An academic has found which types of pay have the biggest positive effect on employee motivation and productivity.
Professor Andrew Pendleton, from Durham University Business School in the UK, recently co-authored a paper on employee incentives, which set out to find which rewards had the greatest impact on company performance.
Based on the UK's national workplace survey, the research found that individual performance pay, or payment by results, is "not very effective", but neither is group payment by results.
Rather, "if you combine schemes, and particularly combining individual performance pay with profit sharing, the effect on productivity is greater than the sum of the individual effects of the two schemes", Pendleton says.
"There's a kind of multiplier effect. The argument... is that individual payment by results, although it can have strong incentive effects, there's often also some negative effects as well."
This is because people can be incentivised to focus on only one part of the job, and that might be to the detriment of relationships with their colleagues, or teamwork, Pendleton told HR Daily
"We argue that adding something like profit sharing, which encourages teamwork, softens the negative effects of the individual payment by results. The good points of one scheme cancel out the bad points of another payment scheme."
Australian changes good for employers
Pendleton, who was in Australia last week to address a conference on the topic of employee share schemes, says proposed legislative changes that make it easier for organisations to offer share options to employees will help improve productivity and retention.
He says Australia has "a way to go" to catch up with best practice in countries such as the USA and UK, and outlined two types of schemes that have proven successful in the UK.
The first, Sharesave, or Save As You Earn (SAYE), gives employees an option to buy shares at their current value at some point in the future, and they enter a savings scheme to generate the money to exercise the options at that time.
When they get to that point – usually after three-to-five years – they can either just take their money out of the savings scheme; they can exercise the options, acquire shares and immediately sell them (usually making a gain); or they can use their savings to exercise the options and hold the shares.
Under the second type of scheme – a share incentive plan – employees can be granted free shares by their employer, or they can elect to purchase shares out of their pre-tax salary.
There's "quite a lot of evidence now" from the UK and USA that companies with employee share schemes perform better than otherwise similar companies without them, Pendleton says.
These companies typically have higher productivity, for a number of reasons, he says.
"One is that the research evidence shows that companies with share schemes have lower employee turnover, so they save on hiring and separation costs. And there's also some emerging evidence that companies with share schemes are more likely to do more training of their employees, so they're generating better quality employees."
How to encourage participation
Pendleton says not everyone wants to participate in these types of schemes – generally only about 25–30 per cent of employees take part.
Participation is lowest among the youngest employees but increases as they get older, before plateauing when workers are about 55 years of age.
Similarly, salary level has a big influence on scheme participation, where "the more you earn, the more likely you are to join", Pendleton says.
But aside from the individual characteristics affecting participation, employers can influence involvement.
"The message that comes out pretty clearly is that the more communications a company does, the more likely people are to participate. That figures: the more information companies are pumping out to employees, the more employees come to trust the company and trust the scheme and feel they know what they're getting into," Pendleton says.
And using communication to raise participation among younger workers helps create more financially stable employees – Pendleton has found that for many young workers these schemes are their only form of savings, and about 50 per cent say that if the scheme wasn't there, "they would spend the money rather than saving it".
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