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Use of Intrinsic and Extrinsic Rewards on Improving Job Performance in an Organization

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Universiti Malaya
Faculty of Business And Accountancy
Master of Business Administration
Semester 2, Session 2012/2013

CSGB6101 Human Capital Management
Group Assignment

The Use of Intrinsic and Extrinsic Rewards
on Improving Job Performance in an Organization

Date of Submission:
18 May 2013
Word Count:

In the world of rapid changing environment and globalization, for an organization to compete favourably and competitively, the performance of their employees goes a long way in determining the success of an organization (Ajila and Abiola 2004). Both public and private sectors organizations are putting increasing attention on human resource management to maintain and motivate its most valuable and worthy assets, the employees. According to Catalini (2012), organizations are taking more of a proactive stance towards ensuring employees are satisfied with their place of employment and feel a level of commitment and connection to employers. Back then, employee satisfaction is often not a primary focus of an employer. Organizations routinely focus on finances, production, and pleasing customers and neglect the impact their actions or lack of action has on employee satisfaction. The consequences may be seen in products or services that are not up to standards and an increase in turnover and increase in cost for employers. Hence, finding the right balance between employee satisfaction and its enhancement of employee motivation and performance is imperative as it will have positive effects on several aspects of an organization, including lowering turnover rates and increasing productivity and profit.

The use of rewards has been found over the years to be one of the management tools in the organization to increase job performance. Besides, it is common to offer employees attractive, lucrative and competitive remuneration packages. For example, an attractive reward packages has been a norm of any employment contract. These have a direct link or inter-related to improving employees’ job competency, retaining high achievers and finally achieving the organizational performances and goals (Mansor, Borhannudin and Mohd Yusuf 2012).

Besides, performance of employees in any organization is important not only for the growth of the organization, but also for the personal growth of the employees (Ajila and Abiola 2004). The rewards systems for employees are now closely connected to the performance measurement indicators of an organization. If the rewards does not commensurate with their performance, this will lead to low motivation and high attrition, which eventually affecting the service delivery (Nabiha, Thum and Sardana, 2012). Hence, rewards are very important to ensure that adequate and reasonable reward packages can significantly increase motivation of employees to increase work performance.

Generally, a reward is given in return for good work or in recognition of merit or for performance of a service rendered. McCormick and Tiffin (1979) suggested that rewards can be either intrinsic or extrinsic. Intrinsic rewards classified as rewards that are inherent in the job itself. Employee feels satisfied and enjoyed when tasks are completed successfully or attain his goals. On top of that, intrinsic reward is also referred as “psychological” rewards. Examples of intrinsic rewards are opportunity to use one’s strength, a sense of achievement from completing the job, challenging roles, receiving appraisal, and positive recognition and appreciation towards one’s effort, and last but not least being treated in a caring and respected manner.

On the other hand, extrinsic rewards are those that are external to the task of the job, such as pay, work condition, fringe benefits, security, promotion, contract of service, the work environment and conditions of work.
Such tangible rewards are often decided at the organizational level, and it is not within the control of individual employees. Ajila and Abiola (2004) suggested that for an individual to be motivated and commited in his job, there must be a need that the individual would have to perceive a possibility of satisfying oneself through some rewards. For instance, if the works inherently contains elements that is satisfying, individual will feel intrinsicially motivated and will be motivated to complete his job. Likewise, if the individual perceives that he could gain external rewards from completing the job, he will be extrinsically motivated and committed in accomplishing the job.

Problem statements
As it’s a known fact that employees’ performance can be improved by increasing motivation, deciding which type of rewards to motivate employee is of important to bring the best out of the employee. Having stressed the importance of a good remuneration policy on the performance of employees and the different kinds of reward that can influence employees to perform better on a job, it is relevant that employers are committed to put in place appropriate incentive plan that will motivate workers to be more purposeful and improve their job performance. Making sure to know what motivates the employees is the mark of an enlightened leader, and rewards policy need to have the flexibility to be tailored to fit the needs of individuals and the organization. As rewards management has been a crucial to determine success of an  organization, it is essential to comprehend what type of rewards, either intrinsic or extrinsic, can be used in today work dynamics to motivate employees to improve job performance.

Objective of the study
The objectives of this study are to determine the relationships between intrinsic rewards and extrinsic rewards on job performance, as well as to examine the most effective types of rewards that may improve job performance. The following are the topics that we will be discussing in the study :1.

To discuss the relationship between intrinsic rewards and job performance.


To discuss the relationship between extrinsic rewards and job performance.


To examine what are the most effective types of rewards to towards improving job performance.

Literature Review
Job motivation and reward system
Good remuneration packages have been proven over the years to be one of the policies that organizations adopt to increase their workers performance and thereby increasing the organizations productivity. Organizations offer intrinsic and extrinsic rewards to members for the purpose of improving human resources outcomes (Mahaney and Lederer, 2006). The reward system should be aligned to motivate employee performance that is consistent with the organization’s strategy, attract and retain people with the knowledge, skills and abilities required to realize the organization’s strategic goal, and create a supportive culture and structure (Allen and Killman, 2001a).

Reward systems are strategically designed when rewards are linked to activities, attributes and work results that support the organization’s strategic direction and that foster the achievement of strategic goals. Such linkages can lead to improved skills and knowledge, flexibility, commitment, retention and productivity (Howard and Dougherty, 2004). Reward systems are likely to have a direct effect on the direction of employees’ individual attention and effort (Bamberger and Levi, 2009).

Rewards that an individual receives are very much a part of the understanding of motivation. Research has suggested that rewards now cause satisfaction to the employees and it directly influences the performance of the employee. Lawler (1985) concluded that factors influence the performance with regards to work. Firstly, it depends on the amount received and the amount the individual feels he or she should receive. Secondly, comparison to what others collect influences peoples performance, and thirdly, and employee’s satisfaction with both intrinsic and extrinsic rewards received affects overall job performance.

Fourthly, people differ widely in the rewards they desire and in the value they attach to each. And the firth, that many extrinsic rewards satisfy only because they lead to other rewards. The observations above suggest the need for a diverse reward system. Numerous rewards systems operate within organizations. It is seen in the literature that reward practices of businesses are mostly analyzed under the classification of intrinsic and extrinsic rewards (Mahaney and Lederer, 2006).

Extrinsic Rewards
Remuneration factors that are external to the job such as pay, work condition, security, benefits, promotion contract of services and work environment are examples of extrinsic rewards (Mansor et.al 2012) that employees can find very motivating, and to be most effective should be provided fairly, strategically, and linked to performance. Bonuses, raises, paid vacations and promotions are also included in here. Profit sharing, tuition reimbursement and paid or unpaid leave to pursue further education are practiced by some businesses as additional strategies in determining job satisfaction. Extrinsic rewards drive employee’s morale and the rewards distribution has always loomed large in corporations particularly in tune with performance appraisals in present eras of globalization (Datta 2012, Appelbaum et al., 2011).

A research article by Jenkins, Gupta, Mitra, and Shaw (1998) showed that providing extrinsic rewards motivate in enhancing work performance. The study was conducted using a meta-analytic review of empirical research, and the goal behind the study was to determine whether monetary rewards or gifts and material items were more apt to increase motivation and productivity amongst employees. From the results of this meta-analysis study it is known that extrinsic rewards do correlate with a higher level of performance and outcomes from employees seeking to obtain the rewards. Data concluded that an increase in activity ranged from 24% to

54%, showing a positive correlation between extrinsic rewards and increased quantity. Material rewards were more effective in increasing performance, but monetary offerings also had a positive effect and increase in performance. The meta-analysis study completed by Jenkins et al. (1998) does indicate that extrinsic rewards based on material items and monetary compensation can increase employee performance, but it is important to point out that the study does not prove that employee satisfaction and motivation are maintained for the long term and will sustain at a high level if the material and monetary enticements are not continuously offered.

The research studies show that extrinsic motivators can improve performance and satisfaction of employees in a variety of jobs and roles. It is important to also explain that there may be a direct relationship between how extrinsic rewards are structured and presented to employees, since the approach can have either a positive long-term effect on motivation and performance or the opposite effect and cause feelings of unfairness among employees, which will lead to job dissatisfaction and decreased motivation.

An article titled “Getting ‘More Bang for the Buck’: Symbolic Value of Monetary Rewards in Organizations” (Mickel & Barron, 2008) discussed that to increase motivation and satisfaction it is important to set up an extrinsic reward system. Symbolic value can be explained as the meaning associated with the monetary or material reward. The effects of the reward system may have negative results if the system set up to decide who receives rewards and how they are dispersed is seen as flawed by employees.

The article suggests that when designing a system there are several factors need to be considered to ensure its intentions of motivating employees through extrinsic satisfaction. Fairness issues must be considered. According to equity theory and distributive justice, employees must feel that the reward is fair and equitable. Observing a fair and honest practice to determine who receives the reward is very important. Several aspects of employee roles and performance are considered rather than just be based on a sole category such as attitude or performance.

Just by having high output of performance although not a team player or displays a negative attitude in the workplace, that person’s receipt of the reward may cause other employees to view the reward practice as not fair. Therefore where the reward might have had a direct motivational effect on one employee, it indirectly might cause a decrease in satisfaction and motivation for a group of employees. Hence, factors such as who is presenting the reward, why the rewards are distributed, how they are distributed,

and who receives them and why are important distribution practices in the success of extrinsic reward programs. The article discussed the importance employees feel when rewards are given by high-up executives and in a setting where they feel recognized by many at the workplace.

Bergum and Lehr’s (1964) study, which investigated the influence of monetary incentives and its removal on performance, showed that the subjects in the experimental group who received individual incentives performed better than those in the control group. Daniel and Caryl (1981) study was designed to explore the ability of the investment model to predict job satisfaction and job commitment. The result showed that job satisfaction was best predicted by the reward and cost value of the job. And job commitment on the other hand was best predicted by a combination of rewards, cost values and investment size. Extrinsic are concrete rewards that employees can find highly motivating, and to be most effective, rewards should be provided fairly, strategically, and tied to performance. It remains significant for workers as pay is an important consideration for most workers in accepting a job, and unreasonable pay can be a strong de-motivator.

The creativity of movie and short-story titles developed by two groups of preadolescent students were compared by Eisenberger and Rhoades (2001): one group was rewarded during a prior training task (generating creative uses for common objects) and another group was trained but received no monetary rewards. Results indicated that students who received money during the initial training task compared to individuals who received no money developed more creative titles. In another study, Eisenberger and Rhoades examined whether college students with the promise of a financial reward could generate more creative short-story titles. Results showed that the students who were promised money produced more creative than the titles of students who were not promised rewards. Individuals’ feelings of personal control may be enhanced, thereby boosting levels of intrinsic motivation and creativity with the presence of extrinsic rewards.

Effective rewards management influence employees’ affective commitment, motivation and subsequent high organizational performance and this are clearly reflected in practice examples. Google, for example, was ranked 4th in Fortune’s Top 10 Best Companies to work for, branding it as one of the most desirable employers worldwide (CNN Money, 2011). Company reports indicate a high rate of employee satisfaction, low employee turnover and high organizational profitability. Both monetary and non-monetary rewards are incorporated in Google’s employee management and retention strategies. Google employees receive an average salary of £86 800 a year, as compared to an average of £21 500 in the UK private sector (Rupert, 2011).

Besides, Google’s reward management strategy includes flexi-time and a work environment in line with changing work patterns that promotes employees’ work-life balance. Google has created specialized work environments where its employees are encouraged to spend 70% of their time on core business tasks, 20% on projects related to the core business and 10% on any pet projects unrelated to the core business (The Google Culture, 2011). This serves to boost employees’ competitive intrinsic motivation, as well as rewards and job satisfaction while help Google to improve business operations and maximize financial opportunities. Perkins’ (1988) suggested that individuals who are intrinsically motivated seek opportunities to solve boundary-pushing challenges, demonstrate high levels of commitment to their organization and are thus less likely to leave the employment relationship and this being one of the Google’s strategy. Hence, we can conclude that when applied the rewards in the right way they can generate significant results.

Intrinsic Rewards

Intrinsic reward is intangible reward or recognition that an individual received from performing meaningful work and did it well. McCormick and
Tifflin (1979) pointed out that intrinsic reward is defined as stems from rewards inherent in the job itself and which the individual enjoys as a result of successfully completing the task or attaining goals.

In another article by Ajila and Abiola (2004), intrinsic reward are defined as ‘psychological rewards’ and the examples of intrinsic rewards are opportunity to use one’s strength, a sense of challenge as well as achievement, receiving appraisal, positive recognition, and being treated in a caring and considerate manner.

Refer to earlier research article by Ajila (1997), an extrinsically motivated person is committed for external rewards. However, an intrinsically motivated individual will be committed for inherent job contains tasks that are rewarding. Her article further suggested that to maintain motivation in a work situation; there must have both “need” and “drive” to perceive the possibility of reward satisfaction.

There is another study by Kenneth Thomas (2009) on the important benefits of the intrinsic reward to an organization. The results showed that retention by keeping the people who are energized and self-managing, intrinsic rewards are strong predictors. The employees with high levels of intrinsic rewards will eventually become informal recruiters and marketers for their organization because they will recommend the organization to friends as a place to work and its products and services to potential customers. Besides, intrinsic rewards are identified as sustainable and healthy source of motivation for people. This is because of intrinsic motivation is very much self-sustained and hard to wear off.

Beswick (2007) observed that some people participate more out of interest in a task than others. While some gain satisfaction mainly from which performance on the task leads to physical rewards. He pointed that intrinsic motivation is defined as a process of satisfaction in which the rewards come from carrying out an activity rather than the outcome of the activity. He commented that rewards being intrinsic to a task rather than being a means to an end that is rewarded or satisfying. When people are intrinsically motivated, they tend be more alert of a wide range of events, while giving careful attention to complications, inconsistencies, novel events and unforeseen possibilities. They require more flexibility to make decisions, to acquire new information, and have an appreciation of well finished and integrated products, all of which may lead to more in-depth learning and more creative outcomes. In his view, intrinsic motivation is regards to be appetitive, and new information will further add on to the appetite. For instance,  undertaking a scientific research project can satisfy personal development goals while at the same time intrinsically rewarding in oneself. Satisfaction achieved from such incentives is seen to be intrinsic to the person rather than to the task.

In overall, the intrinsic rewards will create self-sustained and a strong form of motivation for both employees and organization. This kind of motivation is strengthening on the employees’ shared desire on their work which will make an excellent contribution to meaningful reasoning, so that they will be very much performance-driven. It represents self-management and professional development demanded by younger workers. Furthermore, intrinsic rewards will make a person more independent.

Employees are the most important assets of an organization. Organizations that have the ability to identify the best reward system for its employee will not only able to attract and retain employees but also motivate them to achieve organization’s goal. Intrinsic and extrinsic reward system is to encourage desired employee behaviors to ensure the success of human resource strategies. Therefore, it is crucial that organizations design and deploy a suitable reward system that complement human resource strategies and fits the business competitive strategy.

Using the business competitive strategies as described by Porter, we identify the attributes of the competitive strategy selected and then deduce a suitable human resource strategy (innovation-oriented, contribution-oriented
and commitment-oriented). To support the human resource strategies and facilitate the implementation of the business competitive strategy, an appropriate reward system (intrinsic reward, extrinsic reward, combination of both) is finally determined.

Competitive strategy


cost Differentiation


Human resource




extrinsic reward

intrinsic reward


Reward systems


intrinsic and extrinsic

Table 1: The strategic fit between human resource strategies, reward systems and competitive strategies

An organization that implements differentiation as competitive strategy emphasize on delivery of highly customized and unique product or service. Such product or services are highly valued by customers thus organization enjoys a strong loyalty sentiment from customer. Customers do not mind paying a premium price for such unique and high quality product or services. The success factor of differentiation strategy depends on the organization’s ability to cultivate creativity and innovation among its employees to provide high quality product or services. Therefore, an organization that implements differentiation strategy should use innovation-oriented as its human resource strategy.

Organization that implements differentiation strategy produces high quality product or service via extensive research and development activities. This includes the use of sophisticated machinery or latest technologies to be able to produce product or services that satisfies customer’s expectation. Therefore, organization must reward employees that have such skill set and innovation. Intrinsic reward system is the best fit to reward employees in an organization that practices innovation-oriented human resource strategy. By offering intrinsic rewards, employees will be more motivated to develop their creativity and innovation. Intrinsic rewards such as flexible work schedule as employees becomes more qualified in their work. Providing recognition and human capital-based pay to outstanding employees will also motivate them to produce high quality product and services that eventually increases organization’s reputation.

Organizations that implement competitive strategy of cost leadership strategy will always try to lower production cost and aim to be the lowest cost producers in the industry. Customer will stable demand of products and services with reliable qualities. There will be less management discretion to monitor the production of product and services.


organization that adopt overall cost leadership strategy should use contribution-oriented human resource strategy.

Organizations that implements competitive strategy of cost leadership strategy need to continuously reduce costs and achieve more economies of scale. Such strategy requires a human resource strategy of contribution-oriented because more weight needed to be applied to first-line producers and sales personnel. Only through this way, they will boost their performance or productivity to bring in more sales or reduce wastage in production/operational processes. An extrinsic rewards system complemented by contribution-oriented will ensure success of organization implementing cost leadership strategy.

Organizations that implements focus competitive strategy will concentrate its resources to a niche or specific segment market. Although focus competitive strategy concentrate on a niche market, the organization will strive to achieve differentiation or cost advantage in that niche market. Organizations that successfully implement focus competitive strategy will enjoy high customer loyalty and prevents competitor from competitor from entering the niche market. Organization needs highly experienced employee to produce products and services within that particular niche market. Therefore, an organization that implements competitive strategy of focus will have commitment-oriented human resource strategy.

Focus strategy can be cost-focused or differentiation-focused. Organizations that adopt competitive strategy of focus need to offer a positive reward system that include combination of extrinsic and intrinsic rewards in order to retain experienced employees and cultivate their commitment to the organization. This includes extra annual leaves, sponsored company trips, employee stock options scheme, job security, letter of appreciation and flexible working hours.

After interviewing few employees at Astro, we concluded that Astro is
implementing Focus strategy whereby Astro position itself to serve target market segment by offering differentiated TV channels to meet customers’ s needs. At the same time, Astro strategize to be the low cost provider within its broadcasting industry due to economies of scale. We found out that the company is implementing commitment-oriented human resource strategy whereby it focuses on both Extrinsic and Intrinsic rewards to motivate and retain its employees.

Most of the Astro employees that were interviewed from various departments in Astro such as production, marketing, censorship, programming, and customer service agreed that their pay is at least on par with market rate, if not better. Besides, we also found that most of the customer service officers are fresh entrants and they feel satisfied and enthusiastic with the starting salary of RM 2,500. On top of that, fresh entrants are also able to get OT allowance when usually not the case in other companies.

According to them, Astro provides a better perks than other MNCs whereby under the extrinsic rewards, apart from the basic pay, Astro extend the employee benefits by providing medical care, group insurance, ESOS etc. Furthermore, some employees from production department claims that the flexi working hours allowed in Astro provide them a work-life balance. The censorship department staffs also added that they enjoy working on shift and they only work for 4 days in a week with 3 days off.

Astro offers its employees opportunities to learn new skills set in their works. According to the production team, they’re very proud to be in the team as they are the first person to learn new technology in the movie making or television program producing industry. This helps Astro employees to keep pace with the latest technology and knowledge in the rapid changing broadcasting environment. In turn, the employees are more willing to take-up the challenges in work, for example setting new program with new technology, i.e. HD programs. Some programming staffs commented that they are happily attached to Astro as they get to acquire new knowledge and skills from various training, namely First Aid, Fire Escape, CSR etc. that are provided free to Astro employees. They claim that it’s an annual routine for all the staff to comply the training requirements and the trainings are beneficial
and informative to them.

This study showed that intrinsic and extrinsic rewards are effective towards improving job performance. In today’s highly competitive world, organizations that able to deploy the right rewards system will drive worker’s performance and motivate workers in achieving achieve organizational goals. This study serves as a framework for organizations to select appropriate reward systems tailored to the specific circumstances of the organization, with reference to the competitive strategy and human resource strategy selected.

Organizations that deploy differentiation as competitive strategy should use innovation-oriented as human resource strategy and intrinsic reward system would be suitable. Organization that deploy overall cost leadership as competitive strategy should use contribution-oriented human resource strategy and extrinsic reward system. Lastly, organizations that deploy focus competitive strategy should use commitment-oriented human resource strategy and a combination of both extrinsic and intrinsic reward system to get the best from its workers.



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