The startling impact of performance-related pay

Dec 14 2006 by Brian Amble Print This Article

Giving staff a one per cent pay rise boosts employee job performance by roughly two per cent, but offering that same money in the form of a bonus that is strongly linked to a job well done can improve job performance by almost 20 per cent, according to a new Cornell University study on the relationship between pay and performance.

"I looked at both how much people are paid and also how pay increases and bonuses are given," said Michael Sturman, associate professor at Cornell's School of Hotel Administration, who carried out the study.

He found that by increasing the link between pay and performance could improve performance by up to 19 per cent.

When Sturman looked at the experience of a diversified services company, he found that an across-the-board raise in one year meant better performance in the following year and that paying above the market also produced higher performance.

"While both across-the-board raises and bonuses improved performance, bonuses stood out when pay was linked solidly to performance," he said.

"The payroll is not merely an expense to be reduced, but an investment that can be used strategically."

Full report: Using Your Pay System to Improve Employees' Performance: How You Pay Makes a Difference

Older Comments

The findings are interesting. I would have liked to see a study that dealt with knowledge work and which extended over a long enough period that we could see if the booster effect lasts. I'm also convinced that most companies don't have systems in place to measure performance well and haven't trained supervisors in how to do it.

Wally Bock

I worked for a company that tried performance-related bonuses. Problem was that your performance bonus ended up depending on your middle manager's clout with top management. Mine had no clout. His staff got no bonuses. Down the corridor was a different story ..... Overall effect on us employees was very negative.

Mike L. New York (at the time)