Money for nothing – why performance related pay doesn’t always work

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Money for nothing – why performance related pay doesn’t always work

From sky high payments for senior executives to the annual bonus spending spree of more junior staff, bonuses are entrenched in the corporate world.

A quick look at the news reveals some recent headlines on performance related pay:

  • AstraZeneca Chief Enjoys Leap In Pay Packet As Bonuses Pay Off
  • Porsche Awards 21,000 Staff With Bonus Of Up To €9,111
  • RBS Set To Pay Out £340m In Bonuses’ Despite Huge Losses

Bonuses are even seeping into the less cut-throat world of the public and not for profit sectors – but in spite of their proliferation, there is mixed evidence for the effectiveness of bonuses. For some, they may be positively harmful.


Human Behaviour

A simple analysis of human behaviour might suppose that offering a financial incentive for a task will increase motivation and performance.  After all, if someone offers us money to carry out a task aren’t we more likely to do it diligently to ensure we get the cash?

Not surprisingly, human behaviour is much more complex than that simple analysis.


Two Factors

There are two factors at play here: internal motivation and external incentives.

Internal motivation is the personal enjoyment of the task and an interest in doing the activity for its own sake.  External incentives are forms of performance pay – bonus payments, other financial rewards, promotion and public recognition.

As you might expect, internally motivated people who enjoy their job seldom underperform.  So, is it possible to generate even better performance through external incentives?  Well, that depends on the nature of the task.


Quantity And Quality

People who work in jobs that are repetitive, simple and less enjoyable are more likely to improve their productivity when offered external incentives.  On the other hand, performance in jobs that involve complex tasks, cognitive input and quality is more likely to improve through increased internal motivation rather than external incentives.  Further, offering external incentives to people carrying out quality related tasks may even decrease their internal motivation resulting in poorer performance.

In summary, if you want greater productivity on a production line offer financial rewards and performance pay.  If you want to improve the performance of a clinician, work on their internal motivation.


Basic Pay Still Important

None of this removes the importance of financial rewards at work.  If you don’t pay people what they believe is a fair amount then recruitment and retention, never mind performance, will be challenging.

For those in a repetitive tasks, a fair basic pay combined with internal motivation and the right external incentives is likely to be the right approach.

For others focused on quality, they need to be paid enough in basic salary to take the issue of money off the table. Then focus on their internal motivation. Internal motivation is important for all.

Accordingly, careful thought needs to be given to the nature of the work when considering the introduction of external incentives.  In contrast, regardless of the nature of the task, increased internal motivation can lead to improved performance.

There are many factors that contribute to internal motivation.  However, three stand out – purpose, autonomy and skill.



During a visit to the NASA space center in 1962, President Kennedy noticed a janitor carrying a broom. He interrupted his tour, walked over to the man and said, “Hi, I’m Jack Kennedy. What are you doing?”

“Well, Mr. President,” the janitor responded, “I’m helping put a man on the moon.”

The story may well be apocryphal, but illustrates the point well.  Those with a greater sense of purpose are likely to have greater motivation at work.



Autonomy is the ability for employees to control their work situation. Depending on your company and industry, employee autonomy might involve a choice in the selection of projects, roles or clients. Traditionally, only employees in upper management have much autonomy, which can leave lower-level staff members feeling disenfranchised. That need not be the case as their is scope for a degree of autonomy in almost every role.



Most people at work want to do a good job and be respected for what they do.   Enabling them to develop the necessary skills to do their job well can be very powerful.  Particularly when combined with their personal aspirations.


Practical Lessons

First, it’s likely for all workers that the more internally motivated they are, the better they will perform.  Therefore, focus on understanding the internal motivators and how can they be improved. Remember, the three factors – purpose, autonomy and skill.

Next, distinguish those carrying out repetitive tasks from those working on quality.  The right external incentives may improve the performance of the former.  Whereas, external incentives will not work, or may even be harmful, for the latter.

Finally, make sure you pay enough to all to remove it as a major issue.

Norman Blissett is Director of Gallanach, a Board, Strategy and People consultancy

 *Thanks to Emilia Wietrak and Science at Work for some of the source material for the article

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