Why does performance pay demotivate

If your employees are compensated based on performance, their pay might be leading to higher levels of stress and decreased feelings of job satisfaction. New research suggests that certain types of incentive-based pay have a detrimental effect on workers. Since 4 out of 10 U. In a study recently published in Human Resource Management Journal , researchers explored the impact of incentive-based pay on job satisfaction, commitment, and trust in management by surveying 1, managers and 13, employees at 1, workplaces in the U.

The study focused on incentive-based pay, commonly used to motivate employees. The three kinds of incentive-based pay include performance-related pay, profit-related pay, and employee share-ownership. In turn, workers feel exploited, as extra work ultimately benefits the employer.

If you use a performance-based pay structure, consider reviewing compensation packages for your employees and altering the type of incentive-based payment that you utilize. We all need to pay our bills and provide for our families — but once these basic needs are covered the psychological benefits of money are questionable.

But one size does not fit all. Our relationship to money is highly idiosyncratic. Indeed, in the era of personalization, when most things can now be customized to fit our needs — from social media feeds to potential dates, to online shopping displays and playlists — it is somewhat surprising that compensation systems are still based on the premise that what works for some people will also work for everyone else.

Other than its functional exchange value, pay is a psychological symbol, and the meaning of money is largely subjective. If companies want to motivate their workforce, they need to understand what their employees really value — and the answer is bound differ for each individual.

Research shows that different values are differentially linked to engagement. For example, income goals based on the pursuit of power, narcissism, or overcoming self-doubt are less rewarding and effective than income goals based on the pursuit of security, family support, and leisure time. Perhaps it is time to compensate people not only according to what they know or do, but also for what they want.

The more emotionally stable, extraverted, agreeable or conscientious people are, the more they tend to like their jobs irrespective of their salaries. In fact, the biggest organizational cause of disengagement is incompetent leadership. You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access.

Create an account to read 2 more. Compensation and benefits. Does Money Really Affect Motivation? A Review of the Research. We all need to get paid. But the evidence suggests it undermines our intrinsic motivations. However, people in careers that use this payment structure don't necessarily make more money.

The U. The commissions on these sales are few and far between, split up among a large sales force. In short, performance-based pay is great when both the company and employee are performing well, but it's a double-edged sword.

Editor's note: Looking for the right online payroll software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs. Performance-based pay can also be difficult for employers to track, as employee performance may ebb and flow. Companies that want to keep better tabs on their payroll should consider using one of the best online payroll software solutions , especially when transitioning to a structure like performance-based bay.

Key takeaway: Performance-based pay is compensation directly tied to an employee's contributions to a company, or the company's financial performance over the pay period. This can be a way to provide high-performing employees with additional compensation, but overall, employees compensated this way don't earn more than hourly or salaried employees. A study published in the Human Resource Management Journal revealed that workers who receive performance-based pay, such as those whose pay ties into individual or companywide performance, work harder but end up with higher stress levels and lower levels of job satisfaction.

The research found that employees who receive performance-based pay or know how well their employer performs financially are more likely to feel that they are being encouraged to work too hard. That pressure offsets the gains in employee productivity that the pay structure is designed to produce, the study's authors said. The study is the first to reveal the flaws with performance-based pay models, said Chidiebere Ogbonnaya, the study's lead author and a research fellow at the University of East Anglia at the time of the study.

He added that many employees receiving performance-based pay feel immense pressure or do not have enough hours to complete work tasks.

Although employees may value these earnings and see the pay structure as a positive, the ultimate beneficiary of their extra effort is the company. When the researchers looked specifically at pay tied to company profits, they found that performance-based pay positively impacted job satisfaction, employee commitment, and trust in management if the profit-related pay was distributed equitably across the organization.

When profit-related pay was given only to a small portion of the workforce, the study found lower levels of job satisfaction, employee commitment and trust in management.

In other words, sharing the wealth is highly popular. The study was based on surveys of 1, managers and 13, employees at 1, workplaces in the U. Key takeaway: Employees respond better to performance-based pay when it's based on company profits rather than individual performance and distributed equitably across all levels of the business.

Many studies have shown that pay does not contribute to performance, at least not directly. No matter how much you pay employees, they'll eventually cycle through their normal routines.

If those routines include slacking off and underperforming, then that's what will happen. Moreover, a study from Harvard Business School found that not all employees respond well to incentive-based pay. For example, accounting or human resources professionals may want a steady salary instead of being paid commission for each report they complete.

Still, pay increases and bonuses for bulk work, even in operational environments, can be beneficial. There's also a chance of corruption: If employees get in desperate financial situations outside of work, they may cheat the system to get more pay. Key takeaway: Not all employees respond well to incentive-based pay, though there are ways to implement it without damaging employer-employee relationships.

If you want to implement performance-based pay in order to motivate your employees, it helps to make it fun. Remind your team members that their success and paychecks are in their own hands, in a way that empowers and excites them. Put up leaderboards and set goals, displaying progress toward those goals to motivate your team.

You could also purchase prizes, like a bicycle, the latest gaming console, Bluetooth headphones, a laptop, gift cards or event tickets.