The ability of companies to be adaptable and pursue different paths simultaneously, to have organizational ambidexterity, is central to the success of many companies. A recent study on the banking sector in Israel examined the role of performance bonuses in facilitating organizational ambidexterity, and found bonuses to have a significant influence on employee performance, although the study also found that high ability employees were more capable of adjusting performance to benefit most from bonus plans.
Key Topics: Organizational ambidexterity; Employee Ability; Performance; Bonuses
Title of Reviewed Article: Behavioral Ambidexterity: The Impact of Incentive Schemes on Productivity, Motivation, and Performance of Employees in Commercial Banks
Researchers: Mohammad Faisal Ahammad (Nottingham Trent University), Sang Mook Lee (Penn State Great Valley), Miki Malul (Ben-Gurion University), and Amir Shoham (Temple University).
Publication: Human Resource Management, 2015, Vol. 54 No. 1, pp. 45-62.
Setting the Scene
Organizational ambidexterity is a vital element in the success of modern organizations and has been shown to positively affect various organizational outcomes such as sales growth (e.g. Caspin-Wagner, Ellis, & Tishler, 2012) and organizational performance (e.g. Junni et al., 2013). Such ambidexterity relates to a company’s ability to simultaneously pursue two different paths of exploration (discontinuous) and exploitation (incremental), and to manage potentially contradictory processes within the company (O'Reilly & Tushman, 2004), although the term refers generally to adaptability (Gibson & Birkinshaw, 2004), innovation (Sarkees & Hulland, 2009), and incremental and revolutionary change (O'Reilly & Tushman, 1996).
Research suggests that organizational ambidexterity is derived from the actions of employees and so is closely linked to HR practices (Kang & Snell, 2009; Gibson & Birkinshaw, 2004). Gibson and Birkinshaw (2004) outlined a behavioral model of ambidexterity, referred to as contextual or behavioral ambidexterity, which includes the four elements of discipline, stretch, support, and trust, which they identified as important elements to develop in companies and their employees to engender organizational ambidexterity.
Patel, Messersmith, and Lepak (2012) suggested that high-performance orientated HR practices drive greater ambidexterity as they motivate employees to adopt desired behaviours. One such primary motivating HR practice is the use of performance bonus plans to elicit desired behaviours (Sun, Aryee, & Law, 2007), and generate a positive sense of stretch in employees (Patel et al. 2012), and which can also facilitate employees’ perception of being valued for their contributions (Subramony, 2009). While such plans have many positives, there is some suggestion that the value may differ based on the ability of employees (e.g. Delery & Doty, 1996), which the researchers of this study look to examine further.
Following on from this, the researchers outlined two research questions for examination:
Hypothesis 1 – “Employees will change their effort to take advantage of financial incentives.”
Hypothesis 2 – “Employees with higher ability tend to increase their productivity to take advantage of a bonus incentive, while employees with lower ability do not have the resources to respond to incentive schemes.”
How the research was conducted
The researchers collected employee performance data from a single commercial bank in Israel. Actual quarterly performance data for 133 bank branch employees was assessed, from Q2 2007 to Q1 2008. Data was also collected in relation to employee ability, which was defined by the researchers as relating to the employees’ educational level.
Employee performance in each quarter was measured based on a “selling basket” which included seven financial products, with each product weighted differently according to importance to the company. Sales targets for each product were set for each employee by management.
These employees participated in a bonus plan, which paid out based on individual performance against these targets. This bonus plan was effective only in Q4 each year, so while performance was measured in other quarters, employees were not eligible for bonus payments in those quarters.
Key Research Findings
The results found that individual performance in Q4, when employees were eligible for bonus, was significantly higher than in all other quarters, while Q1 performance was a significantly lower than in all other quarters. Q2 performance was found to better than Q3 and Q1 performance. These results support Hypothesis 1.
Hypothesis 2 predicted that employees with greater ability would increase their effort to obtain the bonus, while those of lower ability would be less capable of obtaining the bonus and would only achieve their fixed salary. The results supported this hypothesis, with more educated employees showing a greater increase in performance in Q4 than less educated employees, and decreasing their performance in Q1 to a greater extent.
Younger employees were also found to modify their behavior more according bonus plan payout timing.
The results show that the bonus plan had a significant effect on performance, with performance being greatest in Q4. The performance of employees in the other quarters is also interesting, with employees seemingly delaying effort in Q3 for Q4 and then following a high performing Q4 reducing effort again in Q1. These results are consistent with prior research which indicated that performance bonuses can motivate employees to adopt appropriate discretionary behaviors (Sun et al., 2007; Prieto & Santana, 2012).
The finding that employees with greater ability modify their behavior to a greater extent than lower ability employees suggests that lower ability employees are less able to raise their performance to benefit fully from bonus plans, and use their efforts more in the attainment of the minimal level of performance to remain in their job, while higher ability employees have ‘another gear’ and are better able to take advantage of a bonus plan. Hence, the results suggest that the impact of a performance bonus plan will differ by the abilities of employees.
The results extend the research on organizational ambidexterity by demonstrating that the behavior of employees can vary according to the ability and competency of employees, particularly in the presence of variable, individual performance related, compensation plans. The results are also consistent with prior research (e.g. Patel et al., 2012) which suggested that monetary incentives give employees a positive sense of stretch that is necessary in developing organizational ambidexterity.
Organizational and Reward Implications
There are a number of practical implications of this research. Firstly, while performance increased during the bonus eligible period, performance was also considerably less in the quarter before and after this period. While the benefit of a bonus plan is demonstrated in this study and others, companies should consider unintended consequences of implementing such plans, such as in this case, the inadvertent promotion of decreased performance in other non-bonus eligible periods.
Companies should also consider if their bonus plan designs are appropriately targeting and motivating the desired employee group. This study suggests that individual performance bonus plans may lean towards being more beneficial to high ability employees, with lower ability employees having less tools to respond to such incentive plans. Companies should carefully consider setting targets at an individual level in order to incentivize all targeted employees appropriately.
This study provides insight into employee behavior modification in response to variable compensation and how the ability of employees plays an important role in how impactful bonus plans can potentially be for employees. This study examined performance pay in one banking organization, during the 2007/08 financial crisis, and these factors should be borne in mind in considering the results. Further research in this area examining other types of performance plans and organizations would be beneficial.
Source Article: Ahammad, M. F., Lee, S. M., Malul, M., & Shoham, A. (2015). Behavioral Ambidexterity: The Impact of Incentive Schemes on Productivity, Motivation, and Performance of Employees in Commercial Banks. Human Resource Management, 54(1), 45-62.
Published by: John Wiley & Sons, Inc.
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