How You Pay Makes a Difference

Michael Sturman at Cornell's School of Hotel Administration found in a study that while raises increase performance, bonuses increase performance significantly more.

Simply spending more on employee pay would yield minimal results. Improving the merit-increase pool by one percentage point but otherwise not making any allocation changes, for example, would be projected to increase performance only by roughly 2 percent. However, if the same money was applied to pay-for-performance bonuses, the analysis suggests a performance increase of better than 15 percent. Indeed, the results suggest that providing a strong pay-for-performance link for bonuses rather than raises had the greatest potential benefit, predicted to improve employee performance by nearly 20 percent.

Sturman acknowledges that his study covered just one company of 700 employees. Further research might turn up differences. The result could be tied to other factors that weren't measured. But my gut tells me that while performance improvement may not always be as large as in the group he studied, there is a genuine motivational factor at work here. If employees believe, for example, that a pay raise is a cost-of-living adjustment, there is little challenge to them to perform better. However if they are told the increase is a bonus that is related to performance, there is a clear incentive to improve work habits.

Interesting. Even though the bonus is a delayed increase in compensation, it is valued more by hard-working employees.

A nod to Guy Kawasaki for uncovering the report.

Comments

[Mary-Louise]

I work for Guy Kawasaki. Thanks for the nod to Guy's blog!

Mary-Louise
http://blog.guykawasaki.com/