What is pay for performance, and does it work?

Pay for performance is extra pay the employee receives when certain work goals, targets, piece rate items, or key performance measures are achieved. It is used as a motivational tool. For example:

• Increase revenue by 10% by end of financial year to receive $5,000
• Pack 12 bottles of wine per box to receive a 10 cent bonus per box
• Create a team based work culture by end of the financial year to receive $3,000

Does pay for performance work?

The answer is sometimes…. The London School of Economics says “an analysis of 51 separate experimental studies of financial incentives in employment relations found overwhelming evidence that these incentives may reduce an employee’s natural inclination to complete a task and derive pleasure from doing so.”

Why is that?

The reason is found in part of our brain physiology and function. We go in to a fight or flight response if we perceive a threat. Pay for performance is registered as a threat by the brain. This causes adrenaline to be released and blood is removed from the thinking part of the brain (cerebral cortex and parts of the limbic brain) and pumped in to muscles in our legs and arms. Our thinking ability narrows, we can only solve routine or rule based problems i.e. pack 12 bottles of wine per box. Our ability to think laterally and creatively is shut down.

What is the impact on people’s performance when pay for performance is used?

Pay for performance incentives cause our ability to:

• think laterally and creatively to reduce, our motivation decreases for these types of tasks. We are less likely to achieve the target i.e. create a team based work culture by XYZ, because it requires lateral, creative or less linear thinking.
• focus narrowly and solve black and white problems to improve i.e. pack 12 bottles of wine per box. We’ll be faster, more focused and more motivated to achieve this target.

What are the pay for performance learnings?

1. It works for simple rule based, routine, black and white targets, which have a clear outcome ‘pack 12 twelve bottles of wine per box’.
2. It does not work if more complex thinking is required ‘create a team based work culture’.

To help decipher how to best structure your incentive scheme, contact Juliette Smale.