Does performance-related pay work?
Companies, especially here in the Middle East, love performance-related pay (PRP). Hit your targets and you get compensated for your results. The company can minimise the risk of a high monthly payroll system, managers have a way to reward high performers and employees are fairly compensated for the effort they put in (in theory). So it’s a win-win. Or is it? Are PRP systems all they are cracked up to be?
Support for PRP systems is grounded in expectancy theory. Expectancy theory is based on the premise that human beings are rational actors with behaviours based on conscious intentions. According to expectancy theory, motivation will increase when employees think they can complete a task (expectancy), when they think that their performance will lead to rewards (instrumentality) and when they consider the reward to be appealing (valence). This gives us insight into what PRP systems need to be effective - achievable goals, a clear link between behaviour and rewards and the rewards that are appealing to employees.
There are plenty of studies that report the positive benefits of PRP systems. They have been shown to increase motivation, attract high-performers and give employees a sense of autonomy and control over their work.
Performance-related pay positively impacts motivation especially when there are simple tasks that can be easily measured. This increases expectancy and instrumentality for employees. When the complexity of tasks increases, instrumentality becomes more difficult to achieve and the simplicity of the PRP system may not adequately reflect employee effort. This could then undermine the motivating impact of PRP. Others also argue that PRP is particularly effective for roles that have little intrinsic motivation, the uptick in extrinsic motivation brought about by more pay, will compensate for the lack of intrinsic motivation.
Having said all of this it is important to consider some of the potential drawbacks of using PRP.
Critiques of PRP point to the fact that pay for performance can be experienced as controlling which undermines autonomy, while others find PRP supportive of autonomy as the employee themselves is in control of what they earn. A potential explanation of this is the way that the rewards are presented, issued and measured. Management style will impact how the PRP system is perceived. Consider if your managers are more on the autocratic side and use PRP as a means for control and fear or is the system used to empower and support employees to fulfill their potential?
PRP has been shown to cause people to be less helpful towards others, less socially cooperative and more individually orientated. A focus on performance-related pay can also reduce creativity as employees focus only on what they need to do to hit their targets, not on other general improvements, new ways of doing things and riskier ideas. This can happen when there is an over-focus on measurable performance and pay at the expense of other desired behaviours. Consider how you are measuring and rewarding non-financially focussed competencies. What do you celebrate in team meetings? What is the focus of one-to-one weekly review meetings? What you focus on you get, so if you only focus on the numbers that link to PRP, expect other behaviours to go off track.
A recent study in Denmark of over 300,000 professionals found a 4-6% increase in the use of antidepressants and anti-anxiety medication after companies adopted performance related pay schemes. Clearly this is worrying and raises the question of how much pressure employees are under to meet their basic needs through PRP.
Whether or not PRP is right for your company depends on a few key factors:
How extrinsically motivated in general are your employees? For example, private sector lawyers are more extrinsically focussed than public sector employees and transient employees and ex-pats are also more extrinsically motivated.
Are you more concerned about performance quantity or quality? PRP can be a good motivator for quantity and is not a great motivator for quality.
Are tasks simple or complex? PRP has a stronger motivating impact on simple tasks.
What are our competitors doing? If they have PRP systems in place we either need to pay high base salaries to compete or have a similar PRP system in place.
Do we provide enough salary to meet employees basic needs as to ot induce anxiety and stress?
One factor that is not considered often in performance-related pay is a cost-benefit analysis of doing PRP versus not doing PRP. What if all the time spent on creating PRP systems, monitoring individual performance and allocating rewards was instead invested in creating a supportive work environment where managers focussed on the whole person, not just the employee as means of economic gain? Many of the benefits that come from PRP could still be delivered through a more human-centric approach to rewards where we pay people a living wage, support them to grow and develop in their role and replace people who have consistently poor performance and don’t match the company values.
If you already have PRP in place, how much do you know about the perception of the pay system with your employees? If you are starting to question it, consider surveying and interviewing your employees and managers to see what they think of it. Measure how much time and energy is spent on the PRP system and consider if that time could be better spent elsewhere. And finally, consider how the PRP system influences the culture of your company. Does it reflect your company values? Does it support or undermine employee retention and attraction? Does it have other negative unintended consequences such as reduced teamwork?
The research on PRP is ultimately inconclusive and it is a challenging areas to study without the ability to do randomised studies without a whole host of other interfering factors. Where labour laws are weaker, like the GCC, employers can use PRP systems to lure cheap labour with the promise of large financial returns. This ends up being a lose-lose where employers experience high staff turnover and employees end up deflated and disappointed. Personally, I would like to see more companies paying a good living wage with bonuses for exceptional performance.
