With the competitive landscape becoming increasingly difficult, companies are looking for ways to optimize employee effort and performance. One mechanism used by many companies is pay-for-performance, linking compensation directly to performance. A Norwegian study investigated the role of base pay and variable pay-for-performance plans in the Insurance industry over a 2-year period, and found that such compensation plans can lead to increased effort and deceased turnover intentions, but via employee job motivation.
Key Topics: Pay-for-performance; Employee motivation; Employee effort; Turnover intention
Title of Reviewed Article: Do you get what you pay for? Sales incentives and implications for motivation and changes in turnover intention and work effort
Researchers: Bard Kuvaas (Norwegian Business School), Robert Buch (Oslo and Akershus University College of Applied Sciences), Marylene Gagne (The University of Western Australia), Anders Dysvik (Norwegian Business School), and Jacques Forest (ESGUQAM).
Publication: Motivation and Emotion, 2016, Vol. 40 No. 5, pp. 667–680.
Setting the Scene
Pay for performance (PFP) relates to employee compensation that is contingent on some aspect of work performance (Gerhart & Fang, 2015). Such compensation plans have been shown to have the potential to have notably positive effects on employee performance (e.g. Stajkovic & Luthans, 2003; Weibel et al., 2010), with the main rationale for this PFP and employee performance link being instrumentality i.e. the perceived relationship between performance and pay leads to increased effort (Nyberg et al., 2016). Given the encouraging empirical and anecdotal support for PFP, companies are increasingly looking to use PFP to generate optimal employee performance (Thierry, 2002).
Autonomous motivation is another factor that has been found to lead to greater employee performance (Cerasoli et al. 2014), and relates to individuals doing something because they have an interest in it and enjoy it (Deci & Ryan, 2000). Research indicates that this is a more powerful form of motivation in performance than controlled motivation, which relates to individuals doing something in order to receive reward or avoid punishment (Deci & Ryan, 2008). Furthermore, it has been suggested that external rewards can lead to a decrease in autonomous motivation (Deci et al., 1999).
Building on prior research, the current study examines how PFP elements with varying instrumentality (i.e. base pay, variable annual pay, and variable quarterly pay) relate to employee work effort and turnover intention, and to what extent these relationships are mediated by motivation. The researchers put forward a number of research hypotheses to examine:
Hypothesis 1 – “The relation between the amount of annual variable PFP and an increase in work effort is (a) positively mediated by controlled motivation and (b) negatively mediated by autonomous motivation.”
Hypothesis 2 – “The relation between the amount of quarterly variable PFP and an increase in work effort is (a) positively mediated by controlled motivation and (b) negatively mediated by autonomous motivation.”
Hypothesis 3 – “The relation between the amount of base pay and an increase in work effort is positively mediated by autonomous motivation.”
Hypothesis 4 – “The relation between the amount of annual variable PFP and a decrease in turnover intention is (a) positively mediated by controlled motivation and (b) negatively mediated by autonomous motivation.”
Hypothesis 5 – “The relation between the amount of quarterly variable PFP and a decrease in turnover intention is (a) positively mediated by controlled motivation and (b) negatively mediated by autonomous motivation.”
Hypothesis 6 – “The relation between the amount of base pay and a decrease in turnover intention is mediated by autonomous motivation.”
How the research was conducted
The researchers conducted a survey analysis with sales employees in a large Norwegian insurance company. Two surveys were carried out.
The first survey was carried out in February 2007, and information was collected in relation to work effort and turnover intention. The survey was carried out after new variable PFP plans were introduced by the company, but before the first plan payouts.
The second survey was carried out in April 2008, and was designed to assess the perceived instrumentality of PFP plans.
The third survey was carried out in May 2009, and was designed to collect data on the mediating and dependent variables.
In total, 322 sales employees completed all three surveys. These employees served one of two markets, business to business (B2B; 101 employees) or business to consumers (B2C; 221 employees). Under the PFP plans, B2B employees received annual payouts, while B2C employees received quarterly payouts. Only the top performers under the plan were rewarded with variable compensation on top of their base pay.
Key Research Findings
Hypothesis 1 was supported by the results, as the amount of annual variable PFP was found to increase work effort via controlled motivation, and decrease work effort via autonomous motivation.
Hypothesis 2 was only partially supported by the results. The relationship between the amount of quarterly variable PFP and increased employee work effort was found to be positively mediated by controlled motivation, supporting Hypothesis 2a, but not negatively mediated by autonomous motivation, and thus not supporting Hypothesis 2b.
Hypothesis 3 was supported, with the results indicating that autonomous motivation positively mediated the relationship between base pay and increased employee work effort.
Support was also established for Hypothesis 4, with the amount of annual variable PFP found to relate to increased turnover intentions via controlled and autonomous motivation.
Controlled motivation was found to positively mediate the relationship between the amount of quarterly variable PFP and decreased turnover intentions, which supports Hypothesis 5a. However, the relationship was not found to be negatively mediated by autonomous motivation, and as such Hypothesis 5b was not supported.
Hypothesis 6 was supported as autonomous motivation was found to mediate the relationship between base pay and decreased turnover intention.
Both base pay and variable PFP were found to be positively related to increased work effort, however, interestingly variable PFP was related to increased turnover intention while base pay was related to decreased turnover intention, which is somewhat contrary to previous research which suggested both base pay and variable PFP should lead to decreased turnover intention.
The results of this study provide insight into the mediating roles of work autonomous and controlled motivation. Autonomous motivation explained the relationship between base pay and increased employee work effort, although interestingly the role of motivation in variable PFP was considerably different.
Autonomous motivation led to annual variable PFP having a negative relationship with employee work effort, however, through controlled motivation, annual variable PFP resulted in a positive change in employee work effort. Similarly, quarterly variable PFP was found to be positively related to controlled motivation, and in turn on work effort. Similar relationships were found between compensation plans, motivation, and turnover intention.
The finding that variable PFP appears to be primarily affected by controlled motivation is in contrast to some prior research (e.g. Gerhart & Fang, 2014) which favored the use of PFP plans to increase employee effort and performance. The current study suggests that base pay may be a better tool in enhancing the engagement and optimal performance of employees, as it is more positively related to autonomous work motivation than variable PFP.
Organizational and Reward Implications
This study challenges the belief held by many that base pay does not provide strong motivational power (Magee et al., 2011). Contrary to this, the results indicate that significant increases in work effort and decreases in turnover intention can be achieved through base pay. Taking this into account, companies should focus on ensuring that, at a minimum, top performers have competitive base pay relative to internal and external peers, to signal to them their importance to the company.
Consistent with prior research, the current study also indicates that variable PFP is an important motivator, so companies should not throw the baby out with the bathwater so to speak, and wholly replace base pay with variable pay; a combination of both elements is likely to yield the best results.
Interestingly, when it came to variable compensation, the frequency of payouts was a greater predictor of motivation than the amount of payout. This offers a fresh perspective to prior research that suggested that the amount of compensation potentially or actually received was the primary motivating factor for employees (Heneman et al., 2000). Many companies apply an annual bonus approach to the majority of employees; this study suggests reason to consider more frequent payout events.
This study gives a fresh perspective on the motivating potential of base pay and variable PFP, and makes a strong case for the importance of base pay in driving optimal employee performance. It would be valuable for further studies to examine the relationships highlighted in this study to better understand these nuanced relationships across different and broader populations.
Source Article: Kuvaas, B., Buch, R., Gagne, M., Dysvik, A., & Forest, J. (2016). Do you get what you pay for? Sales incentives and implications for motivation and changes in turnover intention and work effort. Motivation and Emotion, 40(5), 667–680.
Published by: Springer International Publishing AG
For further details and access to the full journal article Click Here (subscription or payment may be required).
Cerasoli, C. P., Nicklin, J. M., & Ford, M. T. (2014). Intrinsic motivation and extrinsic incentives jointly predict performance: A 40-year meta-analysis. Psychological Bulletin, 140(4), 980–1008.
Deci, E. L., & Ryan, A. M. (2000). The ‘‘what and ‘‘why’’ of goal pursuits: Human needs and the self-determination of behavior. Psychological Inquiry, 11(4), 227–268.
Deci, E. L., & Ryan, A. M. (2008). Facilitating optimal motivation and psychological well-being across life’s domains. Canadian Psychology, 49(1), 14–23.
Deci, E. L., Ryan, R. M., & Koestner, R. (1999). A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin, 125(6), 627–668.
Gerhart, B., & Fang, M. (2014). Pay for (individual) performance: Issues, claims, evidence and the role of sorting effects. Human Resource Management Review, 24(1), 41–52.
Gerhart, B., & Fang, M. (2015). Pay, intrinsic motivation, extrinsic motivation, performance, and creativity in the workplace: Revisiting long-held beliefs. Annual Review of Organizational Psychology and Organizational Behavior, 2(1), 489–521.
Heneman, R. L., Ledford, G. E., & Gresham, M. T. (2000). The changing nature of work and its effects on compensation design and delivery. In S. L. Rynes & B. Gerhart (Eds.), Compensation in organizations: Current research and practice (pp. 195–240). San Francisco: Jossey-Bass.
Magee, J. C., Kilduff, G. J., & Heath, C. (2011). On the folly of principal’s power: Managerial psychology as a cause of bad incentives. Research in Organizational Behavior, 31, 25–41.
Nyberg, A. J., Pieper, J. R., & Trevor, C. O. (2016). Pay-for-Performance’s Effect on Future Employee Performance: Integrating psychological and economic principles toward a contingency perspective. Journal of Management, 42(7), 1753 – 1783.
Stajkovic, A. D., & Luthans, F. (2003). Behavioral management and task performance in organizations: Conceptual backgrounds, meta-analysis, and test of alternative models. Personnel Psychology, 56(1), 155–194.
Thierry, H. (2002). Enhancing performance through pay and reward systems. In S. Sonnentag (Ed.), Psychological management of individual performance (pp. 325–347). Chichester: Wiley.
Weibel, A., Rost, K., & Osterloh, M. (2010). Pay for performance in the public sector: Benefits and (hidden) costs. Journal of Public Administration Research and Theory, 20(2), 387–412.
Comments are closed.
Popular Reward Chronicle Searches
Pay for performance
Join The Reward Chronicle Team
Are you passionate about reward? We’d love to hear from you. Click here for more details on how to contact us.