Research: Performance-related bonus schemes can restrict a company’s productivity

Financial bonus schemes intended to motivate employees and improve their performance can actually have the opposite desired effect on a company’s productivity levels, according to new research from emlyon business school.

The research was conducted by Brice Corgnet, Professor of Finance at emlyon business school, alongside research colleagues. The researchers created two laboratory workplaces in which they could precisely assess both work performance along with employee manipulation activities, one with the presence of a manager and one without.

The findings, published in “European Economic Review” demonstrate that when monetary rewards feature in an organisation, employees will exaggerate their accomplishments, falsify documents, and blatantly manipulate their managers opinions in order to create a deceptively favourable perception of themselves for their own financial gain.

Professor Corgnet says,

“In order to reward an employee according to their actual contribution, managers require precise information about individual achievements which is often not readily accessible. Managers must therefore partly rely on an employee’s own reports of their personal contribution, and such reports are likely to be biased.”

The researchers found that when work was performed without the presence of a manager, and opportunities for employees to exaggerate their achievements were not available, the employees work levels corresponded with the pay that they received.

On the other hand, when a manager was present, employees took advantage of this and gave the impression that they were key contributors even if they weren’t. This employee manipulation indeed has a negative effect on organisations, as they encourage time wasting and distort incentive programs.

Furthermore, it was found that organisational output was proved to be much higher when equal pay systems were in place as opposed to performance-related pay. With this in mind, Professor Corgnet highlights the possible advantages of introducing a collective equal pay system in an organisation as opposed to bonus schemes. Additionally, he suggests that organisations should limit managers discretionary power over decisions affecting the distribution of resources.

These findings propose that senior management teams who want to avoid wasteful performance manipulation activities should weaken incentives and limit managerial discretion, as well as implementing a financially sufficient equal pay system in order to benefit their company in the long term.