Understanding employee rewards and penalties

Being praised for going above and beyond one’s duty at work, especially if there’s extra pay, can lead to high employee performance. However, when an employee does not receive favourable subjective performance evaluations, it can also have negative effects.

These are the findings of a study conducted by the University of Toronto, Rotman School of Management, in which they examined the impacts of how managers in a Chinese company incentivise or penalise their workers.

Previous studies around incentivisation assessed performance outcomes when workers are aware of potential rewards and penalties but have not received them yet. This new study examines performance after receiving rewards or penalties.

In the report published in the journal Management Science, researchers evaluated two years of data from a Chinese company, combining subjective and objective performance assessments to reward or penalise employees.

The objective assessment sets monthly departmental goals around organisational behaviour and operational performance. Points out of 100 were awarded based on each department’s progress towards its targets.

The company set up dashboards so that departments could track their progress. However, managers could override monthly results by giving bonuses to departments that did not finish first and by reducing pay to departments that did not finish last. Departments could also receive rewards by not losing pay for finishing last and could receive penalties by not getting a bonus despite top ranking.

The results revealed that departments that received subjective override and rewards improved their job performance by an average of 18.4 points the next month compared to those that did not receive penalties or bonuses. Meanwhile, departments that received subjective penalties experienced a drop of 13 points in job performance.

Moreover, the study found positive and negative effects when workers received bonus pay as a reward or lost pay as a penalty.

The study's findings suggest that managers must be cautious when deciding how to incentivise job performance, said Assistant Professor Jee-Eun Shin, one of the study's co-authors. The results are very relevant among global supply chains and productivity linked to large multinational companies that depend on smaller suppliers.

“What we’re looking at is an incentive system that suppliers to these multinationals could have,” Prof. Shin said.