Performance-related pay is commonplace in the private sector, but it’s generally harder to introduce into the public sector. Instead, promotion-based incentives tend to be more commonplace. A recent study from Kellogg explores whether this approach is effective in motivating employees.
The researchers analyzed a community health program in Sierra Leone, which had a performance program that linked promotions to one’s performance. The researchers were also interested in what happened when employees knew what their bosses earned.
Boosting performance
The results show that knowing your boss’s salary is beneficial when operating under a promotion-based system, but not beneficial when you’re not. As such, promotion-based incentive schemes generally only work when employees know the kind of salaries they’d get by securing that promotion. If they lack that knowledge, such incentive schemes can do more harm than good.
The researchers found that the new system boosted performance by 22% across both the group that was aware of their supervisor’s income and the group that didn’t. This boost was especially pronounced among top performers, for whom performance rose by nearly 40%. Indeed, among those who believed their supervisor would be retiring soon, and therefore there was a chance of promotion, the performance boost soared to 45%.
“It shows that top workers were now more motivated to provide more effort, because it may lead to a promotion,” the researchers explain. “It is essentially a tournament. Only the top person will be rewarded. Though that increase was concentrated at the top, the meritocratic system did not reduce the performance of low-ranked workers. No one has an incentive to provide less effort.”
Mixed results
When workers didn’t know the salary of their supervisor, however, their performance fell by nearly 30%.
Meanwhile, the knowledge of supervisor salary had mixed effects under the old non-meritocratic system. Workers’ expectations of their supervisors’ salaries proved to be important: Those who overestimated it or who guessed right didn’t change their patterns. But those who underestimated their supervisor’s pay, and then learned it was more than they thought, actually decreased their number of visits by 27 percent.
“They’re mad,” the authors explain. “They think the supervisor earns more than they do and there is no way for them to get a supervisor job by performing more. And when they are unhappy, they provide fewer visits. The extent to which the workers were really unhappy with pay progression and no meritocracy was surprising. The reduction in visits was equal to the increase in visits in the meritocratic system.”
Broader implications
Even though the experiment was done in a specific situation, its findings have broader implications, especially for the United States. It turns out that women and people from different racial backgrounds are less likely to get promoted, even if they do a great job. This makes them feel like the system isn’t fair. If hardworking employees don’t see their efforts rewarded with promotions, they might feel unhappy and perform worse.
Also, when there’s a big difference in pay between top bosses and regular workers in American companies, it can cause problems. The pay gap between CEOs and the average worker keeps getting bigger, but even smaller differences can be a problem. If employees in the middle of the company find out that their boss makes a lot more money than they do, it can make them feel less motivated unless they believe the company is fair and they have a real chance to move up in their careers.
“If you increase pay for the boss, that’s good for the boss, but the people at the bottom will be mad,” the researchers conclude. “If the system is not meritocratic, it can backfire.”
