When you pay employees based on the hours they’ve worked, it can lead them to put in less effort, new research finds.

It’s not uncommon to fall victim to the ‘this is how we’ve always done things’ mentality. Many workplaces have rooted their entire processes around it. However, just because you’ve found an approach that works, that doesn’t mean there isn’t a better way. In fact, many people would argue that in 2020 and beyond being open to new ways of working is business critical.

For example, many workplaces used to operate under the assumption that the traditional 9-5 model was the only way to get things done. But many organisations have since challenged that assumption and proven that not only can those concerns be alleviated, but workplace productivity can actually skyrocket when these innovative practices are built into the right cultures.

So where else should we be looking to innovate and iterate traditional workplace practices? Three researchers from the US – Steven Kachelmeier and Eric Chan of the University of Texas, and Xinyu Zhang of Cornell University – believe compensation approaches could be next on the list of things to rethink.

Everyone feels it’s unfair

In their forthcoming article in The Accounting Review, these researchers found that when employers pay people based on time spend on the job, both high and low performers in that organisation view their compensation as unfair and end up putting in less effort as a result.

“Both [high and low performers] back off on their effort intensity, but for different reasons,” says co-author Kachelmeier, who is the Randal McDonald chair in Accounting at the University of Texas.

“The high-ability person is backing off out of what I might call resentment. [They think] ‘Why should I work as hard when that person who’s pretending to work and putting in the same amount of time as me is getting the same pay?’ Interestingly, even the person with lower ability backs off. They think, ‘I’m getting paid for my time. That person is so much better than me, anyway. It’s demoralising and intimidating, so why should I bust my rear and work as hard as they are?'”

Kachelmeier admits that fairness is in the eye of the beholder. Common perceptions of unfairness when it comes to input and pay could be someone who works less hours than their counterpart who is paid more than them or two people who get paid the same amount but one person is putting in significantly more hours. 

Less talked about though, is a scenario where someone puts in 70 hours and another person puts in 40. Say the person putting in 40 hours is far more efficient and better at their job, and ends up accomplishing more than the person slogging their way through a 70-hour work week – who deserves more money? Evidence from this research indicates that paying more to the person who puts in 70 hours would likely be viewed as unfair, leading both employees to back off in the future.

Most compensation models aren’t set up to respond to a situation like this and that’s what Kachelmeier and his co-authors are challenging.

The experiment

In their experiment, Kachelmeier and his co-researchers asked participants to complete anagram puzzles – unscrambling arbitrary letters to form words – without adding an incentive. They chose this task as it was receptive to both effort and ability. They were able to identify high and low performers after assessing what participants were able to accomplish in an uncompensated practice period. 

“That doesn’t mean people are smarter or dumber. It just means that different people are cut out for different things.”

Next, participants were paired up (one high performer and one low performer) but neither knew they had been selected based on their abilities; all they knew was they were being asked to complete anagrams with another person.

Then researchers introduced an incentive and told participants that every anagram they solved together would contribute to a pot of money that they could split at the end of the experiment.

Interestingly, participants’ efforts shifted when it was determined how the money pot would be allocated. It was either split based on how much time they put in relative to each other or how much they individually contributed (i.e. one person created 20 words and the other person only created 10).

The researchers found that when the allocation is based on time, both high and low performers backed off on their efforts.

 “It’s more harmful to reward people for their effort than to reward people for their output.” – Steven Kachelmeier

“The important and subtle part of that is that even if it’s time-based allocation, you still have an incentive to grow the pot. Everybody has the incentive to make the pot of money as big as it can be.” But that’s not enough to ignite a spark inside them to want to maximise their efforts.

Important to note is that reluctance in putting in a solid effort slowly built up the longer participants spent working on tasks with a time-based reward. Applying this research to a workplace context, it could be argued that you might slowly be chipping away at your employees’ loyalty the longer you reward them for their hours worked rather than outcomes achieved.

“Resentful employees will find ways to stab you in the back,” says Kachelmeier. “[They] will find ways to comply in observation. If you don’t give people the opportunity to demonstrate what they can do, then they will pretend to work hard.”

Another interesting finding was that when employees’ skills were equal – i.e. they remove the low/high performer element – the effort aversion goes away.

“People then say, ‘We’re teammates. We’re both pretty good at this. Let’s work hard together so we can both get as much as we can.’

“I don’t mean to sound callous here, but people who aren’t performing well need to get the message somehow… so there’s almost a natural selection to rewarding people for what they accomplish.”

They also found that when you allocate pay based on time, you will get more time but not necessarily more output.

“If you just want butts on seats and you implement a scheme that rewards a junior wannabe manager for not leaving until the boss does [for example]… you’ll get what you pay for, there’s no doubt about that,” says Kachelmeier.

If an executive team wants to implement an innovative workplace initiative, they will look to HR for guidance. AHRI’s short course Internal HR consulting skills will equip you with the skills to offer advice with confidence. Sign up for the upcoming courses on 2nd December 2020 and 16 February 2021.

Play the long game

You want your employees to produce – that’s what gives you short-term gains. But securing long-term gains requires people to be motivated. Now that COVID-19 has caused many of us to question how, why and where we work, this is the perfect opportunity to review how you reward and recognise employee efforts.

In order for an outcomes-based approach to compensation to take hold, workplaces have to work on creating environments that remove the guilt people feel for leaving on time – or even taking a part-time work load – and that can be extremely difficult.

As Kachelmeier observes, “we’re all racing to see who can sacrifice the most for the job”. This, of course, can be incredibly damaging for employee wellbeing and business outcomes.

“There’s this culture where the really deserving people are those who are there seven days a week putting in time, time and more time. But independent of that, you have to ask, “What have you accomplished?” That can be difficult because different companies, different jobs, are going to have different ways of measuring output,” he says.

“Resentful employees will find ways to stab you in the back.” – Steven Kachelmeier

For example, Kachelmeier says if your work is very team-based it can be hard to trace individual output. Kachelmeier’s research is more applicable for organisations where both individual output and hours can be measured.

Many workplaces breed an unhealthy culture of working late for the sake of it. People pretend to punch in and out earlier/later than they actually did or employees might stick around waiting for the boss to leave for the chance to be seen as a hard worker. 

A manager can scan the room at 7pm and fool themselves into thinking they’ve got a productive workforce on their hands, but we have to return to Kachelmeier’s key question: how much is actually being accomplished? Are these people contributing to your business in a meaningful way or are they simply staring bleary-eyed into a computer screen, willing themselves to get through “just one more hour”?

Perhaps the reason many organisations find it hard to think about compensation in different ways is because leaders only know how to measure what’s visible – and looking at the time someone logged on and off is an easy way to do that. So HR professionals can play a key role in helping managers make the invisible visible.

Clearly outline the outcomes expected of each individual and create frameworks to measure them. This way you can set out clear KPIs for each individual and team and get to work on destigmatising getting more done in less time – that should be the goal.

If nothing else, walk away from this research with Kachelmeier’s mantra in mind: “You get what you reward.”