Does a pay rise or money based incentive lead to better employee performance?

Money is probably one of the big reasons why your employees show up to work every day. So what do you do when you want them to become more productive? Giving employees more money for good past performance seems like an obvious, classic economical-thinking answer. But does money improve future performance? Is it the best tool for motivating your teams long-term? 

While there is some evidence that financial incentives boost engagement and motivation - both significant factors that influence employee performance - the real answer is a lot more complicated. Performance does improve with more money, but it often very short-lived.

Financial incentives can increase short-term engagement

In 2018, a study by the UK recruiting firm Genesis Associates found that 85% of surveyed workers felt more motivated to perform well when offered a financial incentive. During incentive periods, 73% of employees reported that the atmosphere in the office was "good" or "very good." On top of that, it also increased a company's profits by an average of £80,000 a week during the course of the study.

But only if you pay well

For money to work as any kind of motivating factor, the amount has to be worthwhile. Too little, and it can actually damage motivation. Hundreds of college students took part in an experiment where they were asked to report their willingness to help move a sofa after being given one of two incentives, or being in the control group, which had none. Students in the control group actually exhibited more willingness to help than those who received the low incentive (50 cents).

But not too well...

Dan Ariely has performed various studies into the subject of financial incentives as an engagement tool. He explains the psychological impact of financial incentives like this:

If I ask you to help me change a tire on my car you might be willing to help, but if I offer you a dollar for this you might think "I don't work for a dollar" and you're less inclined to help.

A study was conducted of computer chip assembly workers in an Intel factory. They worked in cycles of four days on, four days off. Prior to the study, these workers could earn a bonus equating to around thirty dollars on the first day of every work cycle by meeting that day's target. During the experiment, these workers were divided into four groups, each receiving different forms of reward:

• Group 1: Continued monetary reward equating to $30
• Group 2: No reward (control group)
• Group 3: A pizza coupon roughly $30 in value
• Group 4: A message from their boss complimenting their work

All three forms of financial and non-financial incentives improved performance on the first day compared to the control group. But in the days that followed, productivity tailed off significantly for Groups 1 and 3. Group 2, who received positive reinforcement from their manager, declined much more slowly. 

Ariely summed this up pretty succinctly in the interview: 

"When we pay people, we can see an immediate increase in productivity, but what we don't see is we also create a long-term disassociation, where people basically say, "Really? That's it? That's the reason I'm here?"

Money is a small part of what drives employee performance

While financial incentives may have their uses, Ariely's work highlights the importance of a multi-faceted approach to employee performance. Financial security is only one of the benefits we get from work that influences engagement and productivity.

It's important to consider how other forms workplace reward and experience might be impacting the productivity of your employees. One of the best ways to facilitate this is through the use of recognition and visibility processes as well as open and honest cycles of two-way feedback. Employees perform better if they feel that someone is taking an interest in their workplace wellbeing, experiences and career development.

Weekly10 check-ins improve performance without money

Our weekly check-in enables managers to get informative updates from their employees that take only minutes to complete. Employees can even perform their own impromptu updates if they need to raise an issue. 

Employers can also reap the benefits of positive reinforcement by enabling employees to recognise and shine a light on the great work of their colleagues and help managers to share success stories up through an organisations hierarchy, giving much-desired exposure to the top talent in their teams - the lifeblood of career progression for many.

Learn how a weekly employee check-in is the foundation of moving to more transparent feedback practices. Download our latest guide: Embracing continuous performance management