Financial incentives are central to many employers’ strategy for improving employee productivity.
Whether such incentives are offered based on an assessment of employees’ performance, for example performance-related pay, or earnings from a portion of organisational profits such as profit-related pay and share-ownership, their fundamental purpose is to motivate employees to higher levels of goal attainment.
Some employers also introduce incentive payments to enhance employee wellbeing. It is understood that financial reward systems help in bringing employees’ interests into close alignment with organisational goals, leading to greater levels of workers’ satisfaction, commitment and trust in management.
Yet, critical questions have been raised as to whether incentive pay packages influence employee wellbeing in a sustainable way. Employees whose work efforts are linked to financial rewards may experience poor wellbeing due to inequitable pay distribution, peer-monitoring and divisive behaviours among employees, favouritism, and inconsistent performance management systems. These factors give rise to workplace tensions that cause employees to work too hard and more intensely in exchange for more pay. As a result, any financial gains accruable from incentive payments may be associated with increased stress levels.
In a recent study with colleagues at the University of East Anglia, I examined the extent to which three different incentive pay schemes – performance-related pay, profit-related pay and share-ownership – were associated with employee wellbeing.
Our study examined whether particular incentive pay schemes were associated with employees’ experience of high work intensity, and how this might explain any adverse impact on employees’ job satisfaction, commitment and trust in management.
The research used data from face-to-face structured interviews with senior managers in 1,293 private sector workplaces across Britain. Data from the management interviews were matched with survey data from five to 20 randomly selected employees in workplaces where the management interviews were conducted. This amounted to a sample size of 13,657 employees in 1,293 workplaces.
Unsurprisingly, the study identified performance-related pay as an important financial incentive for improving workers’ job satisfaction, commitment and trust in management. Performance-related pay is thought to improve employee wellbeing because it provides direct inducements for employees to achieve desirable work goals. Employees interpret such inducements as an indication that their efforts are valued by the employer, leading to positive workplace attitudes and behaviours.
Contrary to what many believe, our study showed organisation-wide incentives such as profit-related pay and share-ownership were associated with lower levels of employee wellbeing. In fact, profit-related pay resulted in employees being less committed and more distrusting towards management, whereas share-ownership was associated with lower levels of job satisfaction.
These results go against previous studies where profit-sharing activities have been associated with employees’ sense of organisational attachment, and consequently, improved wellbeing.
Another interesting finding was that high employee uptake of profit-related pay improved employee job satisfaction, commitment and trust in management. That is to say that profit-related pay would promote employee wellbeing if it is accessible or spread across organisational levels, and more employees are eligible to take part in the distribution of such profits. Unlike profit-related pay, high employee uptake of share-ownership showed no significant relationships with employee wellbeing.
Of the three financial incentive schemes examined, only performance-related pay was associated with the perception that work is more intense, and this in turn outweighed some of the benefits on job satisfaction, employee commitment and trust in management. Thus, despite the potential gains of performance-related pay, employers should be cautious that such rewards have possible adverse effects. More specifically, performance-related pay may be experienced as an exploitative incentive pay system that intensifies work and contributes to poor wellbeing.
The key message is not for employers to discontinue use of performance-based incentive payments. However, it is essential that the measure of financial rewards offered to employees is commensurate with employees’ work effort, as this would minimise any feelings of dissatisfaction, distrust and poor wellbeing among employees.
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