"It is important for businesses to develop a comprehensive strategy for recognizing and rewarding employee performance so that the various practices reinforce one another."
FSU-led study: Employee incentives actually save businesses money
by Barry Ray
"Sometimes you have to spend money to make money," according to the old adage. Now, a Florida State University researcher and his colleagues have shown just how true that is for U.S. employers.
James Combs, an associate professor of management in FSU's College of Business, was the lead author of "How Much Do High-Performance Work Practices Matter? A Meta-Analysis of Their Effects on Organizational Performance," published in the autumn issue of Personnel Psychology. The study (link), in which Combs and fellow researchers analyzed information from thousands of companies, shows that employee incentives really are good for business.
In all, data from 19,319 organizations were analyzed in the study. The results show that when a company emphasizes progressive human-resource activities, such as incentive pay and flex time, it can enjoy a 10-percent to 20-percent improvement in employee retention, employee productivity, profitability and stock price. The results are just as dramatic—albeit in the opposite direction—for companies that eliminate such incentives: On average, they can expect a 10-percent to 20-percent reduction in their bottom line.
"It is extraordinarily expensive for companies to have to constantly hire and train new employees to replace those who left because they didn't feel valued by their employer," Combs said. "The progressive HR practices we studied put higher-skilled employees on the job, motivate them to give their best, and empower them to apply their skills." In short, giving incentives for good work makes employees feel that they are appreciated - and people who feel that they and their work are appreciated tend to work better and are less likely to leave.
Over the past 25 years, corporate America has debated whether the human-resource function adds value or if it is just a necessary evil, Combs said. The new study, he added, clearly shows that having skilled HR managers can make the difference between a company making a profit or losing money.
The study also found that performance improvements are stronger when companies take a systematic approach to human resources rather than implementing one or two practices independently of one another. Done incorrectly, HR practices can have unintended consequences and unsatisfactory results. For example, implementing teams and rewarding them, then rewarding employees for individual contribution, can be a "deadly combination," Combs said.
"It is important for businesses to develop a comprehensive strategy for recognizing and rewarding employee performance so that the various practices reinforce one another," he added.
In addition, the study showed that human-resource activities make a bigger difference among manufacturing firms than among service firms.
"Some of the most important goals in manufacturing are production, quality and safety," Combs said. "Because manufacturing jobs often involve complex and dangerous machinery, a successful safety incentive program can result in both increased productivity and decreased worker compensation claims and premiums."
The study used a technique called meta-analysis to mathematically combine the findings of 92 previous studies published since the mid-1980s. Co-authors with Combs on the project were Yongmei Liu, an FSU graduate research assistant; Angela Hall, an FSU assistant professor in the College of Business and the College of Law; and Dave Ketchen, a professor of management at Auburn University.