Human Resources, Small Business Spoonfuls Podcast

SBS 228: Incentive Pay – The Good and the Bad

Hey Compliance Warriors!

Today we’re talking about how incentive pay can be really good in an organization but also how it can hinder if it is not well managed.

Don’t forget to rate, review and subscribe on Apple Podcast, Spotify, or Stitcher!
Enjoy and until next time, Be Audit Secure!


Lisa: Today we’re talking about incentive pay and bonuses.


Mason: Yup. This is something we’re going to talk a counterpoint thing on what’s good about it and what can be bad about it.


Lisa: Yeah, absolutely. Because bonuses, have been shown to work, they can increase productivity and they can improve your overall business results. There was actually even a 2010 Harvard business and Yale school of management study on whether bonuses boost sales productivity within a large sales force, and they did find that there were several things that improved. For instance, bonuses did increase productivity in this study. Quarterly bonuses, increased sales force productivity, more than annual bonuses did. And salespeople tended to give up when they’re far away from reaching a quota but, they don’t slow down once a quota is reached, especially if their firm offers commission for over-achievement. So, these were some of the things found in this study that really showed it to be a positive thing.


Mason:  Yeah. Well this sounds pretty good to me. So why wouldn’t you want to do this?


Lisa: Well, there is always the counterpoint. And I think really here that what the good lesson here is, it’s kind of like with anything, if you can handle it properly and you can sus out what the culture and what the thought and the feeling of your company is, there might be a time to implement and a time not to implement. And maybe it’s not the right mix of people or personalities. But certainly, there are some disadvantages to incentive pay.


Mason:  Yeah. you hear that, old quote, it says, too much of anything is too much. So that’s something to think about when going through this. So, some of the highlighted points, over time it can create a sense of entitlement, decreasing motivation and lowering performance.


Lisa: Yeah and so this was found in the 90s and a Hewlett Packard steady, where managers implemented 13 different incentive pay programs at their various locations. And so, employees at first, they met their goals and it was going well. And in response to all this greatness, the raise the goals, and so that lowered the incentive pay, the workers were upset, dissatisfied. The managers found that the workers were not as motivated and it led to large variances in team performance. And so overall it was a major fail, but then again, they started out good And then management got greedy.


Mason:  Yup. That’s right. And if you’re going to do this kind of thing, don’t overhaul your expectations on something. Basically, the point of that. So, it can negatively affect employees Job satisfaction.


Lisa: Here we’re just basing this on studies. This is, an article that I read by Danielle Corradino, an HR director in Florida. But anyway, so she says here that there was this Harvard business study in 2017 and they surveyed more than 13,000 employees in the United Kingdom and they found that profit related incentive pay resulted in lower job commitment and trust and managers and the study also found that performance related incentive pay made employees feel increased pressure at work. So even though you think giving them this goal to reach  and this pay that goes with it is going to help them sometimes it just stresses people.


Mason: It makes them feel like, do I deserve this? What do I need to do? and then people get in their heads and then people are pressure and it’s just not a good culture anymore. So, the next point is it can create overly competitive workforce, not focused on quality.


Lisa: Yeah. So, we just want to get to the point and not, we don’t care if it’s good quality or not. We just want to meet the goal.


Mason:  Just churn stuff out and say your boss can think, oh yeah, he’s got a lot of stuff. But when you go in and look at it, like Whoa. Qualities kind of suffering here.


Lisa: Yes, and then, people who don’t have the get the incentive pay, they don’t meet the goals. They can of course get jealous, which they quit, that causes conflict within the ranks. And there are constant issues with just trying to make bottom line thresholds because you can’t keep people because of the level of competition that’s there. People just give up and go.


Mason:  Yep, And the next thing kind of leading from that is it can create tension among coworkers.


Lisa: Oh yeah. If you give bonuses to teams, that can be a lot of fun and it can be good, but it can also create a lot of animosity, again, envy and issues. It can almost be like a gang mindset. Like, our gang is better than your gang if you have like these teams going on. And so, low performers could feel pressured by others on the team. You’re the reason we’re losing every month. Like if you ever seen survivor, if you’re the weak link on the team, on the tribe, they vote you off the Island. Well here, like you can’t vote a coworker off because you can’t fire someone. Like you may not have the power to fire them, but one way or another you’re going to try to get rid of them.


Mason:  Yeah, You definitely wouldn’t want to divide your workforce in that way. So, the next thing is increase pay, in equality for women.


Lisa: Oh, it’s been a big thing for 50 years and, we hear a lot about it in today’s world. Now this was interesting. She quoted here a study by ADP, a research Institute, and it was released last year, and it showed that women on average are paid 17% less in base salary than men. So that’s just across the board anyway. But when incentive pay was added, the pay gap increased by another 2%. So other research showed that a female executives received less incentive pay than male executives. So, this is part of the reason not that women just can’t perform and get the incentive pay. It’s that our incentive pay levels are set lower than men. And so that just increases that gap. If you do an incentive pay program, make sure it’s fair across the board.


Mason:  Yeah, absolutely fair for men and women. In these situations, but especially women. Okay, the next thing, it can be expensive when things go wrong.


Lisa: Wow. And so, there was a Wells Fargo case that showed when incentive play goes wrong, the cost to employers can really outweigh the benefit. The study published in organization science in 2016 found that an incentive pay plan aimed at boosting attendance in 5 factories decreased productivity by 1.4%. Because conscientious internally motivated employees who were performing well before the program was implemented, felt It was unfair to them. They were already high performers. Why are you challenging me more and so in light of all of these organizational leaders, have been taught that they should proceed with caution in implementing these pay programs.


Mason:  That’s right, and you never want to give out a bunch of money and not ever see the results of it. At the end of the article here, it says if they ultimately decide to implement a program, they should monitor it closely to ensure that it’s achieving the desired goals. And I think that’s important because we’re not sitting here saying incentive pay is bad. We’re saying this can be a very good thing. I mean, I get bonuses sometimes makes me feel great and makes me, gives me good incentive. But we’re also, a smaller company and bigger companies, these things can get muddy. So, you really need to monitor it is what we’re saying. So, we’re not totally shunning it. Not bad, just keep an eye on.


Lisa: Yeah. And honestly, in all of these areas that we’ve talked about, management went wrong somewhere. They didn’t know their audience. They didn’t know their group. They pitted people against each other. We just be very careful like you said.


Mason:  Just keep your expectations in check is the employer.


Lisa: And don’t get greedy.


Mason: Yep, that’s right. Okay, great. So that’ll wrap up another one.


Lisa: All right, well thanks for listening. Until next time.

Log in or Register to save this content for later.