Small business owners who don’t want to give employees permanent pay increases may be using performance-based pay — such as bonuses or profit-sharing arrangements — to reward employees without putting too much stress on their business finances. But it turns out this type of pay arrangement may have unintended negative consequences for employees and the business as a whole, a new study reports.
During and right after the Great Recession, many business owners couldn’t afford to give employees raises. Even if they could afford it, the downturn had lots of entrepreneurs shell-shocked and fearful of committing to additional monthly payroll expenses. So many businesses turned to pay arrangements based on either the employee’s performance (such as bonuses) or the company’s performance (such as profit-sharing or employee stock ownership).
While this arrangement does have many benefits, there are also some downsides, according to a study published in Human Resource Management Journal. The study looked at three different types of “contingent pay” — performance-related, profit-related and employee stock ownership — and how they affected employee attitudes such as job satisfaction, commitment to the company, and trust in management.
Here’s what they found: Only performance-related pay (in other words, pay based solely on the individual employee’s performance) positively affected all three of these employee attitudes. Pay arrangements related to company profit, or employee stock ownership, either didn’t affect employee attitudes or affected them negatively.
But even performance-related pay isn’t all good. The study reports that although performance-related pay positively influenced workers’ attitudes, it also tended to stress them out to a degree that might negate the beneficial effects. Employees in this type of arrangement are more likely to feel they’re being encouraged to work too hard, which decreases their job satisfaction. Ultimately, the stress can lower their productivity — giving performance-based pay the exact opposite effect that was intended.
Read more: Does Performance-Based Pay Really Work?