Reward Management

Companies invest enormous financial resources in reward systems and practices to attract, retain, and motivate employees and thereby ensure and improve individual, team, and organizational effectiveness. Organizational rewards comprise financial and nonfinancial rewards, such as appreciation, job security, and promotion. Financial rewards, also called tangible rewards, include direct forms (such as fixed and variable pay and share ownership) as well as indirect and/or deferred forms (such as benefits and perquisites). Fixed or base pay refers to the amount of money one receives in return for fulfilling one’s job requirements, the job’s grade, or the skill or competence level required to perform the tasks. Variable pay (such as cash bonuses and commissions as forms of short-term incentives, or stocks or stock options as forms of long-term incentives) depends, for example, on individual, team, and/or company performance or outcomes, and is based on quantitative and/or qualitative criteria. Benefits (such as pension plans or health programs) and perquisites (such as onsite fitness centers, medical care or health facilities, and company cars), among other forms, are indirect financial rewards (Milkovich, Newman, & Gerhart, 2016). Both qualitative reviews (Gerhart & Fang, 2014; Shaw & Gupta, 2015) and meta-analytic studies (Cerasoli, Nicklin, & Ford, 2014; Garbers & Konradt, 2014; Jenkins, Mitra, Gupta, & Shaw, 1998) have shown that extrinsic rewards (such as financial incentives) can improve employee motivation and performance and shape employee health (Giles, Robalino, McColl, Sniehotta, & Adams, 2014) and safety behavior (Mattson, Torbiörn, & Hellgren, 2014). However, empirical evidence regarding under which conditions particular rewards are most effective or lead to unintended consequences is still scarce. In short, compensation and incentive systems remain one of the most under-researched areas in personnel psychology and human resource management (Gupta & Shaw, 2015).

This state of affairs poses risks. Reward management approaches may waste both money and effort, and may be ineffective in attracting, retaining, and motivating target personnel, if not grounded in a base of evidence. Added to this, in the face of the recent financial crisis and of serious cases of employee and company unethical behavior, company’s financial incentives, especially bonus and pay-for-performance (pfp) systems, have been widely criticized for their detrimental effects on individuals, companies, and society (Larcker, Ormazabal, Tayan, & Taylor, 2014). These examples of the dark sides of incentives highlight the importance of reward management research, not only from a human resources management (HRM) but also from a societal perspective. They also illustrate the need to understand the underlying mediating and moderating mechanisms linking reward systems and practices to individual, team, and organizational behavior and outcomes. This special issue contributes to the research on reward management by focusing on the contextual effects of financial rewards on employee motivation, behavior, and performance, and by analyzing the mediating mechanisms of different types of financial and nonfinancial rewards.

The four studies included in this special issue address different issues of reward management research and take different theoretical perspectives. The first two studies analyze the interaction effects of financial incentives and individual factors, such as employee perceptions of distributive justice, and then how individual competitiveness moderates the effects of pay-for-performance (pfp) on employee motivation, behavior, and performance. These studies show which and how intended or unintended consequences of pfp occur. The other two studies differentiate the effects of tangible and intangible rewards on employee turnover and risk taking; they disentangle underlying mediating and moderating mechanisms by comparing the effects of benefits and perquisites, and of esteem, security, and promotion as nonfinancial rewards. In the following passages, we present a short overview of these four papers before we discuss their contribution and their implications for further research.

One of the most discussed unintended consequences of financial rewards has been the assumed erosion of intrinsic motivation, also called the crowding-out or undermining effect of extrinsic incentives. This effect is suggested by proponents of the cognitive evaluation theory and is primarily based on findings in nonwork settings or with child samples, or in situations where rewards have been suspended without explanation (e.g., Deci, Koestner, & Ryan, 1999; Weibel, Rost, & Osterloh, 2010). In contrast, the findings of primary and meta-analytic studies typically do not show a crowding-out effect of extrinsic incentives (Gerhart & Fang, 2014), and rather demonstrate that intrinsic motivation increases in the presence of financial incentives (Giles et al., 2014). As a consequence, research has started to reconcile these conflicting findings with the assumptions of cognitive evaluation and self-determination theories. Thibault Landry and colleagues (2017) contribute to this research by analyzing whether financial incentive systems can satisfy employees’ need for autonomy and competence (when bonuses are fairly distributed, thus strengthening autonomy and motivation) and finally improve work performance. They conducted three field studies: one cross-sectional field study in Greece using a diverse sample of professions, and two longitudinal studies in Canada with samples of high-tech workers and financial advisors who received performance-contingent annual bonuses. Findings of all three studies show that distributive justice moderates the relationship between financial incentives and autonomy need satisfaction. In two of the three studies, distributive justice also moderated the relation between financial incentives and competence need satisfaction. Enhancing and buffering effects of distributive justice on the relation between financial incentives and need satisfaction vary across studies depending on the positive or negative relationship between financial incentives and competence and autonomy need satisfaction. By and large, study findings support the hypothesis that financial incentive systems can satisfy employees’ need for autonomy and competence, when bonuses are fairly distributed. In these cases, bonuses strengthen autonomous motivation and ultimately improve work performance. Thus, compensation plans using financial incentives such as annual bonuses can be effective, when rewards are distributed fairly. However, the varying positive or negative relation between financial incentives and need satisfaction across studies also indicates that other variables might influence how financial incentives are perceived.

Another often discussed potential unintended effect of financial incentives has been that individual pfp decreases cooperation and might even increase deviant behavior, such as harming others or sabotage (Gerhart & Fang, 2014). Gläser, van Gils, and Van Quaquebeke (2017) contribute to this debate and show, with varying study designs, that the degree of individual trait and state competitiveness can influence how employees perceive pfp and react to it with deviant behavior. Their results are based on three studies. In the first cross-sectional study, employees from different German organizations receiving performance-contingent annual lump-sum bonuses participated online. Then, two online experiments were done with participants from digital panel studies and Amazon Mechanical Turk taking part in competitive dice games, where in one study only the winner was rewarded, while in the other study every player was able to win the bonus. Their findings indicate that pfp programs can increase employees’ interpersonal deviance, that is, active harming behavior toward coworkers, when employees are high in individual competitiveness, that is, have a strong desire for interpersonal comparison and wish to be better than others. No significant relationship between pfp size and interpersonal deviance was found for participants low in trait or state competitiveness.

While the first two studies in this issue focus on moderating effects of pfp, the following two studies address the differential effects and mediating mechanisms of indirect forms of pay and of nonfinancial incentives on turnover and risk taking. Particularly in highly competitive labor markets, such as the information and communications technology (ICT) sector, companies not only offer attractive salaries, but also benefits (such as pension and private medical insurance plans) and, more recently, even perquisites (such as an onsite fitness center, medical care facilities, or paid meals) to make employees feel that they are valued. In turn, this is assumed to lead to better retention of key employees and a reduction in unwanted turnover (Fortune, 2016). These indirect forms of pay can be quite costly and research on the comparative effects of benefits and perquisites on turnover is still scarce. Renaud, Morin, and Béchard (2017) contribute to this topic by comparing the longitudinal impact of perquisites and traditional benefit packages on the intention to stay and by analyzing the mediating role of affective organizational commitment. In a longitudinal online study with three points of measurement (after 6, 12, and 18 months of participants being with the company), new employees of a Canadian company in the ICT sector reported their satisfaction with the provided perquisites and benefits, their affective organizational commitment, and their intention to stay as an indicator of employee turnover. Study findings indicate that satisfaction with traditional benefits has a stronger direct impact on the intention to stay than satisfaction with perquisites. Furthermore, when benefits and perquisites are analyzed separately, affective organizational commitment partially mediates the effect of satisfaction with traditional benefits on the intention to stay, while it fully mediates the effect of satisfaction with perquisites on intention to stay.

Business scandals (e.g., the Enron scandal and bankruptcy in 2001, and the bankruptcy of Lehman Brothers in 2008, which triggered the global financial crisis) have moved the ethical and financial risk taking of employees and managers as well as the effects of incentives to the fore in both academic and public debates. Risk management research has shown that age and financial and ethical risk taking are related. Ceschi, Costantini, Dickert, and Sartori (2017) contribute to this by analyzing whether perceived nonfinancial rewards moderate and mediate this relationship. They compare the moderating effects of esteem, security, and promotion rewards on the relationship between age and financial and ethical risk taking among managers of Italian companies. They show that age and risk taking are negatively related, that is, young managers report taking more financial and ethical risks than senior managers. Moderation analyses indicate an interaction effect of job promotion rewards and age: Low chances for job promotion seem to be a key factor for young managers’ decisions to take financial risks, whereas no relation between age and risk taking was found when high chances of job promotion were perceived. Findings also indicate that job security and promotions partially mediate the relationship between age and ethical risk taking.

In sum, the findings presented in this special issue provide at least four contributions to our understanding of the moderating conditions and mediating processes of the impact of financial and nonfinancial rewards on employee motivation, behavior, and performance. First, distributive justice perceptions can moderate the effects of financial rewards. When performance-contingent annual bonuses are perceived as distributed fairly, they can satisfy employees’ need for autonomy and competence, and thus strengthen autonomous motivation and, in turn, work performance. Identifying these moderating and mediating processes adds to our understanding of why crowding-out effects of extrinsic rewards do not occur. It also clarifies the validity of the assumptions of cognitive evaluation and self-determination theories. Second, competitiveness as an individual characteristic can influence how employees perceive and react to pfp with deviant behavior. When employees have a strong desire for interpersonal comparison and wish to be better than others, that is, are highly competitive, pfp programs can increase employees’ interpersonal deviance, that is, active harming behavior toward coworkers.

Third, companies can achieve a stronger effect on intention to stay with offering benefits (e.g., private medical insurance plans) than perquisites (e.g., onsite medical care facilities). Employees’ satisfaction with benefits seems to increase their intention to stay both directly and indirectly via enhancing affective organizational commitment, whereas satisfaction with perquisites seems to have only an indirect effect via commitment. Fourth, young managers report more financial and ethical risk taking than senior managers. Young managers’ financial risk taking seems to depend on their perceived chances of job promotion, as no relation between age and risk taking was found when high chances of job promotion were perceived.

We hope that this special issue stimulates further longitudinal, mixed-methods, and multilevel research to compare the effects of specific reward types and practices on employee motivation and on individual, team, and organizational outcomes. There is a need to analyze the underlying mediating mechanisms and to identify individual, team, or organizational level variables moderating these relationships. The four studies in this issue address only a few of the open research questions highlighted in our call for papers, and other issues could be added. Furthermore, the studies in this issue focus only on the individual level of analysis. Questions on how team or organizational level variables, such as work structure, leadership behavior, organizational culture, and corporate strategy, influence the relationship between specific reward types or combinations of different reward types and reward outcomes are open to further investigation. Thus, future research has the challenge to address multi- and cross-level effects of organizational rewards and individual, team, and organizational level contingencies. Until now, empirically-based multilevel reward management research has been the exception (e.g., Trevor & Wazeter, 2006). However, recent conceptual papers on multilevel approaches to the effects of pay variation (Conroy, Gupta, Shaw, & Park, 2014) or team pay-for-performance (Conroy & Gupta, 2016) offer promising models to guide subsequent empirical investigations.