In December, you organized a symposium on pay systems at KLU that sparked a lot of interest. What is it that you personally find so fascinating about this topic?
Pay is a rather complex and contradictory issue which is exactly why I am interested in it. These types of subjects fascinate me. People are generally more inspired by the content of their work rather than the amount they make. That said, we also know that merit pay systems are effective. Moreover, research shows that we are preoccupied with what our colleagues earn in comparison to ourselves. How much we earn plays an important role in our perceived value and overall fairness in the workplace.
As a company, what are the signs that the pay system in place is not working and that changes need to be made?
When discussions about the fairness of the current pay system keep cropping up, that is when I know something has gone awry. Whatever the pay system in place, it is not compatible with my company. This could be for a number of reasons. For one company, performance-based pay will be the largest contributing factor to employee satisfaction, whereas in another, it will prove to be a major source of tension.
What is a common pitfall for companies when they start revising their pay systems?
Quite often there is a lot of upfront discussion about pay. Everyone agrees on a plan, and no one ever bothers to check and see if it actually works. Let’s compare it with marketing. In marketing, it goes without saying that every campaign must undergo testing. I have to check to see if a product is more effective in blue or red. I test every single sentence. However, human resources and in particular pay plans are rarely if ever met with the same scrutiny. If companies start revising their system, management perceives its employees saying, “they are tampering with our salaries.” This, of course, could not be further from the reality of things. Research has shown us that these systems most definitely need to be checked and revised.
As a company, how can I measure the effectiveness of my pay system?
Firstly, I need to advance hypotheses: What is it I believe has changed or is not working? How can I determine this? In order to examine these hypotheses, I need to collect data on the proportion of financial incentives. Secondly, I will need to gauge the reactions of my employees towards these systems. For this I can use available performance data collected by, for example, HR. There might also be results from an employee survey I could take into account, or perhaps there is other data readily available.
That said, such investigative measures are, in fact, quite rare. We have been able to obverse that much of the data available is not being utilized. For example, I had a meeting with one company where there had been a debate going on for more than two years on whether or not performance assessments correlated with the current pay system. They had the necessary data to solve the mystery, so I merely suggested they test it. That way, they would have the statistics right in front of them. However, there was no one who had the skills required to carry out and interpret such an analysis.
But that’s good news for these companies. Look at all the data they already have!
It’s true, most companies do have access to this data. But they have no idea how to analyze it. One possibility in dealing with the situation could be to set up a research assignment. I’d be happy to field any questions on how to do this.
Can you give an example of what I could find out if I were to carry out this kind of analysis?
One good example comes from an intriguing study conducted in a fast food chain. Financial incentives for certain behavior were introduced in some restaurants and social incentives in others. That means some teams earned extra money while others received large amounts of praise. In both instances performance levels improved, albeit monetary boosts did seem to provide faster results than social merits did. The important thing to take from this was that praise can be just as effective as financial incentives. If I were running a business, I would want to know this.
That means money is really just one of many tools in the shed. Why do you think management focuses so much on merit pay systems then?
One reason is it always comes down to that old saying: “that’s business”. After all, money talks. What is more, merit pay systems are the easiest to implement. The results can be seen immediately since the processes involved can be easily documented. On the other hand, if I want my management team to become better at praising employees, I can train them to do this, but I will have a harder time setting this up in a visible process.
What has current research been finding out about pay systems?
At the moment, I am working on a comprehensive global research project known as the IMPACT study. By implementing an identical test design in roughly fifty countries worldwide, we are analyzing the impact of merit pay systems. We are measuring satisfaction, motivation and various other factors before and after people have received financial incentives. The study explores, for example, what amount does elicit a reaction from employees, and in what ways do cultural differences factor into this. In order for us to do this, companies have provided us with their real-life data available. This is something very rare, and we have found ourselves inside a definite research gap. By and large, very little research has been done on pay systems, and that which does exist has mostly been lab-based testing on how people generally react to different types of incentives.
Are companies managing to put any of this current research into practice?
Not always. At the moment, crowding out is a hot discussion topic. It assumes that financial incentives displace intrinsic motivation. This has been proven and there have been a lot of examples pointing to this, however, most of these lie outside of the corporate context. A current meta-analysis has presented us with a different picture. We are seeing a parallel between extrinsic and intrinsic motivation. Merit pay systems really do work, but they are not the only thing that drives us.
In current business practices, there has been a large trend to ditch financial and performance-based incentives all together. Many companies have opted for a return to standard pay options, basing their decisions on studies conducted in free-time activities and volunteer work. One study that is often cited for this is the blood donation scheme. This study has shown that people are willing to volunteer to donate blood because they want to do something good for others. However, as soon as money is involved, they become less willing to perform this charitable act. However, I would advise companies to use caution when implementing this principle in their policies as this result cannot and should not necessarily be applied to business practices.
The world of work is undergoing a massive overhaul, and the need for agile management is trending. What sort of impact is this going to have on contemporary pay systems?
Yearly performance reviews are something everyone is familiar with. In many cases, the feedback process, learning process and pay system are all linked to this at the same time. However, research has shown that, firstly, performance reviews should happen more frequently than the standard once a year, and, secondly, all these matters should be handled separately. Agile management leads to acceleration and flexibility in the work process. But for things to be sped up, it would be advantageous for feedback and learning processes to be looked at more frequently. Employees should be answering questions that promote their personal advancement. For example, what am I not able to do yet or where are my weaknesses? If they are feeling challenged, this will have an intrinsically motivating effect. Regarding financial incentives, on the other hand, employees often tend to set themselves goals that can easily be reached and thus take away their intrinsic motivation. If both performance and financial incentives are discussed in the same meeting, this could lead to conflicts.
Another growing trend is team orientation. As a company, how can I decide whether or not it makes sense to switch to a team-based payment system?
First of all, I can say that team-based payment systems do, in fact, work. At the symposium, Dr. Yvonne Garbers introduced a meta-analysis regarding this subject, and Professor Dr. Thomas Haussmann stated that these systems are gaining in momentum.
However, what I really have to take into account here: What are the behavior patterns of the employees that are contributing to the success of my company? Once I have determined these, I can adjust my pay system accordingly. For many desirable behavior patterns, a pay system is simply not applicable. That is when I should start exploring other options for motivating my employees.
Are there any negative effects pay systems could have?
As a general rule, payment has more of an effect on quantity rather than quality of work. This we have seen come up in many meta-analyses. That said, these systems can indeed produce adverse reactions. For example, employees might cheat the system by claiming they have fulfilled certain tasks without actually doing the leg work. We have also seen that financial incentives can provoke negative behavior among colleagues. In his presentation at the symposium, Dr. Daniel Gläser stated that competitive personality types in particular will react aggressively towards colleagues when there are performance incentives at stake.