The Effect of Intrinsic and Extrinsic Rewards on Employee Motivation

“The effect of intrinsic and extrinsic rewards on employee motivation”

Introduction

Every person is motivated by different factors in their workplace. Some are motivated primarily by

external factors such as salary, promotion and bonuses. These are known as extrinsic rewards (Wilson &

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Madsen, 2008, p. 52; Manolopoulos, 2008, p. 65) and some are motivated primarily by internal factors

such as job satisfaction, recognition and the desire to learn, which are referred to as intrinsic rewards

(Wilson & Madsen, 2008, p. 52; Manolopoulos, 2008, p. 65, Ramlall, 2004, p. 10). This essay will explore

both of these reward types using a range of literature. Specifically the essay will explore the theory that

while extrinsic rewards can be motivating in the short term, intrinsic rewards are more sustainable

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and employers should aim to provide a balance of both reward-types to ensure employee satisfaction.

This essay will also uncover the dominant motivating factors of its author, and link these findings to the

literature. Then finally the essay will examine a case study relating to motivation, and apply the literature

reviewed.

Part one - literature review

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There is extensive literature on the topic of employee motivational factors, and within the literature

reviewed, there are opposing ideas about intrinsic and extrinsic rewards. Even within single pieces of

literature, there are differing ideas of intrinsic and extrinsic rewards, with the majority of authors leaning

towards intrinsic rewards as a prime motivator, and many advising on a balance of both to ensure

employee satisfaction. The main theme that arose from the literature is that different factors will

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motivate people for different reasons, but if they are not sustainable, then employee dissatisfaction may

result.

Intrinsic motivation

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A study by Eby, Freeman, Rush and Lance (1999, p. 465) reveals that there are four states that

employees can experience which contribute to intrinsic rewards and motivation. These are perceptions

of meaningfulness, responsibility, knowledge of results, and empowerment and exchange. These states

may fulfil employee’s job satisfaction because a sense of accomplishment is achieved. These perceptions

support the work of Linz, Good and Huddleston (2006, p. 417) who also believe that high moral, high

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work effort, and the need for achievement and meaning are intrinsic motivating factors. Wilson and

Madsen (2008, p. 52) also believe that intrinsic motivators are far more likely to be sustainable than

extrinsic. These author’s views supports the theory that extrinsic factors alone cannot sustainably

motivate employees. The next section talks about extrinsic motivators and will further explore the theory

that extrinsic motivators alone are not always going to be sustainable.

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Extrinsic motivation

On the other side of the coin, parts of the literature reveal that extrinsic factors such as pay, rewards and

bonuses play a significant role in employee motivation (Rynes, Gerhart and Minette, 2004, p. 381;

Manolopoulos, 2008, p. 63; Grant, 1999, p. 456). Studies and surveys performed by Rynes et al (2004)

and Manolopoulos (2008) revealed that the dominant motivator of employees was extrinsic rewards.

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Rynes et al (2004, p. 382) states that pay is nearly always the most effective motivator and their study

shows that on average, employees were more motivated by pay than any other type of reward.

Manolopoulos’ study (2008, p. 70) also went on to reveal that extrinsic rewards such as pay and job

security can motivate and empower employees. Although these authors all agree that extrinsic rewards

can be successful in motivating employees, it is this authors view that this is not always sustainable, and

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will only be successful in the short term. The reason for this view is that pay is sometimes only part of

the reason for an employee’s de-motivated state.

Mixture of intrinsic and extrinsic

Many of these authors show evidence that supports either intrinsic or extrinsic rewards as a means of

employee motivation, however those same authors also realise that a balance of both is paramount to Page 10 of 36


sustain employee satisfaction. Although Rynes et al study (2004, p. 386), shows compelling evidence that

pay is a substantial factor in employee motivation, they also recommend that a balance between

extrinsic and intrinsic rewards will assist with employee motivation. Tischler (1999, p. 275) and Wilson

and Madsen (2008, p. 56) also believes that pay and monetary incentives alone will not motivate, but

offering extrinsic in conjunction with meaningful work will assist employees grow and develop, and

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sustain satisfaction. Eby et al (1999, p. 475), as well as Linz et al (2006, p. 415), conducted convincing

surveys and both found that employees valued a very close balance between the intrinsic and extrinsic

rewards as motivators factors. The above evidence makes a compelling argument to support the theory

that mixing intrinsic and extrinsic rewards are important to sustainable employee motivation.

Part two – results of self assessment

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This next section will explore the outcome of my motivation tests from the Self Assessment Library

(Robbins, 2008). I will analyse each test, demonstrating my understanding of what they mean for my

current and future workplace behaviour, and I will link each to the above literature review.

Test I.C. 1: What motivates me?

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The first test gauges the order of importance in terms of a person’s existence, relatedness and growth,

also known as ERG theory (Robbins, Judge, Millett and Waters-March, 2008). This test also relates to

Maslow’s Hierarchy of Needs, which states that people are motivated by five needs which are:

physiological, safety, love, esteem and self-actualisation (Maslow, 1943, as quoted in Ramlall, 2004, p. 5).

This test revealed that my primary motivator is existence, which relates to pay and benefits. These are

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extrinsic motivators, and I believe that at this stage of my life, these are important to me. They are

important because I am recently married, I am on the about to purchase a second house with my

husband, and we planning to have children. As a result of this stage of life, pay and benefits are more

important to me than the other aspects of ERG theory. This may not always be the case, because later in

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life, I will be more career-oriented and I imagine the growth factor of ERG theory will be my primary

motivator.

Test I.C.2 - What are my dominant needs? McClelland needs

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The second test relates to McClelland’s Needs Theory (Ramlall, 2004, p. 5). My results in this test show

that the need for affiliation, i.e. the desire to interact socially and be accepted, were most important to

me, followed by achievement, autonomy and finally power. I did not find this surprising as I am a

sociable person, and I am constantly concerned with the need to be accepted by my peers, which could

be seen as intrinsic motivator. My next dominant need was achievement, which is the desire to excel and

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improve past performance (Ramlall, 2004, p. 5). This could also be seen as an intrinsic motivating factor,

and can benefit me in a working environment because it means that I will always strive to be better and

perform to the highest standard possible. This also aligns with the above authors who support that

intrinsic rewards are important.

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Test I.C.3: What rewards to I value most?

The final test examines what value I place on particular rewards (Robbins, 2008). This test relates to

Vroom’s Expectancy Theory which states that a person’s decision to behave in a certain way is

dependent upon the expected outcome of that behaviour (Robbins 1993, as quoted in Ramlall, 2004, p.

5). The rewards I found to be of extreme value to me were job security, vacation time, chances to

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advance and friendly co-workers. Followed by those were rewards of great value which are pay,

recognition, interesting work and flexible schedule. I believe this is a comfortable balance between

intrinsic and extrinsic factors and will be sustainable through my working life. This also aligns with the

literature reviewed and the theory that both intrinsic and extrinsic rewards are important for employee

motivation.

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The results of all three tests show that my motivating factors are a mixture of intrinsic and extrinsic

reward which aligns with the literature review, in particular the work of Tischler (1999, p. 275) and

Wilson & Madsen (2008, p. 56), and also supports this essay’s theory.

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Case study answers

Question one

From the case study, and based on the evidence in the literature review, it is apparent that Matt’s

motivation is primarily intrinsic rewards i.e. factors such as his work performance and the drive to

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succeed. This aligns with the work of Linz et al (2006, p. 417). When assessing Matt’s motivation in

relation to Maslow’s Hierarchy of Needs (Wilson & Madsen, 2008, p. 49), it could be said that the only

need Matt has not fulfilled is self-actualisation, which is his need to achieve (Wilson & Madsen, 2008, p.

48). Matt’s feelings towards Jack’s higher earnings could be causing part of his de-motivation and can be

analysed using Equity Theory (Ramlall, 2004, p. 5). That is, Matt believes that his salary is disproportional

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to his outputs and effort. Matt seems to be frustrated by this and displays a negative attitude as a result.

Matt’s case also relates to Expectancy Theory (Ramlall, 2004, p. 6) because at the end of the case study,

he will be taking on new challenges which may lead to a change in his behaviour and lead to positive

outcomes. Matt’s boss was smart to pose some new challenging goals to Matt to keep him motivated.

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Using Edwin Lockes Goal Setting Theory (Robbins et al, 2008, p. 189) could be a way to tap into intrinsic

factors to keep employees motivated and lead to higher performance levels.

Question two

If I were Peter Finch, I would take into account that Matt’s primary motivation is intrinsic rewards such as

challenging and meaningful work, as well as recognition (Linz et al 2006, p. 417). Although Matt says in Page 25 of 36


the case study that he is not motivated by money, I would make sure that his effort in his work is

reflected in his salary. I would also ensure I provided a balance of intrinsic and extrinsic rewards. This

approach aligns with the literature review and the work of Linz et al (2006, p. 415).

Conclusion

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This essay has covered many facets. Comparisons between intrinsic and extrinsic rewards were

discussed, and the benefits and detriments of both were analysed. There was compelling evidence to

suggest that while extrinsic rewards such as pay and bonuses can motivate employees in the short term,

they can prove unsustainable. A number of motivation test results were analysed. The results of these

tests also showed that a mix of intrinsic and extrinsic motivation can be a successful combination. Finally,

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in the case study, although Matt’s motivation did not purely rely on monetary incentives, the effort he

applied to his work should be reflected in his salary and any related bonuses. All aspects of this essay

provide substantial evidence to support the theory that while extrinsic rewards can be motivating in the

short term, intrinsic rewards are more sustainable, and employers should aim to provide a balance of

both reward-types to ensure employee satisfaction.

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Reference List

Journal Articles

Eby, L.T., Freeman, D.M., Rush, M.C. & Lance,. C.E. (1999) “Motivational bases of affective organisational commitment: A partial test of an integrative theoretical model”, Journal of Occupational and Organisational Psychology, 72, 463-483

Grant, P.C. (1999) “New Perspectives on Incentive System Design: Integrating the Theory of the Firm and the Theory of Individual Behaviour”, The Journal of Psychology, 133(4), 456-464

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Linz, S.J., Good, L.K. & Huddleston, P. (2006) “Worker Morale in Russia: an exploratory study”, Journal of Managerial Psychology, 21(5), 415-437

Manolopoulos, D. (2008) “An evaluation of employee motivation in the extended public sector in Greece”, Employee Relations, 30(1), 63-85

Ramlall, S. (2004) “A Review of Employee Motivation Theory and Their Implications for Employee Retention”, Journal of American Academy of Business, 5(1/2), 52-64

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Rynes, S.L., Gerhart, B. & Minette, K.A. (2004) “The Importance of Pay in Employee Motivation: Discrepancies Between What People Say and What They do,” Human Resource Management,43(4), 381-394

Tischler, L. (1999) “The Growing Interest in Spirituality in Business: A Long-term socio-economic Explanation”, Journal of Organisational Change Management”, 12(4), 273-279

Wilson, I. & Madsen, S.R. (2008) “The Influence of Maslow’s Humanistic Views on an Employees Motivation to Learn”, Journal of Applied Management and Entrepreneurship, 13(2), 46-62

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Texts

Robbins, S.P (2008) Self Assessment Library, New Jersey, Pearson Prentice Hall

Robbins, S.P., Judge, T.A., Millett, B. & Waters-March, T.(2008) Organisational Behaviour (5th Ed), Australia, Pearson Prentice Hall

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Documents

The Effect of Intrinsic and Extrinsic Rewards on Employee Motivation