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Why Performance-Based Pay Doesn't Always Motivate Employees

Alise Bailey, Editor
Square

If your employees are compensated based on performance, their pay might be leading to higher levels of stress and decreased feelings of job satisfaction. New research suggests that certain types of incentive-based pay have a detrimental effect on workers.

Since 4 out of 10 U.S. employees will look for a new job this year, it’s in your best interest to retain great talent and keep everyone happy. You can start by reviewing your employees’ compensation packages.

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In a study recently published in Human Resource Management Journal, researchers explored the impact of incentive-based pay on job satisfaction, commitment, and trust in management by surveying 1,293 managers and 13,657 employees at 1,293 workplaces in the U.K.

The study focused on incentive-based pay, commonly used to motivate employees. The three kinds of incentive-based pay include performance-related pay, profit-related pay, and employee share-ownership.

Researchers found that of the three types, performance-based pay has a negative effect on employees’ overall well-being and is associated with more work, less job satisfaction, and higher levels of stress.

“By tying employees’ performance to financial incentives, employers send signals to employees about their intention to reward extra work effort with more pay. Employees in turn receive these signals and feel obliged to work harder in exchange for more pay,” said head researcher Chidiebere Ogbonnaya. In turn, workers feel exploited, as extra work ultimately benefits the employer.

So what can you do to ensure that you avoid overloading your employees’ workload and maintain high levels of job satisfaction?

“The key thing for managers is to ensure some balance between employee job demands and measurement of rewards offered,” said Ogbonnaya. “The relationships between performance-related pay and employee attitudes depend on whether there is a perceived imbalance between intensive work effort and the availability of appropriate rewards.”

If you use a performance-based pay structure, consider reviewing compensation packages for your employees and altering the type of incentive-based payment that you utilize. A small change could have a big impact on your employees’ daily lives and overall happiness.

At the very least, have an honest conversation with your employees to understand their thoughts about their compensation. Encouraging feedback opens dialogue about the impact pay has on their performance and the success of your business.

What about benefits?

If you’re not already providing benefits, you may think about adding them to your compensation package as well. A Glassdoor study found that four in five employees prefer benefits or perks more than a pay raise. Eighty-three percent of employees say that health insurance is very or extremely important when choosing or deciding to stay in a job, according to a study by the Employee Benefit Research Institute. And 73 percent say the same about retirement benefits.

Square Payroll partners with leading benefits providers so you and your team can access health insurance, 401(k), and more — all in one place.

If you already use Square Payroll, you can enroll in benefits directly from the Square Payroll dashboard. You can choose the benefits that best suit your needs and budget, and we’ll take care of everything else, from employee enrollment to calculating deductions and contributions for each pay run. Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.

Create an account with Square Payroll to learn more about signing up for benefits. Or, if you already have benefits that you want to sync with Square Payroll, learn about adding your benefits to Payroll in our Support Center.

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Alise is an editor at Square, where she writes about how to start, run, and grow a business, highlighting our sellers around the world.