Bonuses boost performance 10 times more than merit raises

December 08, 2006

Giving a 1 percent raise boosts employee job performance by roughly 2 percent, but offering that same money in the form of a bonus that is strongly linked to a job well done can improve job performance by almost 20 percent, finds a new Cornell study on the relationship between pay and performance.

"I looked at both how much people are paid and also how pay increases and bonuses are given," said Michael Sturman, associate professor at Cornell's School of Hotel Administration, who conducted the study. He found that "by changing the strength of the pay-for-performance relationship [awarding bonuses], you can improve performance by up to 19 percent."

When Sturman looked at the experience of a diversified services company, he found that an across-the-board raise in one year meant better performance in the following year and that paying above the market also produced higher performance.

"While both across-the-board raises and bonuses improved performance, bonuses stood out when pay was linked solidly to performance," he said.

Sturman noted that he studied only one company that had almost 700 employees working in the United States. "The point is, pay methods can be used strategically to improve performance," he concluded. "The payroll is not merely an expense to be reduced, but an investment that can be used strategically."
-end-
The study, "Using Your Pay System to Improve Employees' Performance: How You Pay Makes a Difference," is available at no charge from the Cornell Center for Hospitality Research, at http://www.hotelschool.cornell.edu/chr/research/centerreports.html.

Cornell University

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