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Grow Your Business Finances

Performance-Based Pay Won't Motivate Employees As Much As You Think

Performance-Based Pay Won't Motivate Employees As Much As You Think
Credit: Viktor Gladkov/Shutterstock

Rather than motivating employees, certain types of incentive-based pay structures end up having negative effects, new research finds. A study recently published in the Human Resources Management Journal revealed that workers who receive performance-based pay, such as those whose pay ties into individual or company-wide performance, work harder, but also end up with higher stress levels and lower levels of job satisfaction.

The research found that employees who know that how much money they take home each year is tied to their level of contributions to the organization, or how well their employer as a whole performs financially, are more likely to feel that they are being encouraged to work too hard.

That pressure in turn offsets the gains in productivity that the pay structure is designed to produce, the study's authors said.

Chidiebere Ogbonnaya, the study's lead author and a research fellow at the University of East Anglia, said that, despite an increase in thinking among employers that performance-based pay structures are important for motivating employees and encouraging positive attitudes, this study is the first to find that these pay schemes are associated with feeling that work might be too demanding or that there is insufficient time to get work done.  [See Related Story: To Keep Employees Motivated, Give Them a Better Title]

"By tying employees' performance to financial incentives, employers send signals to employees about their intention to reward extra work effort with more pay," Ogbonnaya said in a statement. "Employees in turn receive these signals and feel obliged to work harder in exchange for more pay."

Although employees may value these earnings and see the pay structure as a positive, the ultimate beneficiary of their extra effort is the organization.

"As a consequence, performance-related pay may be considered exploitative, or a management strategy that increases both earnings and work intensification," Ogbonnaya said.

When looking specifically at pay tied into employer profits, the researchers found that this pay structure only had a positive impact on job satisfaction, employee commitment and trust in management if the profit-related pay was distributed widely across the organization.

The study found that when profit-related pay was given only to a small proportion of the workforce, there was lower job satisfaction, lower employee commitment and lower trust in management.

Kevin Daniels, one of the study's authors and a professor at Norwich Business School in the U.K., said the study shows that employers should ensure that mechanisms for distributing organizational profits are administered efficiently so that deserving employees are not overlooked.

"If profit-related pay is spread across the workplace, employees may show greater acceptance and respond with positive attitudes," Daniels said.

The study was based on surveys of 1,293 managers and 13,657 employees at 1,293 workplaces in the U.K. 

Chad Brooks

Chad Brooks is a Chicago-based writer and editor with nearly 20 years in media. A 1998 journalism graduate of Indiana University, Chad began his career with Business News Daily in 2011 as a freelance writer. In 2014, he joined the staff full time as a senior writer. Before Business News Daily, Chad spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including local and state government, crime, the legal system and education. Chad has also worked on the other side of the media industry, promoting small businesses throughout the United States for two years in a public relations role. His first book, How to Start a Home-Based App Development Business, was published in 2014. He lives with his wife and daughter in the Chicago suburbs.