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WORKSPAN
WORKSPAN DAILY |

Financial Rewards: What Does Research Tell Us?


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Editor’s Note: WorldatWork, in partnership with the Center for Evidence-Based Management (CEBMa), is proud to announce a new Workspan Daily series that will utilize research as evidence to inform decision-making for the benefit of our readers and to encourage further discourse on topics vital to the total rewards profession. This series will present scientifically sound research on topics that rewards practitioners deal with as well as informed opinions that, at times, may actually contradict what sound research tells us.

Financial rewards are a major component of virtually every employer’s value proposition. People establish their standard of living based on the size and the stability of their income stream. The disruption the pandemic has caused has interrupted that stream for people who have lost their employment or have been furloughed. Governmental support has temporarily addressed this loss to varying degrees. But the destabilizing impact of the pandemic has put a spotlight on financial rewards and highlighted the importance of their continuity.

Financial incentives are widely accepted as being a tool to motivate workers to focus on what their employer needs and to extend their best efforts toward achieving the desired outcomes. Decades of research have established that linking financial rewards to performance has a positive motivational impact. If properly designed, financial rewards programs can encourage maximum effort, focusing that effort on the right things and sustaining the effort for as long as is required.

A recent CEBMa analysis of research findings about the impact of financial incentives aggregated the results of six meta-analysis and nine primary research studies, which was the most comprehensive summary of high-quality research on the topic. Of the 16 findings reported, those listed below were strongly supported by research evidence considered to be of the highest quality.

What the Evaluation of Research Shows

  1. Financial incentives have a moderate to large positive effect on employees’ motivation and performance. One of the six meta-analysis studies contained 45 controlled studies and found that performance gains from financial incentives were double those of the average gain from non-financial incentives. A large number of high-quality research studies have in the past produced similar findings.
  2. Financial incentives do not affect intrinsic motivation. Claims to the contrary have been made in several articles and books, but recent meta-analyses and high-quality research studies indicate that financial incentives have no adverse effect on the intrinsic motivation of employees. There is, however, some evidence that financial incentives perceived by employees as being exploitative may decrease intrinsic motivation.
  3. Financial incentives tend to increase performance on non-interesting tasks, but it’s possible they may decrease performance on interesting tasks. The evidence shows a strong positive impact on the performance of non-interesting tasks. Research studies of somewhat lower quality suggest the incentives may have a smaller or negative impact on performance of interesting tasks.
  4. Financial incentives have a larger positive impact on performance for highly complex tasks than for less-complex tasks. Despite past claims that financial incentives only affect performance on simple tasks, a meta-analysis of 146 controlled studies found these incentives were even more effective in highly complex tasks.
  5. Financial incentives that are not tied (or loosely tied) to performance can negatively affect performance. If the incentives are only tied to completion of a task without any established performance standard, they can have a negative impact on performance. Rewarding everyone in the same way or based on some other factor (e.g., longevity) would be expected to have the same result.
  6. The effect of team-based financial incentives on performance is larger than the effect of individual-based incentives. Basing rewards on team results when people work interdependently can elicit a focus on aggregated outcomes.
  7. Equitably distributed rewards result in higher performance than equally distributed awards. This finding suggests that equity, however defined, is important when attempting to motivate performance, even at the team level. This is an important consideration when designing financial incentive programs.
  8. The effect of team-based financial incentives on performance decreases with the number of team members. This is also an important consideration when creating teams and when designing team-based financial incentive programs. Past studies have shown that “social loafing” is easier to engage in when the number of team members is large, which diffuses accountability.
  9. The effect of financial incentives is mediated by employee perceptions of procedural justice. Justice is evaluated based on three perceptions: procedural justice, distributive justice and interpersonal justice. When the right parties are involved in determining performance and rewards and the basis for their decisions are viewed as legitimate, the chances of acceptance by participants increases.

Financial Incentive Program Design and Administration Implications

The practitioner literature has included numerous claims about how financial incentives affect motivation and subsequent performance. Many of these claims have been based on individuals’ personal experience, while others have used research of questionable validity to support them. A research study must be both internally and externally valid to serve as strong evidence.

Internally valid studies are based on a design that provides a high level of confidence that, under the same set of controlled circumstances, repeating the study will likely produce similar results in the same context. The “gold standard” is the randomized controlled study. This study design enables causation to be determined, rather than being limited to finding correlations. 

In order for studies to be externally valid, they must be generalizable to other settings. But this requires the contexts to be identical, or at least no contaminating influences must be present. To assume that results of a lab study will be the same in a field is often a mistake, due to the factors influencing results being different. An often-cited lab study involved people throwing tennis balls at targets for a short time with insignificant rewards at stake. This context bears no resemblance to sustained work on tasks that may be disliked, which may be the reality in field settings.

Practitioners can utilize valid and high-quality research to serve as evidence that supports their recommendations and decisions. As decision makers have increasingly asked “what is the evidence that supports that?” it has become important to carefully select research findings that are of high quality and are relevant to the recommendation and subsequent decision.

The literature is biased, in that only successes are generally reported. Even though a number of articles are about successes with a rewards strategy or program, it must be remembered that people are reluctant to take the initiative to publicize failures. The academic literature is subject to a similar bias, in that editors generally only publish studies that resulted in the hypotheses being supported. Failure is a source of evidence as well, yet it is often shrouded in secrecy.

Anecdotal evidence of successful outcomes in single organizations may be useful information, but to assume “what worked there will work the same way here,” the contexts must be similar.

Trends get started because the bandwagon effect encourages those with a success story to publish. Using articles about successes with a particular type of program can be considered evidence — but only as something that perhaps should be considered. 

About the Authors

Robert J. Greene is the CEO of Reward Systems Inc.

Eric Barends is managing director at the Center for Evidence-Based Management (CEBMa).