Simple bonus plans with fewer metrics and limited managerial discretion could result in greater employee motivation at lower cost, according to a recent PwC research report.
“We felt the need to debunk highly publicised studies that promote the idea that financial incentives don’t work,” said PwC partner Emma Grogan.
“Our study reinforced the idea that financial incentives can deliver significant value to employee motivation , but only when designed in a particular way.”
“We have ended up in a place where businesses have added more complexity to their reward structures in an attempt to meet the needs of employees, employers and shareholders, without the benefit of innovation.
“Added complexity destroys value in the eyes of the employee.”
The report, What are You Really Paying For? Improving Return on Reward Investment, based on a survey of more than 1000 Australian employees, found incentive pay such as bonuses only work if they are simply structured, have an element of certainty, and are closely tied to individual performance, or small team performance.
Design bonuses which are smarter – not higher
The report found that pay is still the critical lever above most non-financial incentives, with employees willing to sacrifice no more than 10 per cent of their pay packet for a better role, better boss or more flexible hours.
It found that employees expect up to 18 per cent higher pay if pay is uncertain or ambiguous, while employees do not experience greater motivation from team bonuses if the team size exceeds five, or if team members are unfamiliar to them.
An additional 41 per cent of employees would stop working at or around a bonus cap, while 29 per cent would work beyond bonus caps to get the job done, knowing they will not get extra reward, said Grogan.
“So the presence of a financial reward doesn’t automatically destroy intrinsic motivation as prior research would have us believe,” she said.
“Rather than tinkering with last year’s bonus plan or throwing more money at employees, getting the design right will deliver greater return on investment.”
5 keys to lower reward spend
There are five important keys to designing financial incentives that cost less but which still provide effective levels of reward, according to the report:
- Use at-risk rewards and discretion only where absolutely necessary. Wherever possible, clearly define performance expectations to minimise ambiguity. When considering more than a few metrics, be sure the gains from specificity will offset any costs caused by the added complexity
- Measure performance at the individual or small team level where possible, and allow familiar colleagues to form teams to increase motivational value. Team bonus structures can counteract the effects of free-riding, but free-riding should still be addressed quickly to avoid longer term negative team response.
- When using caps and differential bonus rates to be fiscally responsible, organisations need to be aware of the opportunity cost of lost incremental performance. Caps should be used sparingly and only where there is a real threat of overpayment.
- Employees will trade off financial rewards for more intrinsically motivating roles, better leaders and more flexible working arrangements. However, stated amounts are typically less than 10 per cent of total remuneration. Ensure that financial incentives are appropriately designed for equal, if not bigger, impact.
- Any efforts to tailor incentive plans should carefully weigh the benefits against associated incremental costs. Tailoring should be based on evidence rather than intuition, as the perceived value of tailoring is often overplayed. Prioritise tailoring efforts rather than trying to achieve ideal conditions for all groups.