The Dark Side of Performance Bonuses

Companies nowadays continuously try to find methods to incest their employees to perform at their greatest, often turning to motivational tools such Pay-for-Performance (PFP). How it works is really straight-forward, you perform better, you get paid more, the basic tenant of PFP. It can be used at all levels in the organizations, from CEOs to mangers to entry-level workers. No doubt that the concept is simplistic but the negative outcomes of this compensation system are much more complex that it actually sounds.

            Although PFP is used in all level of organizations, there is no guarantee that every company will abide by the same rule as there is the presence of bonus eligibility. Proportion of managers and employees who can receive a performance-based bonus plays a big part and will definitely affect the way others think. Lower paid or even employees who are ineligible may experience feelings of inequality, relative deprivation and injustice which may incur voluntary and involuntary turnovers. So, does bonus eligibility impact employee relations? The larger the proportion of mangers who can receive a bonus, the more employees quit, unequal distributions of rewards like this can even lead to turnover in lower level managers due to their ineligibility.

            PFP in organizations can really well lead to something called a “strain effect”. If managers are told that their pay is based on subordinates’ performances, what they will do is they will strictly monitor and direct their employees. This is done because they will have more control over getting better performance evaluations for themselves and receiving bonuses. But this kind of behavior might be bad for employee morale because how it increases competition, stress, conflict, and mistrust. This places strain on an integral part of a healthy and productive working environment.

            “You’ll win some, you’ll lose some”, most of the time this line makes sense, one will gain something by losing something, but in this case there is a way to pay managers who perform well and reduce the strain on the manager-employee relationship. Fair treatment is one vital step in this situation. Having said that, one can kill two birds with one stone by incentivizing managers to treat employees well. These practices include emphasizing the evaluation on managers and based on how they treat their employees, training managers to provide employees with fair treatment and showing appreciation to employees who perform well.

            Notably, when it comes to PFPs, it might be considered the best practice in the strategic HR literature but every light has its shadow and the shadow might have a chance of overwhelming the light if not properly shown.

Written By: Anson Tan

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