Expectancy Theory

The following case analysis evaluates the Expectancy Theory and the three main elements of the Effort / Performance / Outcome (“EPO”) model as it relates to motivation at Nordstrom. In assessing Effort, individuals ask themselves whether exerting the effort will allow them to attain the requisite performance level. Having an achievable performance level is critical in strengthening the links between Effort and Performance. The second element of the model relates to Performance, and evaluates whether meeting the performance standard will result in an outcome, or reward. For individuals to feel motivated, they must feel confident that meeting the performance standards will result in the promised reward. The final element of the model relates to the Outcome, and is the component whereby individuals consider whether or not the reward is valuable to them. Offering the right reward is essential in order for the EPO model to successfully function to extrinsically motivate employees.

The Expectancy Theory and EPO model can be used to analyze Nordstrom’s culture and incentive system. The first step of the theory is to clearly define the performance standards. At Nordstrom, management attempted to clearly articulate performance standards with the metric of sales per hour (“SPH”). Each employee was given a target SPH ratio, which was computed by taking sales (less merchandise returned) divided by hours worked. If an employee’s actual SPH was higher than their target SPH, then they received a 6.75-10% commission on net sales; however, if SPH was below their target, they only received their base wage. Failure to meet the target SPH often resulted in decreased hours – or in some cases, termination. While technically, Nordstrom’s performance standard was clearly defined through SPH, there was an unwritten rule that even if an employee was meeting their target SPH, they should still work “off the clock” in order to reduce their reported hours and therefore, boost their SPH. As depicted in the case, a sales clerk may have chosen to sacrifice pay in the short term for better shifts and more hours in the future. In other words, while the performance standards appeared to be clearly defined on the surface level through the SPH targets, the actual performance standard was even higher than the published target.

The second step of Expectancy Theory is to ensure that the performance standards are achievable. This step demonstrates the link between Effort and Performance and answers the question, “If I put forth the effort, will I attain the performance level asked of me?” In the case of Nordstrom, it was common practice for employees to expend high levels of effort through activities including: driving to another Nordstrom to retrieve an out-of-stock item, driving to a customer’s house to deliver purchases, and writing thank you notes to customers. Some sales clerks went as far as changing customers’ flat tires, paying their parking tickets, or taking customers to lunch. In addition, employees were also expected to spend time performing routine merchandise stocking, store display activities, and attending numerous staff meetings. Unfortunately for Nordstrom employees, putting forth this level of effort did not enable them to meet their target SPH levels. In fact, the considerable amount of time spent performing these activities – if formally recorded in an employee’s time sheet, lowered their SPH. This was a key flaw in Nordstrom’s model and demonstrates a weak link between Effort and Performance, as putting forth the expected level of effort was actually detrimental to meeting Nordstrom’s SPH performance standard. The only way for an employee to attain the desired performance level through “achieving” their targeted SPH ratio was to underreport their actual hours worked.

The third step of Expectancy Theory is to offer the right outcome. This aspect of the model answers the question, “Do I actually want this reward?” For Nordstrom employees who were extrinsically motivated by money, the answer was definitely yes. The company offered generous compensation, with the average Nordstrom sales clerk earning approximately $22,000 per year in the 1980s – nearly double the national average for retail sales clerks – and top-performing clerks earning over $80,000 annually. Furthermore, Nordstrom honored its top sellers by awarding them an annual membership to the company’s Pace Setter’s Club, which entitled them to 33% discounts on merchandise. In addition to monetary rewards, salespeople who received written compliments from customers were honored as “Customer Service All-Stars” with their pictures publicly displayed. While this type of reward played on intrinsic motivation – clerks were able to see their task significance by understanding how their service impacted customers, and were provided feedback– it also largely emphasized extrinsic factors such as praise and status. At Nordstrom – where sales clerks tended to be young, competitive, and college-educated individuals who were willing to work hard in exchange for the retailer’s relatively high salaries and opportunities for rapid advancement – these extrinsic rewards of money, status, and praise were generally the right ones to offer.

The fourth step of the Expectancy Theory is to guarantee that meeting the performance standards will result in the promised reward. This step of the model clarifies the link between Performance and Outcome. In the case of Nordstrom, the employees with the best SPH ratios received handsome rewards, including large salaries, memberships to the Pace Setter’s club and free dinners, among other perks. In addition, those employees with higher SPH ratios received a greater number of – as well as more desirable – sales shifts, which enabled them to continue making more sales and earning these extrinsic rewards. In contrast, employees who were not willing to lie about the number of hours worked – and as a result did not meet their SPH targets – were penalized and often “forced out” of Nordstrom’s. As such, the link between Nordstrom’s SPH performance standard and the resulting reward was actually quite strong – which is why there were so many “Nordies” who remained loyal to the company despite the grueling hours and number manipulation required to meet the high performance standard.

Nordstrom’s compensation system produced several unintended consequences – one of which was intense competition among its employees. For example, the pressure to become an achieve a high SPH and become an “All-Star” – which gave employees