New study looks at downsides of performance-based pay

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Many companies use raises or bonuses to motivate employees. But, new research suggests it doesn’t always work.

Tony Kong, professor of organizational leadership at the University of Colorado Boulder, found that performance-based pay can backfire, causing decreased productivity and negative attitudes among employees.

The factor that determines whether pay for performance will work relies on the leader being competent and personable.

“A leader’s competence … is beneficial for employees engagement and performance under pay for performance,” Kong said. “The takeaway from this research is having pay for performance in place is one thing and leadership development is also important.”

Michael Sturman is a professor at Rutgers University’s School of Management and Labor Relations. He said researchers have known that pay for performance systems can and usually do motivate people to perform better, but that they don’t always work, and leadership matters.

“This paper takes the important step of combining research in these areas, and it then shows the process through which the pay-for-performance system works because of how leaders are involved in the implementation of those systems,” Sturman said. “Pay-for-performance is an important tool, but just rolling out a bonus plan across an organization doesn’t work on its own.”

The study surveyed more than 250 pairs of employees and leaders in 234 organizations across more than 40 industries in China. Kong said although the sample was from China, the results likely hold true in the U.S. because both countries have pay-for-performance-oriented cultures.

The study couldn’t be conducted in the U.S., Kong said, because many American companies don’t allow researchers the access needed to conduct a comprehensive study.

The results revealed that employees will increase work engagement and performance when they view their manager as competent and warm. If a leader is trustworthy, friendly and supportive, employees will feel more supported and less stressed at work.

“If my leader is cold, untrustworthy, unfriendly and unsupportive, then I’ll perceive pay for performance as a threat,” Kong said. “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.”



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