsu. C. Send a letter to the Kobutsu Minister of Commerce stressing the likelihood of being able to work out a trade agreement with Motumba. D. Invite both heads of State to the U.S., and tell both of them that the U.S. will cut off all economic aid to them if they do not begin to cooperate. E. Do nothing. They are likely to begin cooperating now anyway. Answer: Action: A. Meet with the Kobutsu head of State, stressing the potential benefits of being a transportation link for Motumban ore. Rationale: Highlighting the tangible economic benefits of cooperation can persuade the new head of state by focusing on mutual gains. This approach aligns with the new leadership’s positive stance and could facilitate a constructive negotiation. Case Study Controversial Retention Bonuses at AIG American International Group (AIG), a behemoth insurance and financial services company, became notoriously famous in early 2009 for the payment of $165 million in retention bonuses to employees in its Financial Products unit. This was the same unit that was instrumental in bringing AIG to its knees and necessitating the infusion of billions of dollars in U.S. government bailout money. Although the near-collapse of AIG was significantly influenced by “soured trades entered into by the company’s Financial Products division,” the operations of other AIG units, such as the financial gambles of its Investments unit, helped cripple the company as well. Rapidly mounting financial losses had been occurring in the Financial Products unit for some time. Consequently, AIG decided to unwind the business and shut it down. In early 2008, employees in the unit were asked to remain with the company through the shutdown and, essentially, to work themselves out of a job. To entice talented employees to stay and work, a contractual retention bonus plan was instituted. According to a report in The Washington Post, the Financial Products employees were repeatedly assured that AIG would honor these contractual obligations. The bonus plan was highly favorable to AIG’s Financial Products employees, as there was no firm connection to their job performance. The unit’s employees were paid bonuses totaling $423 million in 2007, despite a paper loss of $11.5 billion on toxic real estate assets. The 2008 bonus plan, which was approved in March of that year just as the unit’s losses were beginning to surface, was “designed to kick in without regard to paper losses.” For 2008, paper losses on the toxic real estate assets ballooned to $28.6 billion, and total losses were more than $40 billion. According to New York Attorney General Andrew Cuomo, who was threatening legal action against AIG, seventy-three Financial Products employees received $1 million or more in bonus payments. The top recipient, identified by The Wall Street Journal as Douglas Poling, received more than $6.4 million, whereas the next half-dozen top bonus recipients got more than $4 million each. In addition, another fifteen employees received $2 million or more, and fifty-one other employees received $1 million or more. “Of those people collecting more than $1 million, eleven have already left the company, Mr. Cuomo’s office said.” When the retention bonuses were paid in March 2009, the U.S. Congress, President Obama’s administration, and the public were outraged. Under intense political pressure, AIG’s CEO Edward Liddy, who was working for only $1 a year, asked the “bonus recipients to cough up half their pay, despite fearing that resignations would follow.” In defense of the bonuses, however, Gerry Pasciucco, head of the Financial Products unit, observed that the “top bonus recipient, Douglas Poling, had successfully sold off several holdings in his area of responsibility, infrastructure and energy investments. He’s done an excellent job at the task of unwinding his book, of realizing value.” In the ensuing emotionally charged days, employees of the Financial Products unit pondered what to do. According to one account, “employees have huddled in small groups in conference rooms off the division’s main trading floor in Wilton, Conn., debating what to do. Some have expressed worries about retaliation. One employee said he had instructed his wife to call the police in the event his identity became known and a news truck appeared at his home. Others commiserated that their children have been verbally abused in school. Employees have passed around emails from colleagues who opposed returning the payments.” Some Financial Products employees decided to return their bonuses. Mr. Poling indicated that he intended to return his bonus. “Fifteen of the top 20 recipients of the retention bonuses have agreed to give back a total of more than $30 million in payments.” Other Financial Products employees opted to keep their bonuses, perhaps the most notable being Jake DeSantis, a Financial Products unit executive who received an after-tax bonus of $742,006.40. On March 25, 2009, in an Op-Ed contribution to the New York Times, DeSantis published an open letter to AIG’s CEO, Edward Liddy, wherein he resigned from his AIG position. His letter read in part: After 12 months of hard work dismantling the company—during which A.I.G. reassured us many times we would be rewarded in March 2009—we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company. I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down. With respect to his intention to not return the retention bonus, DeSantis wrote, I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need. DeSantis’s Op-Ed piece stimulated much discussion regarding the proper response to the retention bonus fiasco. Did DeSantis do the right thing? This case was written by Michael K. McCuddy, The Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of Management, College of Business Administration, Valparaiso University. Discussion Questions 1. What types of work behaviors did AIG intend to encourage through its retention bonus plan? Answer: AIG's retention bonus plan aimed to encourage key employees to stay with the company during a critical period of restructuring and financial difficulty. The intention was to retain top talent essential for the company's recovery and stability, thereby ensuring continuity in critical roles and maintaining organizational expertise. 2. Which needs seem to be important to the employees of AIG’s Financial Products unit? Answer: The employees of AIG’s Financial Products unit seemed to prioritize security and financial compensation. The retention bonuses addressed their need for job security and financial stability during uncertain times, reflecting their emphasis on economic well-being and personal financial security. 3. Using the model of the individual-organizational exchange relationship, explain the relationship that employees of AIG’s Financial Products unit believed they had with the company. How was this exchange relationship violated? Answer: Employees perceived a contractual exchange with AIG, where their loyalty and expertise were expected to be rewarded with fair compensation and job security. The relationship was violated when AIG's decision to award large retention bonuses was publicly criticized, leading to a perception of unfairness and misalignment with broader organizational and societal values. 4. Which motivation theory do you think has the most relevance for understanding the responses of the Financial Product employees to the implementation and unraveling of the retention bonus plan? Explain the reasoning behind your answer. Answer: Equity Theory is most relevant, as it focuses on fairness and the perceived balance of inputs and outcomes. Employees likely felt their contributions were undervalued compared to the substantial bonuses, leading to feelings of inequity and dissatisfaction when the public reaction deemed the bonuses excessive. 5. The amount of compensation earned by executives—as well as by professional athletes and famous actors/actresses and musicians—often sparks emotionally charged debate. Do you believe the $1 million plus retention bonuses received by seventy-three employees of AIG’s Financial Products was excessive? Why or why not? Answer: The bonuses were perceived as excessive given the context of AIG's financial distress and the broader economic environment. The large sums awarded to employees during a bailout situation fueled public outrage, leading to questions about fairness and the appropriate level of compensation in times of crisis. 6. What would you have done if you were one of the seventy-three Financial Products employees who received a retention bonus of $1 million or more? Explain the reasoning behind your answer. Answer: If I were one of the recipients, I would consider returning a portion of the bonus or publicly acknowledging the situation to demonstrate empathy and align with public sentiment. This gesture could help restore trust, address concerns about fairness, and reflect an understanding of the broader impact of such compensation on the company's reputation and public perception. Quiz 1. Generally speaking, employees who receive rewards that are contingent on performance tend to perform: A: better. B: worse. C: about the same. Answer: A: Correct. B: Incorrect. Review p. 59. C: Incorrect. Review p. 59. 2. In spite of the fiercely negative public image, many AIG employees have chosen to remain with the company during the recent recession for fear that they will not find other jobs. This is an example of: A: organizational commitment. B: individual commitment. C: continuance commitment. D: normative commitment. Answer: A: Incorrect. Review p. 61. B: Incorrect. Review p. 61. C: Correct. D: Incorrect. Review p. 61. 3. AIG’s bonus payments are an example of: A: external incentives. B: internal needs. C: need for affiliation. D: valence. Answer: A: Correct. B: Incorrect. Review p. 73. C: Incorrect. Review p. 73. D: Incorrect. Review p. 73. 4. True or False? AIG’s bonuses, which were not linked to performance, were intended to address primarily the need for achievement. Answer: T: Incorrect. Review p. 76 F: Correct. 5. True or False? An employee’s salary can be classified as both a motivation and hygiene factor. Answer: T: Correct. F: Incorrect. Review p. 78. 6. In exchange for its contribution of bonuses, AIG demanded which contribution from employees? A: better performance. B: longer hours. C: integrating technology. D: staying at their jobs. Answer: A: Incorrect. Review p. 81. B: Incorrect. Review p. 81. C: Incorrect. Review p. 81. D: Correct. 7. True or False? As illustrated in this case, the employees of AIG were motivated by two conditions: expectancy and instrumentality. Answer: T: Incorrect. Review p. 83. F: Correct. 8. Which of the following is NOT an example of an external incentive? A: wage increases. B: stock options. C: affirmation from colleagues. D: bonus payments. Answer: A: Incorrect. Review p. 73-74. B: Incorrect. Review p. 73-74. C: Correct. D: Incorrect. Review p. 73-74. Case Study Compensation Controversies at AIG American International Group (AIG), a behemoth insurance and financial services company, became notoriously famous in early 2009 for the payment of $165 million in retention bonuses to employees in its Financial Products unitthe business unit that was instrumental in bringing AIG to its knees and necessitating the infusion of many billions of dollars in United States government bailout money, beginning in September 2008. Although the near collapse of AIG was significantly influenced by “soured trades entered into by the company’s Financial Products division,” the operations of other AIG units, such as the financial gambles of its 2,000-employee Investments unit, helped cripple the company as well. Rapidly mounting financial losses had been occurring in the Financial Products unit for some time. Consequently, AIG decided to unwind the business and shut it down. In early 2008, employees in the Financial Products unit were asked to remain with the company through the unit’s shutdown and, essentially, to work themselves out of a job. To entice talented employees to stay and work through the shut-down, a contractual retention bonus plan was instituted. According to a report in The Washington Post newspaper, the Financial Products employees were repeatedly assured, subsequent to the plan’s implementation decision being made in March 2008, that AIG would honor these contractual obligations. The bonus plan was highly favorable to AIG’s Financial Products employeesand the bonuses were not really linked to the employees’ performance. The unit’s employees were paid bonuses totaling $423 million in 2007, despite a paper loss of $11.5 billion on toxic real estate assets. The 2008 bonus plan, which was approved in March of that year by the board of AIG’s Financial Products unit just as the unit’s losses were beginning to surface, was “designed to kick in without regard to paper losses.” For 2008, paper losses on the toxic real estate assets ballooned to $28.6 billion, and total losses were more than $40 billion. According to New York Attorney General Andrew Cuomo, who was threatening legal action against AIG, 73 Financial Products employees received $1 million or more in bonus payments. The top recipient, identified by The Wall Street Journal as Douglas Poling, received more than $6.4 million, whereas the next half-dozen top bonus recipients got more than $4 million each. In addition, another 15 employees received $2 million or more, and 51 other employees received $1 million or more. “Of those people collecting more than $1 million, eleven had already left the company [by March 209], Mr. Cuomo’s office said.” When the retention bonuses were paid in March 2009, the United States Congress, President Barack Obama’s administration, and the public were outraged. Under intense political pressure, AIG’s then-CEO Edward Liddy, who was working for only $1 a year, asked the “bonus recipients to cough up half their pay, despite fearing that resignations would follow.” In defense of the bonuses, however, Gerry Pasciucco, head of the Financial Products unit, observed that the “top bonus recipient, Douglas Poling, had successfully sold off several holdings in his area of responsibility, infrastructure and energy investments. He’s done an excellent job at the task of unwinding his book, of realizing value.” In the ensuing emotionally-charged days, employees of the Financial Products unit pondered what to do. According to one account, “employees have huddled in small groups in conference rooms off the division’s main trading floor in Wilton, Conn., debating what to do. Some have expressed worries about retaliation. One employee said he had instructed his wife to call the police in the event his identity became known and a news truck appeared at his home. Others commiserated that their children have been verbally abused in school. Employees have passed around emails from colleagues who opposed returning the payments.” Some Financial Products employees decided to return their bonuses. Mr. Poling indicated he intended to return his bonus. “Fifteen of the top 20 recipients of the retention bonuses have agreed to give back a total of more than $30 million in payments.” Other Financial Products employees opted to keep their bonuses, perhaps the most notable of who is Jake DeSantis, a Financial Products unit executive who received an after-tax bonus of $742,006.40. On March 25, 2009, in an Op-Ed contribution to the New York Times, DeSantis published an open letter to AIG’s then-CEO, Edward Liddy, wherein he resigned his AIG position. DeSantis’s letter read in part: “After 12 months of hard work dismantling the company—during which A.I.G. reassured us many times we would be rewarded in March 2009—we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company. I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.” Because the United States Government bailed out AIG, along with numerous other financial institutions, through the Troubled Asset Relief Program (TARP), significant oversight of executive compensation was imposed on these recipient companies. Kenneth Feinberg has played a key role in addressing the controversy over the AIG retention bonuses. As the federal government’s overseer of executive compensation at AIG and other major TARP recipients, Feinberg tried “to recover $45 million paid to the most highly compensated executives, but AIG management said reclaiming the entire amount would be difficult because many employees who originally received retention awards have left the company.” In late October of 2009, Kenneth Feinberg, the federal government’s pay czar, rejected much of the proposed pay package that AIG put forth for “a group of highly paid employeesincluding five at the financial-products unit whose problems helped nearly sink the firmas inconsistent with the ‘public interest’.” Feinberg said base salary should not exceed $500,000 annually; however, he did not rule out bonuses for financial-products employees which were scheduled to be paid in 2010. Feinberg also allowed AIG to “compensate executives with ‘stock units’ tied to the value of four of its insurance unitsan outcome that executives at AIG had pushed for in negotiations. The stock units would be payable in three equal annual installments, starting two years after they were grantedin effect giving executives incentive to stay at the company and help it thrive.” “Feinberg rejected AIG’s proposal that five high-paid officials at the financial-products unit get ‘significant increases in cash base salary’ and total 2009 compensation of $13.2 million. He concluded that those employees should get only the cash salaries that were in effect at the end of 2008.” Did Kenneth Feinberg make appropriate decisions regarding executive compensation at AIG? Discussion Questions 1. What types of work behaviors did AIG intend to encourage through its retention bonus plan? Answer: AIG aimed to encourage employee retention and continuity of expertise during a critical restructuring period. The plan sought to keep key employees from leaving, ensuring their skills and knowledge remained with the company to aid in its recovery. 2. Which needs seem to be important to the employees of AIG’s Financial Products unit? Answer: Employees valued job security and financial stability. The retention bonuses addressed their need for economic security and assured their positions during a period of uncertainty. 3. Using the model of the individual-organizational exchange relationship, explain the relationship that employees of AIG’s Financial Products unit believed they had with the company. How was this exchange relationship violated? Answer: Employees believed in a fair exchange where their expertise and loyalty were met with adequate compensation and job security. The relationship was violated by the public perception of excessive bonuses during a bailout, undermining the fairness and integrity of the exchange. 4. Which motivation theory do you think has the most relevance for understanding the responses of the Financial Product employees to the implementation and unraveling of the retention bonus plan? Explain the reasoning behind your answer. Answer: Equity Theory is most relevant as it focuses on perceptions of fairness. Employees felt inequity when large bonuses were perceived as excessive, especially given the company’s financial troubles and public criticism. 5. The amount of compensation earned by executivesas well as by professional athletes and famous actors/actresses and musiciansoften spark emotionally-charged debate. Do you believe the $1 million plus retention bonuses received by 73 employees of AIG’s Financial Products was excessive? Why or why not? Answer: Yes, the bonuses were seen as excessive given the financial distress of AIG and the public scrutiny. The high compensation during a bailout situation conflicted with public expectations of fairness and responsibility. 6. Do you think that the various decisions made by Kenneth Feinberg with respect to executive compensation at AIG were justified? Explain the reasoning behind your answer. Answer: Kenneth Feinberg’s decisions aimed to balance fair compensation with public perception. His adjustments were justified in seeking to align executive pay with societal expectations and restoring trust, though opinions on fairness and effectiveness. SOURCE: This case was written by Michael K. McCuddy, The Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of Management, College of Business Administration, Valparaiso University. S. Ng and L. Pleven, “An AIG Unit’s Quest to Juice ProfitSecurities-Lending Business Made Risky Bets; They Backfired on Insurer,” The Wall Street Journal (Eastern edition) (February 5, 2009): C1. H.W. Jenkins, Jr., “The Real AIG Disgrace,” The Wall Street Journal (Eastern edition) (March 25, 2009): A11. H.W. Jenkins, Jr., “The Real AIG Disgrace,” The Wall Street Journal (Eastern edition) (March 25, 2009): A11. H.W. Jenkins, Jr., “The Real AIG Disgrace,” The Wall Street Journal (Eastern edition) (March 25, 2009): A11. R. Smith and L. Pleven, “Some Will Pay Back AIG Bonuses,” The Wall Street Journal (Eastern edition) (March 19, 2009): A1. R. Smith, J. Weisman, and L. Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay,” The Wall Street Journal (Eastern edition) (March 26, 2009): C1. R. Smith and L. Pleven, “Some Will Pay Back AIG Bonuses,” The Wall Street Journal (Eastern edition) (March 19, 2009): A1. R. Smith and L. Pleven, “Some Will Pay Back AIG Bonuses,” The Wall Street Journal (Eastern edition) (March 19, 2009): A1. R. Smith and L. Pleven, “Some Will Pay Back AIG Bonuses,” The Wall Street Journal (Eastern edition) (March 19, 2009): A1. R. Smith and L. Pleven, “Some Will Pay Back AIG Bonuses,” The Wall Street Journal (Eastern edition) (March 19, 2009): A1. Anonymous, “The AIG Mess Gets Worse,” Business Week (4125) (April 6, 2009): 6. R. Smith, J. Weisman, and L. Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay,” The Wall Street Journal (Eastern edition) (March 26, 2009): C1. R. Smith, J. Weisman, and L. Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay,” The Wall Street Journal (Eastern edition) (March 26, 2009): C1. R. Smith, J. Weisman, and L. Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay,” The Wall Street Journal (Eastern edition) (March 26, 2009): C1. R. Smith, J. Weisman, and L. Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay,” The Wall Street Journal (Eastern edition) (March 26, 2009): C1. J. DeSantis, “Op-Ed Contributor: Dear A.I.G., I Quit!,” NY Times.Com, http://www.nytimes.com/2009/03/25/opinion/25desantis.html (accessed February 6, 2014). M.A. Hofmann and J. Greenwald, “Treasury Ignored AIG Pay, Watchdog Says,” Business Insurance 43(37) (October 2009): 3 (2pages). L. Pleven, “Executive-Pay Limits: AIG Compensation Plans Fail to Pass MusterFeinberg Rejects Chunks of Packages for Highly Paid Workers; Bonuses Still Possible for Unit That Nearly Toppled the Firm,” The Wall Street Journal (Eastern edition) (October 23, 2009): A5. L. Pleven, “Executive-Pay Limits: AIG Compensation Plans Fail to Pass MusterFeinberg Rejects Chunks of Packages for Highly Paid Workers; Bonuses Still Possible for Unit That Nearly Toppled the Firm,” The Wall Street Journal (Eastern edition) (October 23, 2009): A5. L. Pleven, “Executive-Pay Limits: AIG Compensation Plans Fail to Pass MusterFeinberg Rejects Chunks of Packages for Highly Paid Workers; Bonuses Still Possible for Unit That Nearly Toppled the Firm,” The Wall Street Journal (Eastern edition) (October 23, 2009): A5. D.A. Hughes, A. Saha-Bubna, and M.R. Crittenden, “Feinberg Caps Pay at Rescued FirmsBut Five AIG Executives’ Compensation Will Exceed $500,000 Cash Limit for ‘Good Cause’,” The Wall Street Journal (Eastern edition) (March 24, 2010): C3; L. Pleven, “Executive-Pay Limits: AIG Compensation Plans Fail to Pass MusterFeinberg Rejects Chunks of Packages for Highly Paid Workers; Bonuses Still Possible for Unit That Nearly Toppled the Firm,” The Wall Street Journal (Eastern edition) (October 23, 2009): A5. Solution Manual for ORGB Organizational Behavior Debra L. Nelson, James Campbell Quick 9781305663916, 9781337148443
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