Smarter bonuses can help businesses boost employee performance: Study

Businesses can give their productivity a boost by becoming smarter about how they hand out performance-based bonuses, according to a PwC study released this morning.

The findings are contained in PwC’s report, What are you really paying for? Improving return on reward investment, which is based on a survey of 1009 participants evenly spread across generations.

The results follow a survey issued last month by Monash and Deakin universities looking into how much businesses need to increase wages by to lure a potential employee to a remote or regional location in order to fill a skills shortage.

PwC partner Emma Grogan told SmartCompany that, contrary to popular myth, bonus pay remains a more powerful motivator than most non-financial incentives.

“There’s been a lot of scepticism in the media about whether incentives work. Our study showed they do work, as long as they’re designed in a specific way,” Grogan says.

However, Grogan says the structure of reward schemes can have a significant impact on their effectiveness in motivating staff.

“Organisations are not necessarily getting a return on their reward spending and designing their schemes in a different ways can lead them to get more value for less money,” Grogan says.

“I think our study revealed common features of many reward schemes can destroy value in employee eyes, including uncertainty, ambiguity, complex metrics and bonuses linked to team performance.”

A key finding of the report is that employees required up to 18% higher pay to motivate the same results when pay was subject to more uncertainty, ambiguity or complexity.

The report also found employees are not motivated by team bonuses for teams larger than five members, and required 19% higher bonuses to achieve the same performance levels when their team mates were unfamiliar to them.

In other words, bonuses based on the performance of a large department are likely to be significantly less effective than those paid based on the performance of a small team.

With capped bonus structures, around 41% of employees slow down when they reach their bonus cap, with many viewing the caps as a signal of acceptable or maximum performance.

Meanwhile, most employees would gladly take a pay cut of 11% for a job they enjoy, 9% for a perfect work/life balance and 6% for a good relationship with their manager.

Grogan says there are some additional ways business owners can make their reward schemes more effective.

“We suggest simplifying plans by reducing the number of metrics, with four metrics as a sweet spot. When we compared four metrics to 10 metrics, we found employees ask for a 20% premium,” Grogan says.

“We also suggest limiting management discretion and using more objective measures for deciding bonuses.”