IB Business Management HLTopic 2 — Motivation and DemotivationPaper 1 & 2Core idea~9 min read
Paying People to Perform
Financial rewards are payments made to employees in return for their labour, or for better performance. They are the most obvious motivator and the most misunderstood one — because money reliably changes behaviour, and just as reliably fails to make anyone love their job.
📚 What you need to know
The main financial rewards: wages and salaries, piece rate, commission, bonuses, profit share, performance-related pay and fringe benefits.
Wages are paid per hour worked or per item produced. Salaries are an annual figure paid in monthly instalments.
Most pay packages mix a fixed base with a variable element tied to output or results.
In Herzberg’s terms, pay is a hygiene factor: too little causes dissatisfaction, but more of it does not create motivation.
In Maslow’s terms, pay meets physiological and safety needs, while bonuses and commission can reach esteem needs.
The right mix depends on whether output can be measured and whether the job needs quality or quantity.
Fixed pay and variable pay
Almost every reward package is a blend of two things: money you get for turning up, and money you get for producing. The proportions say a lot about the job.
A heavily variable package pushes effort hard, but it also makes income unpredictable. That works for a confident salesperson and terrifies someone with a mortgage and a quiet month.
The rewards, and what they connect to
Reward
How it works
Link to theory
Wages and salaries
Wages are paid by hours worked or items produced; salaries are annual and paid monthly.
Maslow’s safety needs; a Herzberg hygiene factor.
Piece rate
Paid per unit produced. Common in manufacturing and assembly work.
Straight out of Taylor’s scientific management.
Commission
A percentage of the sales revenue the worker generates.
Esteem needs in Maslow; a hygiene factor for Herzberg.
Bonus
An extra payment for hitting a goal, finishing on time or exceeding expectations.
Esteem needs (achievement). Herzberg warned that bonuses as the main pay method distort behaviour.
Profit share
A slice of company profits distributed among staff.
A Herzberg motivator: it creates ownership and shared responsibility.
Performance-related pay
Pay based on an appraisal of the individual’s performance.
A hygiene factor, and widely criticised as subjective and open to abuse.
Fringe benefits
Non-salary financial rewards: health insurance, a company car, a pension.
Can meet esteem needs where they signal status in the hierarchy.
The trap in piece rate. Paying per unit maximises quantity, and quality is what pays the price. If a case study firm has both a piece rate and a rising defect rate, you have found the cause — and the fix is to pay only for units that pass inspection.
Piece rate against time rate
The two systems reward completely different behaviour, and the choice between them depends on whether output can be counted fairly.
Piece rate transfers risk to the worker. A machine breakdown, a slow day or a difficult batch costs the employee money under piece rate, and costs the employer nothing.
WORKED EXAMPLE
A factory pays either a time rate of $50 a day or a piece rate of $1.20 per unit. A worker makes 45 units a day. Calculate which pays more, and find the output at which the two are equal. (4 marks)
Step 1: pay under piece rate45 × $1.20 = $54Step 2: compare$54 is $4 more than the $50 time rateStep 3: the break-even output$50 ÷ $1.20 = 41.7 unitsPiece rate pays more above about 42 units a dayAnyone producing fewer than 42 units loses money on piece rate. That is why unions often resist it, and why it can push workers to rush.
WORKED EXAMPLE
Since introducing piece rate, the factory’s output has risen 12% but customer returns have doubled. Evaluate the decision to use piece rate. (6 marks)
In favour
Output rose 12% with no extra staff, so labour cost per unit fell and the factory can meet larger orders. The scheme clearly changed behaviour.
Against
Returns doubled. Piece rate rewards quantity only, so workers rush and quality suffers. Returns cost money twice: replacing the goods, and losing the customer’s trust.
Keep piece rate, but pay only for units passing inspectionThis is the strongest kind of answer: it keeps the benefit, fixes the specific flaw, and explains why the fix works.
Herzberg’s warning about bonuses is worth remembering. He argued that making bonuses the main form of pay distorts behaviour — people optimise for the bonus rather than for the job. Plenty of financial scandals have followed exactly that pattern.
💡 Exam tip
Ask whether output can be measured. Piece rate and commission only work where individual output is countable and fairly attributable.
Always name the theory link. Saying pay is a Herzberg hygiene factor takes an answer up a band.
Raise the quality problem whenever quantity is rewarded.
Consider the team effect: individual commission can damage cooperation, while profit share encourages it.
Mention cost and predictability. Variable pay lets a firm’s wage bill fall automatically when sales fall.
For evaluation, weigh the financial package against non-financial rewards. The best packages use both.
⚠️ Common mix-up
Wages versus salaries. Wages are per hour or per item; salaries are annual, paid in instalments.
Commission versus bonus. Commission is a percentage of sales generated; a bonus is an extra payment for hitting a target.
Calling pay a motivator for Herzberg. It is a hygiene factor.
Profit share is not performance-related pay. Profit share depends on the whole firm; PRP depends on the individual.
Forgetting fringe benefits are financial. A company car and health insurance both cost money.
Assuming higher pay always raises output. It removes a complaint, and often nothing more.
Up next: Motivating Without Money — the rewards that cost almost nothing and, according to Herzberg, do the work that pay cannot.
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