Why you should be paying low performers more money


Low performing employees are more motivated by extra money than high performers, research finds. In part two of HRM’s pay series, we explore why you should be paying low performers more.

In the current climate of economic uncertainty, few companies are in a position to be dolling out huge pay rises.

In February this year, 72 per cent of businesses said they were experiencing reduced cash flow, and 69 per cent indicated there was less demand for goods and services, according to the Australian Bureau of Statistics. 

Even among those companies whose finances are tracking well, an uncertain economic environment might mean they’re closely scrutinising cash flow, and are reluctant to divvy out pay increases.

Even if significant pay rises aren’t on the cards this year, you shouldn’t underestimate the importance of rewarding staff and rule out the possibility altogether.

Small pay increases can reap big rewards. The secret is knowing who to give them to. 

Turn your attention to the bottom performers

Contrary to traditional thinking on remuneration, research suggests gains might be greatest when a company’s lowest performers are incentivised.

One experiment conducted on employees in Canada, who made $200 per day planting trees, provides some useful insight into why this may be the case.

Unsurprisingly, when these employees were all handed an $80 bonus, it put a spring in their steps – and this was particularly apparent for the low performers.

Top and middle level performers were grateful for the bonus, but they only returned a 10 and 9.3 per cent increase in productivity respectively. However, that same bonus resulted in a substantial shift for the bottom performers, whose productivity surged by 35 per cent.  

The researcher, James Baron from Yale University, surmised that the discrepancy in outcomes was due to differing levels of recognition typically extended to high and middle vs low performers, although noted an upper limit on productivity could influence the results.

“Given the intense physical demands of agricultural labor, perhaps responses to the gift were smaller among more productive workers simply because they were already at or near a ceiling on effort or physical work capacity,” said Baron.

Nonetheless, he argued that lower performers are not as accustomed to receiving praise, whereas higher performers generally are. So gratitude begets results.

Michelle Brown, professor of management and marketing at the University of Melbourne, says Baron’s explanation is “a very credible one”.

“Organisations often pay more money to high performers, but they would have performed high anyway. Organisations are generally always after the superstars. They’re the ones who get all of the recognition, whether it’s in terms of money, rewards or otherwise. 

“It’s hard for others to get any kind of sunlight in those circumstances…  [they] typically go unrecognised.”

Since the recognition for lower performers came as a welcome surprise, Brown says their improved productivity suggests it might be worthwhile for organisations to reconsider their current rewards and recognition approach.

This is particularly important since stand-out performers may be more likely than lower performers to jump ship when the pandemic has passed, says Brown.

“Star performers can’t necessarily travel interstate or overseas [right now], so they’re just sitting around waiting for all of this to be over. [When the economy recovers,]  they’ll go back into the labour market and chase higher pay and other opportunities, whereas there’s a much broader group of people who stay with organisations for a longer time.

“They may not be the star performers, but they do make a contribution. And when organisations recognise the contributions of those people, they get a return on that.”

It’s likely this will show effect for lower performers who exhibit potential, so it’s important to note the message here isn’t to pay more money to low performers who are simply slacking off and unlikely to improve any time soon. 

And in an ideal situation, high and middle performers continue to be rewarded for their efforts, too.

Further underpinning the findings from the aforementioned study, Baron referred to Alvin Gouldner’s study on gratitude in 1960, which suggests that gift-giving has a greater motivational impact on less privileged employees.

“When employees have low expectations, inferior social standing, or a prior history of limited attainment, the employer has greater prospects for influencing both the perceived value of and perceived motive for the compensation it provides, in ways that can redound to the benefit of the firm,” said Baron.

What is the right amount?

So now that we know who to offer rises to, the next question to address is how much you should offer.

While a salary increase of any size is something most employees would embrace in an instant, pay rises need to hit a certain level in order for them to be noticed and appreciated by employees.

In 2009, professors Atul Mitra from the University of Northern Iowa, Aino Salimaki from the Helsinki University of Technology and Jason Shaw of the University of Minnesota, investigated this very topic.

They explored changes to salary by reference to the psychological construct, ‘just noticeable differences’ – i.e. how much a salary needed to change for employees to consider it as a pay rise.

Across 495 university employees in Finland, they found that pay needed to increase by 7.2-9.7 per cent in order for employees to exhibit positive emotions. And in order to see employees put more effort into their work, they concluded a rise of 8.4 per cent was needed.

Interpreting the research, Brown notes that organisations should be wary that if they’re operating on a pay for performance system and don’t account for other mechanisms, they might not see the benefits.

“Organisations often think about pay in isolation, as an incredible driver of behaviour, but it’s part of a suite of practices. It’s also about the design of jobs and the amount of control people have over their performance and productivity. 

“The argument has always been you just give people more money and they’ll work harder, but that doesn’t take into account whether people have the right tools and equipment to do a good job, and the sorts of limits on productivity,” she says.

Leaders going above and beyond

It’s evident that a salary increase above a certain threshold is likely to improve employee satisfaction, motivation and productivity, but if your budget is already stretched you might be left wondering how you can possibly offer employees any kind of bonus.

A radical approach taken by Dan Price, CEO of US credit company, Gravity Payment, provides one possible solution.

In 2015, Price took a $1 million (US) pay cut so he could establish a $70,000 minimum wage for his 120 employees at the time.

The approach was considered revolutionary and many in the business community likely baulked at the gesture, but it certainly pleased employees and made a positive impact on his company. 

As a result, Gravity Payments reduced staff turnover by 50 per cent, and employee satisfaction sits at twice the average for businesses in the US. 

This novel remuneration scheme helps to address the pay discrepancy between employees and their CEO, which often receives a great deal of public scrutiny, says Brown.

“You get situations where CEOs  are earning 450 times the salary of an average working person,” she says. “There’s a persuasive body of research which shows really big pay gaps have a negative impact on employee satisfaction, commitment and loyalty.”

“This case study demonstrates that when you have a fundamental change in the relationship between a CEO’s pay and their workers’ pay, it has a huge impact.”

She observed how, at the start of the pandemic, some CEOs were commended for taking a 20 per cent pay cut, but six months later, they restored their pay to its pre-pandemic level.

“The thing that’s really interesting about [Gravity] is that it seems to be enduring. It’s not just a one-off and that seems to be why they’re generating such positive outcomes.”

Leaders might have returned their salaries to the pre-existing amount, but organisations can still  prioritise putting resources towards their talent.

“There are organisations with recognition systems where you have employee of the month or cafeteria style reward systems. A lot of new organisations have simple systems that are communicated effectively, and they work well.”

For long-lasting changes to take form, perhaps leaders need to make radical and sweeping changes to see the benefits pay off for their company. That doesn’t necessarily mean cutting your CEO’s wages – this is just one extreme example – but it’s indicative of the lengths some employers are willing to go to in order to show their people what their contributions mean to them..

How could you demonstrate this to your people?

This article is the second in a three-part series on new ways to think about paying employees. Read part one here.


Do you see benefit in paying low performers more?  Share your thoughts by starting a conversation on the AHRI LinkedIn Lounge. Exclusive to AHRI members.


 

2
Leave a reply

avatar
100000
  Subscribe to receive comments  
Notify me of
Lynda
Guest
Lynda

Rewarding mediocrity is a slippery slope. Nothing worse than handing out golden handcuffs 🤦‍♀️. Imagine buying the product from the company that rewards poor performance?

More on HRM

Why you should be paying low performers more money


Low performing employees are more motivated by extra money than high performers, research finds. In part two of HRM’s pay series, we explore why you should be paying low performers more.

In the current climate of economic uncertainty, few companies are in a position to be dolling out huge pay rises.

In February this year, 72 per cent of businesses said they were experiencing reduced cash flow, and 69 per cent indicated there was less demand for goods and services, according to the Australian Bureau of Statistics. 

Even among those companies whose finances are tracking well, an uncertain economic environment might mean they’re closely scrutinising cash flow, and are reluctant to divvy out pay increases.

Even if significant pay rises aren’t on the cards this year, you shouldn’t underestimate the importance of rewarding staff and rule out the possibility altogether.

Small pay increases can reap big rewards. The secret is knowing who to give them to. 

Turn your attention to the bottom performers

Contrary to traditional thinking on remuneration, research suggests gains might be greatest when a company’s lowest performers are incentivised.

One experiment conducted on employees in Canada, who made $200 per day planting trees, provides some useful insight into why this may be the case.

Unsurprisingly, when these employees were all handed an $80 bonus, it put a spring in their steps – and this was particularly apparent for the low performers.

Top and middle level performers were grateful for the bonus, but they only returned a 10 and 9.3 per cent increase in productivity respectively. However, that same bonus resulted in a substantial shift for the bottom performers, whose productivity surged by 35 per cent.  

The researcher, James Baron from Yale University, surmised that the discrepancy in outcomes was due to differing levels of recognition typically extended to high and middle vs low performers, although noted an upper limit on productivity could influence the results.

“Given the intense physical demands of agricultural labor, perhaps responses to the gift were smaller among more productive workers simply because they were already at or near a ceiling on effort or physical work capacity,” said Baron.

Nonetheless, he argued that lower performers are not as accustomed to receiving praise, whereas higher performers generally are. So gratitude begets results.

Michelle Brown, professor of management and marketing at the University of Melbourne, says Baron’s explanation is “a very credible one”.

“Organisations often pay more money to high performers, but they would have performed high anyway. Organisations are generally always after the superstars. They’re the ones who get all of the recognition, whether it’s in terms of money, rewards or otherwise. 

“It’s hard for others to get any kind of sunlight in those circumstances…  [they] typically go unrecognised.”

Since the recognition for lower performers came as a welcome surprise, Brown says their improved productivity suggests it might be worthwhile for organisations to reconsider their current rewards and recognition approach.

This is particularly important since stand-out performers may be more likely than lower performers to jump ship when the pandemic has passed, says Brown.

“Star performers can’t necessarily travel interstate or overseas [right now], so they’re just sitting around waiting for all of this to be over. [When the economy recovers,]  they’ll go back into the labour market and chase higher pay and other opportunities, whereas there’s a much broader group of people who stay with organisations for a longer time.

“They may not be the star performers, but they do make a contribution. And when organisations recognise the contributions of those people, they get a return on that.”

It’s likely this will show effect for lower performers who exhibit potential, so it’s important to note the message here isn’t to pay more money to low performers who are simply slacking off and unlikely to improve any time soon. 

And in an ideal situation, high and middle performers continue to be rewarded for their efforts, too.

Further underpinning the findings from the aforementioned study, Baron referred to Alvin Gouldner’s study on gratitude in 1960, which suggests that gift-giving has a greater motivational impact on less privileged employees.

“When employees have low expectations, inferior social standing, or a prior history of limited attainment, the employer has greater prospects for influencing both the perceived value of and perceived motive for the compensation it provides, in ways that can redound to the benefit of the firm,” said Baron.

What is the right amount?

So now that we know who to offer rises to, the next question to address is how much you should offer.

While a salary increase of any size is something most employees would embrace in an instant, pay rises need to hit a certain level in order for them to be noticed and appreciated by employees.

In 2009, professors Atul Mitra from the University of Northern Iowa, Aino Salimaki from the Helsinki University of Technology and Jason Shaw of the University of Minnesota, investigated this very topic.

They explored changes to salary by reference to the psychological construct, ‘just noticeable differences’ – i.e. how much a salary needed to change for employees to consider it as a pay rise.

Across 495 university employees in Finland, they found that pay needed to increase by 7.2-9.7 per cent in order for employees to exhibit positive emotions. And in order to see employees put more effort into their work, they concluded a rise of 8.4 per cent was needed.

Interpreting the research, Brown notes that organisations should be wary that if they’re operating on a pay for performance system and don’t account for other mechanisms, they might not see the benefits.

“Organisations often think about pay in isolation, as an incredible driver of behaviour, but it’s part of a suite of practices. It’s also about the design of jobs and the amount of control people have over their performance and productivity. 

“The argument has always been you just give people more money and they’ll work harder, but that doesn’t take into account whether people have the right tools and equipment to do a good job, and the sorts of limits on productivity,” she says.

Leaders going above and beyond

It’s evident that a salary increase above a certain threshold is likely to improve employee satisfaction, motivation and productivity, but if your budget is already stretched you might be left wondering how you can possibly offer employees any kind of bonus.

A radical approach taken by Dan Price, CEO of US credit company, Gravity Payment, provides one possible solution.

In 2015, Price took a $1 million (US) pay cut so he could establish a $70,000 minimum wage for his 120 employees at the time.

The approach was considered revolutionary and many in the business community likely baulked at the gesture, but it certainly pleased employees and made a positive impact on his company. 

As a result, Gravity Payments reduced staff turnover by 50 per cent, and employee satisfaction sits at twice the average for businesses in the US. 

This novel remuneration scheme helps to address the pay discrepancy between employees and their CEO, which often receives a great deal of public scrutiny, says Brown.

“You get situations where CEOs  are earning 450 times the salary of an average working person,” she says. “There’s a persuasive body of research which shows really big pay gaps have a negative impact on employee satisfaction, commitment and loyalty.”

“This case study demonstrates that when you have a fundamental change in the relationship between a CEO’s pay and their workers’ pay, it has a huge impact.”

She observed how, at the start of the pandemic, some CEOs were commended for taking a 20 per cent pay cut, but six months later, they restored their pay to its pre-pandemic level.

“The thing that’s really interesting about [Gravity] is that it seems to be enduring. It’s not just a one-off and that seems to be why they’re generating such positive outcomes.”

Leaders might have returned their salaries to the pre-existing amount, but organisations can still  prioritise putting resources towards their talent.

“There are organisations with recognition systems where you have employee of the month or cafeteria style reward systems. A lot of new organisations have simple systems that are communicated effectively, and they work well.”

For long-lasting changes to take form, perhaps leaders need to make radical and sweeping changes to see the benefits pay off for their company. That doesn’t necessarily mean cutting your CEO’s wages – this is just one extreme example – but it’s indicative of the lengths some employers are willing to go to in order to show their people what their contributions mean to them..

How could you demonstrate this to your people?

This article is the second in a three-part series on new ways to think about paying employees. Read part one here.


Do you see benefit in paying low performers more?  Share your thoughts by starting a conversation on the AHRI LinkedIn Lounge. Exclusive to AHRI members.


 

2
Leave a reply

avatar
100000
  Subscribe to receive comments  
Notify me of
Lynda
Guest
Lynda

Rewarding mediocrity is a slippery slope. Nothing worse than handing out golden handcuffs 🤦‍♀️. Imagine buying the product from the company that rewards poor performance?

More on HRM