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Labor Motivation Models
Labor Motivation in Russia



Workers, being human beings, present employers with a range of tricky problems. Things like ability levels, effort levels, and dishonesty are difficult to verify and present special problems for personnel managers and economic theorists. Motivation goal is not only to achieve the desired indicators from the employees, but create such work conditions to allow employees work for result and do it with pleasure. The ways that firms solve the problems of motivating and retaining employees are interesting to many economists because they can affect labor markets function and, therefore, the entire economy.
In this essay I will explore economists' main models of how employee motivation can be achieved and observe the situation on Russian labor market.

Labor Motivation Models
According to the theory of Frederik Herzberg published in 1950, the labor motivation is based on 2 groups of factors: factors of hygiene and motivation factors. To the first group belong company policy, management (approach and personality), remuneration, relations with colleagues and subordinates, labor conditions, status and safety. To the motivation factors belong achievement (fact of goal achievement), recognition, work (how much it is interesting), level of responsibility, professional growth and development.
Factors of hygiene refer to the minimum necessary for each employee to work productive and to perform the tasks and functions. Dissatisfaction in this area results in focus change. [1] For example, if the air temperature in the office is around 10 °C, the employee will not be able to work properly — he will be focused on the warming up process. At the same time, if the temperature will be changed, for example, to +22°C degrees, the employees will work better.
To satisfy the other motives of employees (related to motivation factors), the economists developed numerous motivation, or compensation, systems. Every top manager has to decide what motivation should be chosen in his company in order to obtain reliable, effective and committed employees.
Broadly speaking, the solutions fall into three categories (with considerable diversity within each): piece rates, performance bonding, and efficiency wages.
Piece rates directly link pay to workers' output. If the agency problem is related to the worker's productivity, there is an obvious approach to solving it: establish a direct connection between the worker's output and his compensation. Many workers are compensated in ways that resemble piece rates: garment workers who are paid on the basis of output, sales workers paid on commission, auto mechanics employed by large dealerships.
One pervasive problem of this approach: fraud and accounting tricks often allow employees to manipulate the measurement of output without any change in output. Or, perhaps worse, easily observable quantity may rise at the expense of less apparent quality.
The biggest impediment to the implementation piece rates is that the output of individual workers is not easily measured in many jobs; reasonable objective measures of performance do not exist. One reason is that it is usually difficult, if not impossible, to separate the performance of a particular worker from the overall performance of a group or the firm. This makes piece rates far less effective. Although a supervisor may be able to judge whether the worker is doing a good job over some period of time and set pay accordingly, this is not really a piece rate. First, evaluation by supervisors breaks the tight relationship between performance and pay that true piece rates can achieve in a simple environment. Second, it introduces a time dimension to the relationship between work and compensation, which changes the relationship in fundamental ways from the simple immediate reward system of piece rates. [2]
Performance bonding uses combination of up-front payments from workers and conditional repayments to guarantee their performance.
In the face of workers' inclinations to do various things contrary to the best interests of the firm, we can think about compensation in two pieces.
One piece is the level of compensation that the worker insists on before he agrees to work for the firm at all. Suppose that this piece includes any compensating differentials the firm must pay. So we can call this the wage. The second piece is what is necessary to convince the worker to perform optimally - to work hard, stay sober, be unlikely to quit, and so forth. We will call this the bonus. If piece rates were feasible, this bonus could be zero. It might also be zero if it is easy to monitor the worker's performance in relevant ways. As I argued above, these cases are not so popular and universal.
The wage does not help motivate the worker, because it simply measures the alternative value of his time. It does not motivate him to do things he is disinclined to do (e.g., work hard). Compensating differentials only reflect the market's valuation of things such as high effort, but without perfect monitoring of the employee's behavior, the compensating differential will not ensure that high effort is forthcoming. Clearly the bonus will also be of no use in motivating workers if it is not conditional on performance in some way. So the firm must have some kind of scheme whereby the worker is evaluated after some period and receives the bonus if the evaluation suggests that his performance exceeds some threshold.
Suppose that the evaluation is reasonably closely related to the worker's actual performance and that the firm is honest about it. If the bonus is big enough, it will provide adequate incentive for the worker to perform in the way the firm wants. How big it needs to be will depend on how likely it is that the firm's evaluation will detect suboptimal performance. [3]
There is a flaw in this plan, however. The worker's compensation (wage plus bonus) may exceed the value of his marginal product if the bonus is too large. One response would be to say that firms would simply find it unprofitable to hire workers whose compensation exceeds the value of their marginal product and that that is the end of the story. But here is a better idea: the firm requires the worker to give the firm some money at the beginning of the evaluation period and promises to pay it back with interest at the end, conditional on adequate performance. Now the firm is free to hire workers up to the point at which the value of the marginal product of labor equals the wage because the workers are posting a bond to guarantee their own performance. The firm still has to compensate workers to do things they do not want to do (pay a compensating differential, in other words), but the bond guarantees that the firm gets what it pays for (if the bond is large enough relative to the probability of getting caught).
We should say, however, that jobs which require an explicit bond, as just described, are extremely rare. There are no labor markets anywhere in the world where this practice has been really widespread.
Firms that pay wages high enough to deter undesirable behavior by making a job too good to lose are said to pay efficiency wages. The most obvious solution is to make jobs valuable in a direct manner—by paying more. The firm's strategy here entails the use of a "carrot" (the promise of a high-paying job). The contrary principle is a "stick" (the threat of dismissal). We assume for simplicity that workers could either work hard (high effort) or shirk (loaf).
The efficiency wage is the lowest wage that will induce high effort. Because the wage premium reduces profits, paying efficiency wages would be a second-best solution for the firm, if some form of performance bonds could be used. Because it must pay a wage premium, an efficiency-wage firm demands less labor and produces less output than an otherwise identical firm that does not have to pay efficiency wages (or can solve its problem with performance bonds).
It is fairly easy to see whether a firm is using some sort of piece rate plan. There is quite a bit of controversy, however, about whether firms that do not use piece rates adopt efficiency-wage or performance-bonding plans. These three compensation systems are based on monetary component and as nearly all common compensation systems, on "carrot" principle.
None of the labor motivation theories contains the "stick" principle. But the "stick" is used in considerable addition to the compensation package common for Russia - penalties and deprivation of bonuses. Employees can be fined for small disciplinary breach (coming late, term delay), as well as for serious activities - loosing client, sales plan non-fulfillment, image damage, etc. The penalty amount varies from small amounts till considerable part of the monthly pay-roll.
The companies that fully provide all components of compensation package to its employees cannot use the penalty method because it is the direct violation of the labor legislation. Exceptions are the situations when there is a concluded agreement on liability for breakage. If employees caused direct damage, it is compensated from their pay-roll during the definite period of time. It is worth mentioning that here the managers can use numerous tools and methods for implementing. [4]
The problem of penalty system is that it basically divides employees and employers into two enemy groups. Though, the main motivation principle - to find the common goal between company and employees - is broken. Penalties negatively influence the attitude to work and to employer, relations inside the company. Instead of the interest to work appears the fear that transforms into indifference and apathy. Fining the employee the company enters his safety area, because it reduces the stimulus affecting the hygiene factors.

Labor motivation in Russia
If we analyze the motivation level of the employees in Russia and on post-soviet territory, we can come to the following conclusions. In many situations both top management and employees consider each other as enemy parties. Employees believe the employer should be thankful they are coming to work. Remuneration of their work is another aspect. Employers think the employee should be thankful for the provided opportunity to work.
Increasing work dissatisfaction and value disorientation were characteristic of the crisis of Soviet society. And post-Soviet development, relying on private property-based institutions, has not yet produced an adequate work motivation shared by all members of society. Big business is not conscious of its social responsibility. Mid-sized and small business is in a difficult situation now. Huge masses of working people (engineers, skilled workers, physicians, teachers and other mass occupations) have gone off the rails during 90s. Motivation based on job certainty, on respect for skills and one's occupation has been undermined.
In most companies on the post-soviet territory small cheating, stealing and bribe-taking are widespread mass actions known by both management and subordinates. The following fact explains why the penalty system works successfully in our companies. It can be considered effective and even necessary - as a weapon with the enemy representatives. But the thing is that such system does not unleash the potential of the employee and gives no guidance for him as well as for the company to achieve the common goal and prevents from achieving the maximum result. Nevertheless, numerous companies believe that without penalty system, the atmosphere of impunity and disorder will dominate. Such situation remains unchanged until the employers realize that the approach to compensation system should be basically changed.
Fortunately, characteristic feature of the current management in Russia is recognition of the growing role of human factor and development of new forms and methods of staff management.
Talking about possible alternatives, the most successful compensation system is optimal mix of fixed pay-roll as hygiene factor and additional remuneration (bonuses) as motivator. Effective system should combine personal results as well as labor deliverables of the department, connecting the personal responsibility with the collective one. Thus, the participation feeling appears. The level of personal responsibility for work results increases and everyone clearly understands: if the company loses, each employee loses as well.
All these misfortunes of Russian national companies to implement successful motivation approach have led to the fact that Russia's Best Employer Ranking consists of foreign companies. Hewitt Associates, a global human resources services company, announced the results of Hewitt's Best Employers Study the first time held in Russia in 2007 year. The study surveyed nearly 17,000 employees and 300 senior leaders at 64 companies in Russia (including Central European region, Urals, Eastern and Western Siberia).
List of Best Employers in Russia 2006/2007:
1. Moscow-McDonalds
2. Microsoft (Russia)
3. GlaxoSmithKline
4. Nycomed Russia
5. Novartis Pharma
6. TMK
7. State Corporation "Bank for Development and Foreign Economic Affairs"
8. Cadence Design Systems
9. Kimberly-Clark - Russia
10. Corporation'TNKOM-nedvizhimost"
The survey also revealed that only 50% of Russian employees agree that companies in Russia are successful in motivating, retaining and attracting talents.
As the competition on the labour market is continuously growing the biggest challenge for employers appears to be retaining and motivating their people. The Hewitt study showed what are the most important factors for Russian employees today that can influence their final choice of remaining loyal to their current employer or leave it for the sake of the other one: First, these are Career Opportunities - moving up the career ladder is one of the main drivers which can stimulate employees to demonstrate outstanding results. Career and succession planning remains among the main factors why employees choose to look for other places to work for as they do not see opportunities of professional development inside their organization.
Professional growth and development naturally lead to higher salary expectations which brings us to the second factor, Compensation - fair as well as transparent compensation package is considered by employees one of the sufficient ways to high performance and motivation of personnel.
Third, this is Recognition and valuing people factor - employee motivation can be boosted if employees feel like being a valued part of the organization, not just 'bio robots'. Open communication on strategic issues, involvement in important decisions and empowerment, innovation enhancement, recognition of achievements can send the message to employees that they really count and are treated as the most valuable asset of the company. [5]
Of course, among Russian companies there are also positive examples of successful implementing of motivation policies. OAO "Gazprom" can be taken as a good one. With a view to improving labor force related work, in 2006 Gazprom developed and endorsed the Personnel Management Policy. It is aimed at establishing an efficient human resources management mechanism based on social partnership. In order to ensure financial interest of Gazprom's management staff in the Company's efficient development, in 2006 the company introduced a financial motivation system for the management of OAO Gazprom and its major subsidiaries, which includes an annual bonus system and a program for allocating OAO Gazprom shares as a bonus. [6] One of the most important social guarantees in Gazprom is an additional pension program, which involves monthly payment of non-government pensions to the employees by Non¬government Pension "Fund «Gazfund» or monthly additional payments to the government pension.

Motivation is an extremely important issue for any company. The three main approaches to implementing motivation policies observed in this essay are based on the monetary component. The system of fines and penalties is typical for Russian business which results in many problems.
Russian companies should change their attitude towards compensation in order to cultivate valuable and committed employees, motivate and retain them. The best employers on the Russian market are foreign companies and our national employers should use the practice and the experience of these successful foreign organizations in order to make the labor of their employees more efficient.

[1]. Helen Volska, "Motivation system - to give or to take", "General Director" magazine. October 2005.
[2]. "Economic Models of Employee Motivation", Joseph Ritter and Lowell J. Taylor, 1997.
[3]. "Economic Models of Employee Motivation", Joseph Ritter and Lowell J. Taylor, 1997.
[4]. Helen Volska, "Motivation system - to give or to take", "General Director" magazine. October 2005.
[5]. http://www.good2work.com/article/6688
[6]. http://eng.gazpromquestions.ru/?id=l 6

1. Helen Volska, "Motivation system - to give or to take", "General Director" magazine, October 2005.
2. http://en.wikipedia.org/wiki/Efficiencv wages
3. Leonard, N. H., Beauvais, L. L., & Scholl, R. W. 1999. Work motivation: The incorporation of self based processes.
4. "Economic Models of Employee Motivation", Joseph Ritter and Lowell J. Taylor, 1997.
5. http://eng.gazpromquestions.ru/?id=16
6. http://www.good2work.com/article/6688

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