Collective performance-related pay systems may have more effect on performance than individualized performance-related pay systems

Stephen Wood, Professor of Management, University of Leicester School of Business.

A systematic review conducted in the University of Leicester School of Business revealed that collective performance-related pay systems such as profit-sharing and team bonuses have a bigger impact on organizational performance than their individual counterparts such as piece rate and sales bonuses. Systems which combine both may also more effective than when individual performance-related pay is used alone.

The pay system can be the centre of HRM strategy.  This is most commonly the case with piecework – the quintessential performance-related pay system (PRP). As a director of a manufacturing company said to me many years ago, it is both a “personnel and production management technique”, enabling management to control both effort and production levels, as well as costs.

In fact, Frederick Taylor, the founder of Scientific Management, criticized PRP, saying it was management by the pay system and an abdication of what management should be doing, which is designing and organizing work in the most optimal way.  Instead, a pay system can be a support to core HRM practices, functioning to provide motivational support to enhance the effect of other HR practices such as job design and team working.

In the concept of high-performance work systems, so prevalent in recent management thinking, PRP is singled out and awarded equal status with other practices, and in some versions it is central to it, being part of a literal performance management approach to management alongside appraisal and monitoring of performance.

In contrast, high-involvement management (often wrongly equated with high-performance work system) emphases the value of high discretion jobs, role involvement, team working and idea-capturing methods (organizational involvement). Individual performance-related pay systems are antithetical to high-involvement management as its motivational assumption is that intrinsic motivation is more important than monetary incentives. The danger is that individual systems undermine this motivation as people orient themselves towards fulfilling extrinsic needs. Collective systems may be more appropriate for high-involvement management than individual ones. Pay systems which are supportive of this include profit sharing, team bonuses, and gain-sharing.

A key dispute across the pay systems area is the role of money as a motivator. If it is powerful why not use PRP? If it is not, then  build on high involvement management. The evidence on PRP actually undermining intrinsic motivation is quite convincing but not 100% clear cut so. So against this background, we explored the literature that directly compared collective and individual PRP systems.

We also included flat-rate systems and moreover hybrids, which are common in practice, whereby individual and collective systems are used together. John Lewis is famous for this and its organizational-wide bonus, the annual announcement of this being heralded in the press and often used as a kind of barometer of the retail sector. The issue then is: do hybrid systems provide the best of both worlds or give off mixed messages, especially if they are replacing or supplementing an individual PRP system, which may mean people gravitate to the individual element and thus become individualistic.

Our review is systemic which in contrast to a narrative review means review procedures are defined and stated in advance, so the review is transparent and can be replicated. Our inclusion criteria were that the study had to involve a comparison of collective and individual schemes and be in refereed journals.  Our research questions were defined in particular by the debate about the dysfunctional effects of individual PRP that has dominated pay system research, and have led to sceptism about it.

These issues include:

a) the quality of output may be impaired by focusing on the quantity and speed of production;

b) workers may deliberately restrict output, game the system or forsake income in favour of lower effort, and;

c) workers’ intrinsic motivation may be reduced, meaning its associated performance benefits may not materialize. The debate on pay systems has centred on individual PRP but these issues may be applicable to collective systems

In all but two studies, collective payment systems outperform individual ones, either when used alone or in conjunction with individual systems.  We can then be certain about recommending that individual pay systems are unlikely to be optimal. However, we cannot conclude unequivocally in favour of collective systems because 64 per cent of the studies considering hybrid systems found them to produce greater performance effects than collective or individual systems used alone. Also, flat-rate systems performed best in half of the rare cases where they are included in the analysis. The prevalence of contingent effects in some of the few studies testing for them also limits the extent to which we can decisively conclude about the advantage of collective systems in all cases.  Nonetheless, discussion in the papers of results relating to the effect of collective systems gives convincing reasons for why collective systems may work which are centred on their positive effect on group processes and cooperation within the workplace. References are made to a variety of mechanisms, including idea-generation and -sharing, helping behaviours, improved methods of working, and goal interdependence.

The research is reported in:

S. Wood, S. Leoni, and D. Ladley, Comparisons of the effects of individual and collective performance related pay on performance, Human Resource Management Review, Vol. 33, Issue 4, December 2023.

https://www.sciencedirect.com/science/article/abs/pii/S1053482223000359?dgcid=rss_sd_all