The role of management bonuses in employee behavior is a little researched area but one that is potentially of great significance for companies. A study in Canada looked at the impact of management pay for performance bonus eligibility on the turnover levels of non-management employees. The results indicate that management bonus eligibility is indeed related to greater levels of voluntary non-management employee turnover, but is not related to greater involuntary turnover.
Key Topics: Pay for performance; Bonus eligibility; Employee turnover
Title of Reviewed Article: Does Pay-For-Performance Strain The Employment Relationship? The Effect Of Manager Bonus Eligibility On Non management Employee Turnover
Researchers: Dionne Pohler and Joseph A. Schmidt (University of Saskatchewan).
Publication: Personnel Psychology, 2016, Vol. 69, pp. 395-429.
Setting the Scene
Pay for performance typically involves linking parts or all of an employee’s compensation to performance measures and along with related bonus practices are increasingly used in organizations to drive particular behaviors from employees (Jenkins, Mitra, Gupta, & Shaw, 1998), and attract high performers (Gerhart, Rynes, & Fulmer, 2009). Numerous studies have highlighted the positive effects of pay for performance on company and employee performance (e.g. Stajkovic & Luthans, 1997).
While there are notable positives related to pay for performance practices, research also suggests that there can be negative behavioral and psychological consequences of such practices (Larkin, Pierce, & Gino, 2012). Agency theory suggests that when management compensation is linked to performance, managers may look to address poor performance through methods that could result in increased voluntary and involuntary turnover of underperforming employees (e.g., Bandiera et al., 2007). Equity theory, on the other hand, suggests that applying pay for performance policies to management and not to non-management employees could result in non-management employees leaving the company due to perceived inequity. Lastly, strain effect suggests that management pay for performance policies are can have negative effects on the manager-employee relationship, through the likes of increased monitoring, which again could lead to increased voluntary turnover.
Research by Larkin et al. (2012) proposes that, where there are management but not employee bonuses, the potential costs of not having pay for performance (e.g. shirking and free riding) are lower than the negative implications of having pay for performance, such as perceived inequity, relative deprivation, and perceived injustice. However, other research suggests that negative consequences of pay for performance systems can be limited by paying attention to implementation (Gerhart et al., 2009).
Following this, the researchers propose three primary research questions which they examine:
Hypothesis 1 - “The association between the proportion of bonus eligible managers and turnover among non management employees is moderated by overall workforce performance. There is a stronger positive association between the proportion of bonus eligible managers and (a) involuntary and (b) voluntary turnover among non management employees when overall workforce performance is lower compared to when it is higher.”
Hypothesis 2 - “The association between the proportion of bonus eligible managers and voluntary turnover among non management employees is moderated by the proportion of bonus eligible non management employees. There is a stronger positive association when the proportion of bonus eligible non management employees is lower compared to when it is higher.”
Hypothesis 3 - “The association between the proportion of bonus eligible managers and voluntary non management employee turnover is moderated by organizational investment in HR practices that train and incentivize managers to treat employees well. The positive association will be weaker when there is extensive organizational investment in these HR practices, and stronger when there is not.”
How the research was conducted
This research used data from the Canadian Tourism Human Resource Council sponsored 2008-2009 and 2010-2011 surveys, which detailed Canadian compensation practices across the hospitality, tourism, and travel industries. Survey submissions were made at a company level by company representatives. There were 2,016 respondents to the 2008-2009 survey and 1,961 respondents to the 2010-2011 survey.
A number of measures were reviewed in detail, namely non-management employee turnover, management and non-management employee bonus eligibility, workforce performance, and manager HR practices focusing on employee treatment (e.g. manager training).
Key Research Findings
The results suggest that management bonus eligibility is positivity related to voluntary non-management employee turnover but not to involuntary turnover.
The results did not support the research Hypotheses 1a and 1b, in which the researchers posited that the positive relationship between management bonus eligibility and involuntary and voluntary turnover among non-management employees will be stronger in lower performing workforces.
Hypothesis 2 posited that inequity in eligibility for bonus between management and non-management employees will result in greater voluntary turnover amongst non-management employees. This contention was not supported by the results.
The results supported Hypothesis 3, which stated that there is a relationship between management bonus eligibility and a company’s investment in management Human Resources practices to the extent that the positive effects of management bonus eligibility on voluntary non-management employee turnover will be weaker when management receive training and have incentives to treat employees well.
Additional analysis of the results found that the proportion of management who were eligible for bonus had an effect on the voluntary turnover of non-management, with a greater proportion of management eligibility leading to greater voluntary turnover of non-management. Support was thus found for a strain effect.
The results point to a positive relationship between management bonus eligibility and voluntary turnover amongst non-management employees, which supports recent research that suggests that there can be unintended negative consequences to pay for performance practices.
The research results did not support the contentions based on agency and equity theory put forward in Hypothesis 1 and 2, however there was strongest support found for a strain effect, through the results for Hypothesis 3. The results suggest that company investment in Human Resource practices focused on training and rewarding managers to treat employees well can reduce the effect of management bonus eligibility on non-management voluntary turnover.
The results found that when companies had low investment in Human Resources practices designed to facilitate good treatment of employees by management turnover rates were approximately 13% higher when there was no management bonus eligibility and 36% higher when management was bonus eligible.
Organizational and Reward Implications
Prior research indicates that many of the negative implications of pay for performance policies are the result of poor implementation and the unintended results of eligible employees ‘gaming’ the policy (Gerhart et al., 2009). The present study makes clear the benefit of designing management pay for performance policies with the treatment of employees in mind.
The researchers suggest a valuable element of a management pay for performance system should be that management bonus determination is partially dependent on how they treat employees. The researchers warn however that this would, based on their research results, reduce rather than fully eliminate the impact on employee turnover, and that practitioners should evaluate carefully the assumptions they are making regarding employee behavior before implementation, in order to take into account possible unintended consequences such as closer monitoring of employee performance potentially leading to a perception among employees of reduced autonomy and self-determination.
This study expands on the theoretical and practical body of knowledge on an important area of reward management, namely the relationship between management compensation and the behavior of employees, an area that has received limited attention previously, particularly in the review of management compensations relationship with non-management turnover. It would be of particular interest to see in future research if the present result could be replicated outside of the hospitably related sector in Canada. Also, it would be interesting to see future research review the details of management pay for performance beyond simply eligibility to add further depth to this area.
Source Article: Pohler, D. &Schmidt, J., A. (2016). Does Pay-For-Performance Strain The Employment Relationship? The Effect Of Manager Bonus Eligibility On Non management Employee Turnover. Personnel Psychology, 69, 395-429.
Published by: Wiley Periodicals, Inc.
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Bandiera, O., Barankay, I., & Rasul, I. (2007). Incentives for managers and inequality among workers: Evidence from a firm-level experiment. The Quarterly Journal of Economics, 122(2), 729–773.
Gerhart, B., Rynes, S., & Fulmer, I. S. (2009). Pay and performance: Individuals, groups, and executives. Academy of Management Annals, 3(1), 251–315.
Jenkins, D., Mitra, A., Gupta, N., & Shaw, J. (1998). Are financial incentives related to performance? A meta-analytic review of empirical research. Journal of Applied Psychology, 83(5), 777–787.
Larkin, I., Pierce, L., & Gino, F. (2012). The psychological costs of pay-for-performance: Implications for the strategic compensation of employees. Strategic Management Journal, 33(10), 1194–1214.
Stajkovic, A., & Luthans, F. (1997). A meta-analysis of the effects of organizational behavior modification on task performance, 1975–1995. Academy of Management Journal, 40, 1122–1149.
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