Anyone familiar with performance pay knows that in some situations it works as expected, and in other situations it can completely backfire. A new study by Ola Kvaloy, Petra Nieken and Anja Schottner helps to explain why.
They propose that both what you say - performance pay - and how you say it - motivational language - make a difference. Specifically, they suggest that "motivational efforts by a leader telling her employees how diligent they are and how important their work is... potentially changes the perception of performance pay."
To test this notion, they conducted an experiment. Participants were given a data entry task and were divided into four groups:
- Those receiving a flat hourly wage rate and "motivational language";
- Those receiving a flat hourly wage rate and no "motivational language";
- Those receiving a piece rate and a fixed payment and "motivational language";
- Those receiving a piece rate and a fixed payment and no "motivational language".
The "motivational language" in this experiment consisted of the experimenters communicating to the participants their belief that the participants were competent, diligent, and able to work quickly and precisely. Kvaloy, Nieken and Schottner state that this is 'moderate' motivational language, leading the participants to believe that they are working on a "valuable project and are likely to do a good job."
The data collected during the experiment was then used to examine the interaction between performance pay and motivational language. The analysis results indicate that:
- Motivational talk alone has no significant effect on overall performance;
- Performance pay alone has a significant negative effect on performance;
- The interaction of motivational talk and performance pay has a significant positive effect on performance.
Based on these results, the authors conclude that "subjects respond to motivational talk by increasing their performance only if they also receive performance pay. Moreover, performance pay decreases performance unless it is accompanied by motivational talk."
In practical terms, our employees know when we're blowing motivational smoke with nothing behind it. They also know when the carrot of performance pay is closely followed by a stick. It is only when our message is internally consistent and holistically complete that we can realize the positive effects of performance pay.
Sorry Grandma, but we need to think carefully about what we say AND how we say it.
Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University and the Program Director for the Institute for Compensation Studies (ICS) at Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in a media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.