When it comes to keeping employees happy and productive, giving them raises seems like a safe choice. However, a new study from CU Boulder Leeds School of Business suggests that tying pay to performance can backfire, making employees less engaged and lowering their productivity.
“Pay for performance is a double-edged sword,” the researchers explain. “When used wisely, it can really motivate people and increase their sense of competence. But oftentimes employees feel like they choke under pressure.”
Common practice
About three-quarters of organizations use pay-for-performance compensation, which includes pay raises, bonuses, and profit-sharing, as part of their overall pay structure, according to Salary.com.
However, whether these incentives actually work as intended is up for debate. The study, covering more than 250 pairs of employees and leaders in 234 companies across various industries in south China, focused on how employees perceive pay-for-performance. The research revealed that the effectiveness of such incentives depends on two key factors: leader competence and warmth.
The study found that when employees see their manager as competent, they respond positively to the idea of performance-based raises. In such cases, they become more engaged in their work and show improved performance.
Competence is key
Competence is crucial to employees because they rely on their managers for guidance on tasks, achieving work goals, and receiving helpful feedback. Though the study focused on China, the results are likely applicable in other locations, according to Kong, the researcher behind the study.
“If my leader is very capable, then I feel pay for performance is a positive thing. I’m more likely to engage in my job and perform well. The other part is leader warmth—whether a leader is trustworthy, friendly and supportive,” the researchers explain.
“If my leader is cold, untrustworthy, unfriendly and unsupportive, then I’ll perceive pay for performance as a threat,” they continue. “I’ll be super stressed and withdraw from my work, maybe coming to work late and leaving early. I will perform worse because I’m disengaged.”
How to improve
How can organizations make the most of performance-based pay to inspire their employees? The researchers offer these recommendations:
- Companies should thoughtfully design their pay-for-performance system and ensure employees grasp how it functions.
- After establishing the pay-for-performance system, employers should be clear about its workings and apply it consistently throughout the organization.
- Leadership training is essential, as leaders play a crucial role in implementing a pay-for-performance model and can shape how employees perceive it.
Essentially, the perception of performance-related pay is key to understanding how it drives motivation and behaviors. As a result, managers must be aware of how employees perceive it so that the connection between pay and performance is clear.
“If the link is perceived as ambiguous or biased, that’s not good for the system. Employees and companies won’t benefit,” the researchers conclude.
