A study published this month demonstrates that performance related pay may not be the Frankenstein’s monster that it is made out to be.
As many as 90% of corporates use some form of performance related pay (Gerhart & Fang, 2014), but the research around it is contradictory. Some studies have demonstrated an increase in performance, others that it can sap motivation and lead to reduced performance. Daniel Pink, in his 2009 best-seller “Drive”, went so far as to say that performance related pay schemes generally don’t work and that they often do harm.
There is a body of work that shows that extrinsic rewards like monetary bonuses can reduce intrinsic motivation for the work. It takes away a feeling of autonomy. This means that an employee that just loves doing the work they do will do the work for the joy of it, but if you incentivise them to do the work, they may feel obligated and the joy dissipates. Now you may have a demotivated employee on your hands. They might do the work, they might hit the targets set, but will gain less enjoyment from it. They might leave. Worse they might stay and become a problem employee. One that is disruptive, creates conflict and is difficult to manage, but because they do the work you’re loath to dust off the disciplinary policy. This would be consistent with Self-Determination Theory and the thesis of Daniel Pink’s book.
Another body of work suggests that performance related pay will inhibit collaborative behaviours and altruistically helping colleagues because the incentives focus attention on getting the job done. If we accept the premise that organisations only exist to achieve objectives that individuals alone could not, then reducing collaboration is clearly counterproductive. It’s a reason silos form and persist in organisations and is one of the five symptoms of a dysfunctional culture according to Patrick Lencioni.
That’s where this new study comes in. The results suggest that performance related pay based on highly specific, results oriented objectives (think SMART goals) can lead to reduced collaboration and helping behaviour. More subjective performance goals based on behaviours and process (in which helping others can be implicitly or explicitly an aspect of high performance), leads to increased helping behaviours outside of strict role responsibilities.
Subjective performance goals may bring their own challenges of course. What if the leader’s interpretation of the goals, or the performance in relation to those goals, is not the same as the employee’s? If the leader’s interpretation is of lower performance, the employee may feel hard-done-by. The result: demotivation and disengagement. One of the benefits of hard, results-based objectives is that they minimise the opportunity for favouritism. Subjective goals increase the odds that favouritism may be perceived by some, resulting in conflict and disengagement.
As ever, it is better to adopt a nuanced approach rather than the dichotomous, black-and-white approaches often advocated by gurus. Employees are individuals and deserve to be treated as such. Managers and leaders should take the time to discover what motivates each individual and remember it will evolve during an employee’s tenure. An employee that has just taken out a mortgage might be more motivated by money, and therefore performance related pay, than normal. However, intrinsic motivations are likely to persist over time and setting intrinsically motivating objectives are therefore likely to be more effective in the long run. And this new study demonstrates that incentivising behavioural and process based goals that value collaboration may improve performance and break down silos. Taking the time to talk, adult-to-adult, with each direct report is essential to maximise perceptions of the fair application of softer, subjective performance-related pay schemes. With effort, the rewards can outweigh the costs.