Performance Pay & Mental Health: Are They Connected?

Performance-based pay (PBP) is a method of employee financial compensation that consists of bonuses or stock options made in response to meeting a specific goal; for example, when a sales target is met or exceeded.

Performance-based pay is responsive to a specific outcome and does not affect the employee’s basic salary. This is opposed to performance-related pay, where an employee’s conduct is measured to offer an appropriate salary for their position.

Research conducted by Salary.com discovered that employers who offer a performance-based pay program are twice as likely to experience above average to excellent levels of employee engagement compared to companies that do not.

In 2018, 77% of US companies had a performance pay program in place, with a further 12% intending to instigate a program in the near future.

Is Performance-Based Pay a Good Thing?

The large percentage of US employers taking advantage of a performance pay program and the resulting increase in employee engagement would suggest that performance-based pay is a beneficial practice for all concerned; however, what are the benefits?

• Motivation and increased productivity – The incentive of a bonus or financial reward for exceeding the requirements of the job is strongly motivational for most employees. Research carried out by Genesis Associates supports this, concluding that 85% of employees admitted to being influenced by financial reward. Performance-based pay is used by 77% of US companies, which would indicate that the practice works to encourage workforces into increasing their productivity.
• Loyalty – Employers that provide their workforce with the opportunity to boost their monthly earnings with performance-based pay could increase loyalty from employees towards that company, particularly in the case of share-options being made available to employees as a reward for their performance. Taking up share options can encourage employees to identify with the company and its continuing success.
• Attracts high performing candidates – Performance-based pay is an important factor in recruitment too. Jobs with a compensation package that is bolstered by a performance pay program often attract high performing candidates, for whom performance-based pay is the ideal motivator. It can also identify high-performing employees within the company.

The Downsides of Performed-Based Pay

So far, performance-based pay appears to be an advantageous option for employers and employees alike; however, are there any disadvantages?

• Risky business and quantity over quality – If the employer rewards achievement above all else, employees may take risks to reach targets, be those risks with their health or ill-advised shortcuts to reaching a goal. Equally, the quality of their work could decrease. For example, to increase the number of products created or sold.
• Attract short-term workers – Candidates may apply for a position because they know that it provides the opportunity to earn money quickly. Once they have received their bonus, however, they could move on to the next employer who can offer them a short-term financial supplement. This may be an employee engagement issue or a failure to draw full insight from recruitment selection.
• Breeds a dog-eat-dog environment – If performance-based pay relies on reaching a specific outcome at work, this will often compete with colleagues. Competitiveness can provide positive outcomes in any area of life; however, at work, it can motivate disharmony among employees and consequently reduce co-operation and even trust within a workforce.
• Can ignore skills and potential – If the achievement of goals is singularly rewarded, then employees may feel that their skills, developing skills and potential are not valued.
• Can prove exclusivity – In certain work arenas, particular employees could possess an advantage, such as further available hours to work because they have fewer responsibilities than others or better health to be able to work longer or regular overtime. In this situation, those employees may benefit more from a performance pay program. Over time, employees who cannot compete but are equally skilled could feel excluded and less-valued.
• Can lead to burnout – Where an employee continually works harder, longer, better without respite, resulting in physical and mental exhaustion. A work environment that encourages its employees to push themselves beyond their health limits may experience higher levels of absence due to sickness and an increasing staff turnover.

Performance-Based Pay and Mental Health

The findings of research into the effects of performance-based pay on employees’ mental health, conducted by Washington University in St. Louis and Aarhus University in Denmark, highlights the increased prescription and use of anxiety and depression medication where a performance pay program is adopted.

The focus of this research involved employees who were prescribed benzodiazepines; for example, Xanax, or selective serotonin reuptake inhibitors (SSRIs), like Zoloft and Prozac.

The Academy of Management Studies in 2020 published its researchers’ findings, highlighting an increase from 5.2% to 5.7% of the workforce taking medication when a performance pay program was implemented.

Lamar Pierce, the co-author of the research, further believed that the research undermined the actual quantity of medication being taken, and suggested it was part of an ongoing trend of workplace mental health issues.

This is supported by the discovery that only one in three US workers who experience mental health issues seek help.

The negative effects of the use of performance-based pay on the mental health of employees might include:

• Overwork leading to stress and sickness – Working extra hours to achieve a PBP related benefit, taking fewer breaks and the pressure to work more often results in a lack of sleep, exhaustion, stress and depression. This can negatively affect an employee’s performance and productivity.
• Increased anxiety in the workplace – Worry caused by an employee working under pressure and with an increased expectation, operating in an overly competitive and sometimes hostile environment, and feeling judged by colleagues and managers increases the likelihood of anxiety.
• Higher turnover of staff – The use of a performance pay program can result in a more loyal and engaged workforce; however, research carried out in Denmark found that women were more likely to leave a stressful work environment than men. This results in companies that have instigated performance pay programmes experiencing the possibility of a less gender-diverse work environment. Employees who feel stressed – possibly to the point of illness – and undervalued may seek employment elsewhere.
• Higher level of sickness absence – A work environment that causes employees to suffer from mental health issues and stress will undoubtedly result in an increase in sickness absence. High levels of sickness absence are detrimental to productivity and workflow while placing stress on other members of staff and can be expensive for an employer who provides sickness pay to their workforce. Even where sick pay is not provided, the cost of hiring temporary workers can result in an increasingly unsustainable situation.
• Corruption – Performance-based pay in the workplace has the potential to incite corruption, however. The use of PBP can lead to favouritism and criminal behaviour. In 2016, the multinational financial services company, Wells Fargo, was fined $185 million. Its level of PBP and the resulting competitive work environment this instilled led to the creation of 3.5 million fraudulent accounts by employees to earn their performance-based bonuses.

Can It Be Made to Work?

If performance-based pay can have such widespread detrimental effects on a workforce and its mental health, how can it be used constructively in the workplace?

Can it be made to work?

Keep Communications Open

The use of PBP should be monitored regularly by opening discussions with managers and employees alike, concerning:

• Do employees feel they experience too much pressure to improve their performance?
• Has the competition to win bonuses created a hostile, merciless environment?
• Do employees feel their performance is being judged fairly? Or do they believe that there is a level of favouritism involved?
• Do employees feel that they all have an equal chance to benefit from PBP?

Allowing employees the chance to contribute to the organisation of the company performance pay program has two benefits for the employer:

• First, a workforce that feels listened to is generally more engaged
• Second, their input may indicate ways for the program to be improved that would not have been otherwise obvious

For more information on how employees can contribute to the improvement process at work, read How to Create a Culture of Continuous Improve-ment.

Set Achievable but Challenging Goals

Offering a reward for a goal that is easy to reach serves no purpose; however, equally, promoting the pursuit of a goal that is impossible to reach, at least for some employees, is self-defeating.

Instead, goals for PBP should be achievable but challenging. Without the desire to reach a target, nothing will be learned, and skills will not develop.

Equally, using goals within reach but require a level of stretch will encourage employees to improve their performance instead of feeling too intimidated to try.

Reward Employees Proportionately

Employees should not be expected to go above and beyond to improve their performance for a proportionately small reward. Doing so could result in employees feeling undervalued and taken advantage of.

Instead, the level of reward should match the level of performance.

Alternatives to PBP

If performance-based pay can negatively affect the mental health of a workforce, what are the alternatives, and how might they benefit employees?

Use PBP alongside Other Rewards

All employees need a take-home salary to pay their bills; however, non-financial rewards may also be appreciated.

For example, taking the team out for a meal to reward their hard work or providing vouchers.

Recognition can be a strong motivator too. Taking the time to not only financially reward an employee, but also to inform the workforce that they have done well, achieved a goal or perhaps played a key part in a business process, can be a further reward to that individual and a push for other employees to improve their own performance too.

Other non-financial rewards might include:

• Gym membership
• Extra paid holiday
• The opportunity to lead a future project
• Promotion
• Flexible working
• Employee benefits platform vouchers or ecards
• Paid educational courses

To discover more non-financial rewards, read Top 10 Most Beneficial Employee Benefits.

Use Different Metrics to Decide an Employee’s Worth

PBP is usually measured by increased productivity. For example, how many sales did the employee make, or how many units did they manufacture? However, using this single factor of an employee’s performance reduces the equal opportunities of all employees.

Instead, an employee’s worth should be measured on other aspects of their performance, such as:

• How effective are their customer service skills, and how successful have they been in this area?
• How have they over-delivered? Have they performed beyond what is required?
• Have they contributed to the ongoing improvement of the company? Do they provide innovatory ideas?
• Do they help to drive the team they are part of? Do they have exceptional teamwork skills?
• How have they made a positive difference in the workplace as a whole?

A workforce is built by individuals with the appropriate skills and experience for their respective roles; however, that also means that workers will vary from person to person in regards to their motivation and skill set.

Recognise those differences so that the entire workforce has the opportunity to earn rewards.

Increase Base Salary

A company will often set its base salaries at the level that will attract the right calibre of candidate and retain them in that position.

An increase to an employee’s base salary is rarely the reward for a single outcome, however. This ensures the salary for a position is competitive and in keeping with the market for that job, which is paramount to ongoing employee engagement and the retention of valued employees.

Beyond base salary increases to counter inflation, to maintain a competitive level of pay for the job, yearly employee assessments gauge whether a worker’s performance over the last twelve months merits an additional base salary increase.

This method rewards employees who continually perform well and make a positive contribution in the workplace.

Group and Team Incentives

Using group or team incentives, the measures of success of a project are applied to the selection of employees as a whole, including the supervisor or manager.

Each team member works towards the same goals, and they are collectively rewarded. The reward apportioned to each individual is linked to the level of their base salary.

Rewarding the team altogether encourages each member to support their colleagues to strive for success.

Career Progression Ladders

Employee engagement is heightened in companies where there is a clear career progression ladder that rewards success and a high standard of performance with career development.

Instead of simply working harder to earn a bonus on top of their base salary, employees feel more in control of their future because the level of their performance can directly contribute to their progress along a recognised career path.

For more on this, read What Are The Benefits of Career Ladders?

Final Thoughts

The downsides to implementing performance-based play are well established, and with a wealth of alternatives that may be offered instead of or alongside it, the wise path to take before implementing PBP in the workplace is to have an honest and open discussion with employees to understand their opinions.

It is only with their contribution that the true value of such a program can be gauged.