There’s no doubt that a competitive base salary is the first priority when attracting highly-skilled job seekers and retaining employees over time. But in the modern war for talent, bonuses and other incentive pay types can go along away towards building an engaged workforce.
Among the most common types of short-term incentives are performance sharing plans and individual performance-based plans. In these plans, companies reward bonuses to employee based on how they advanced the goals of the organization, and what they accomplished individually over the course of a quarter or year.
But, according to a research first published in the journal Economic Inquiry, The Telegraph reports that implementing a bonus structure – and then replacing it with a fixed pay structure – negatively impacts productivity among male employees.
In the experiment, researchers mimicked a bonus structure by paying individuals for each piece of work they did. But when they moved to a fixed rate, there was a 12% decrease in effort among men. Women, on the other hand, worked just as hard under both pay structures.
STI Trends and Motivational Crowding-Out Effect
In this year's Pay Practices and Compensation Strategy Survey, we found a sharp increase in the number of companies using hiring, referral, and retention bonuses compared to 2017. Over 80% of organizations somewhat or strongly differentiate between high and low performers, and 77% of companies in both the U.S. and Canada continue to use variable pay as part of their total rewards packages. As bonus structures grow more and more common across industries, it’s important to find – and try to stick with – a consistent pay strategy.
When a bonus structure is replaced with a fixed pay structure, the negative effect on productivity is called ‘motivational crowding out.’ However, this only applies to folks who had prior experience in a bonus structure, and not those who’ve only worked in a fixed rate structure. Short-term incentives, when administered correctly, can increase employee engagement. But since reneging on such a system can decrease engagement, The Telegraph suggests it may not be worth implementing a bonus system to begin with if organizations believe their pay strategy may be reworked in the future.
Gender Pay Gap Widens with Bonuses
The Telegraph also suggests that if it’s necessary to scale back on a bonus system, organizations can reduce the negative impact on productivity by increasing the share of female employees in an organization. However, this tactic misses a greater concerns pertaining to incentive pay: the gender pay gap is even wider when accounting for bonuses.
As organizations begin to implement new pay practices moving forward, it’s ethical and advantageous for businesses to reward effort consistently – and understand the flight risks that come not only with scaling back a bonus plan, but also not staying committed to pay equity.
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