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.”
Kong said many employees work in a low-trust environment where they can’t count on others and don’t thank others for their contributions due to feeling a need to protect themselves.
“We found appreciation is really important for people’s well-being and attitude,” Kong said, adding, “Think about how to make the work-life more positive and how to have a positive impact on other people.”
While leaders are important, Kong said, they shouldn’t be expected to have perfect behavior and decision-making.
“Leaders are humans,” Kong said. “They have limited attention, they have limited energy, they have limited resources … I do feel like we need to take a more realistic perspective on what leaders can do and what they should do.”
Mengjie Lyu, an expert in the field and visiting assistant professor at the University of Illinois, said she’s excited about this research because the findings offer “great insights” that are in line with her own research on pay for performance.
“We want to use pay for performance to attract more productive workers and to reward high performers,” Lyu said. “But from this research, pay for performance might not be ideal in all situations because we have different workplaces and organizations. There are a lot of factors that influence the effectiveness of pay for performance.”
The best way to help struggling employees is to make it easier for them to change jobs, Sturman said, but many employees are often stuck in toxic workplaces due to financial challenges.
For people who have a narcissistic or abusive boss, it makes it difficult to function, Kong said. Besides leaving their job, people can find support from coworkers. Research suggests that support from coworkers is just as important as support from leaders, he said. Happy hours and social gatherings can also connect people in the company. When people feel like they’re not alone, a positive culture will follow and create a safe environment for employees to speak up.