Do bonus schemes result in high performance?

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Two recent pieces of research look at whether or not a reward scheme can help create a high-performance organisation, and how a low level of trust in management affects employee engagement and retention. This is the first in a series summarising findings from a new journal of evidence-based HR management.

Role of reward systems in high performance

A paper by Andre de Waal of Maastricht School of Management and Paul Jansen of VU University, Amsterdam – “The bonus as hygiene factor: the role of reward systems in the high performance organisation” – explores how an organisation can make use of its reward system as a means of supporting its development into a high-performance organisation (HPO).

It classifies an HPO as organisations that achieve better financial and non-financial results than its peer group for at least 5-10 years.

This is the first in a series summarising the key practical implications of research articles in Evidence-based HRM (EBHRM) – A Global Forum for Empirical Scholarship.The journal was launched in 2013 and is “committed to publishing scholarly empirical research articles that have a high impact on the HR field as a whole”.

The researchers identify five key factors where HPOs are superior to their rivals and are fundamental to their position as an HPO:

  • management quality;
  • openness and action orientation;
  • long-term orientation;
  • continuous improvement; and
  • workforce quality.

From their research, the authors identify 12 factors that various HPOs believe to be fundamentally important in the development of their reward systems:

  • a fair reward and incentive structure;
  • reward systems that reinforce core values and strategy;
  • pay and incentives linked to long-term performance;
  • rewards based on relative performance;
  • group compensation;
  • creative and flexible rewards;
  • pay for performance;
  • emphasis on intrinsic rewards;
  • employee stock as an incentive;
  • a minimum threshold for incentive pay and no cap on payments;
  • skills-based pay; and
  • rewards for results, not efforts or seniority.

Three key implications

As a result of their detailed empirical analysis there are three key implications for reward systems within organisations:

  • There is no single type of reward system that will magically transform a firm into an HPO, in fact there are many different types suitable for high-performance organisations.
  • Bonuses and reward systems do not show a significant correlation with organisational performance, hence rewards systems are not the key factor in promoting the superior performance within these firms.
  • The reward system is simply a hygiene factor (in motivator-hygiene theory of Frederick Herzberg, hygiene factors need to be in place but do not motivate higher performance).
  • The organisation needs to have an appropriate reward system that is considered to be fair and equitable. If a reward system is not in place, becoming an HPO will be virtually impossible. If a reward system is in place, and it only matters if that system is appropriate for the organisation, employees will consider it normal and will be content, so becoming an HPO is feasible.

Driving organisational engagement

“What drives organisational engagement? A case study on perceptions and withdrawal attitudes” by Sanna Malinen, Sarah Wright and Peter Cammock of the University of Canterbury, Christchurch, New Zealand, investigates how perceptions of trust in the senior management team as well as perceptions of justice within the organisation impact upon employee engagement and individuals’ intention to quit.

Employee engagement can be defined as “harnessing of organisation members’ selves to their work roles” or “the degree to which an individual is attentive and absorbed in their work environment”.

The authors also distinguish between job engagement and organisational engagement, which in simple terms refer to the activities that the employee does and who they are doing them for, respectively. This paper concentrates on organisational engagement seeing as presumably this is transferable and the employee is likely to be “engaged” on whatever he or she happens to be doing at that point in time. Overall, it should be clear as to why organisations would benefit from having their employees as “engaged” as possible.

The authors speculate that employee engagement, as well as turnover intentions, are likely to be a function of the level of trust in the senior management team, procedural justice within the organisation as well as distributive justice. Procedural justice relates to whether or not the systems within the organisation are perceived as being fair, whilst distributive justice relates to the treatment of each individual and whether or not they perceive that they have been given the opportunities that they deserve.

The empirical analysis clearly indicates that trust in the senior management team, as well as procedural justice, have a strong positive influence upon employee engagement and turnover intentions, ie the greater the level of trust in the senior management team, and perceptions of procedural justice, the more employee engagement there is likely to be, as well as fewer workers looking to quit. Distributive justice was shown to be less important.

Implications

Although the paper gives no guidance as to how to increase the level of trust in the senior management team or increase perceptions of procedural justice, which is arguably a topic for a separate analysis, presumably those within the organisation would be best placed to make those decisions. It is clear that if they could be achieved it is very likely that the organisation would benefit from a more “engaged” workforce. There would also, almost certainly, be a reduction in the direct costs associated with recruitment, selection, induction and initial training.

Summaries by Dr Michael Brookes, Middlesex University

One Response to Do bonus schemes result in high performance?

  1. Pat 6 Mar 2014 at 4:23 am #

    Excellent. A really helpful summary!!