Variable pay schemes can make workers ill

Fatigue, depression, sleep disorders, burnout: the number of cases where employees are unable to work for mental health-related reasons has increased dramatically in recent years. Professor Sascha Alavi, Chair at the Sales Management Department (SMD), has long been keeping a critical eye on this development in society, especially in the corporate world. Together with his former PhD student Dr. Kim Linsenmayer and Professor Johannes Habel from the University of Houston, Alavi has now demonstrated in the Journal of Marketing the negative effects that pressure in the form of performance-based remuneration schemes can have on health. Rubin, the science magazine from RUB, reports on this.

In a field experiment, the research team studied a medium-sized company in Germany that sells consumer goods, tools and services to customers in the construction and automotive industries. Over a period of twelve months, the team monitored the transition of the company's remuneration model from 80 per cent variable to 80 per cent fixed remuneration and analysed the data of more than 800 employees for this purpose. The result of their time series analysis: stronger performance incentives go hand in hand with more sick days.

The J-effect

"If the percentage of variable remuneration in total salary increases, this initially has a positive effect on employee performance," points out Alavi. The incentive provided by sales commissions and bonus payments is motivating. However, the empirical data also show that as variable pay increases, so do stress levels. "This in turn results in more sick leave and reduced performance," as Alavi elaborates the J-shaped progression of the curve. "We call this the J-effect," the economist continues. When variable remuneration accounts for about 30 per cent of total remuneration, the pressure to perform increases rapidly and performance decreases. "Our data thus reflect that incentive schemes in the form of variable remuneration can have harmful consequences on health. They can create stress and insecurity and thus generate pressure," the researcher concludes.

Pressure to perform leads to emotional exhaustion

In subsequent studies, the research team confirmed the observed J-effect and expanded on existing stress theories. For example, a survey of 400 salespeople from different companies and industries found that an increase in variable remuneration is also associated with an increase in emotional exhaustion. "Above a share of variable remuneration of about 30 per cent of total remuneration, the survey participants increasingly reported suffering from symptoms of fatigue, feeling drained, burnt out, frustrated or tired at the end of a workday or workweek", Alavi explains.

Coping strategies

The survey results also show that there are differences between individual employee groups. Not everyone finds the performance incentives stressful; some remain unaffected. In particular, employees who had very specific personal, mental and social skills or considerable experience were more resilient. "The pressure to perform is less of a problem for those who, for example, have delivered fairly consistent performance in the past or have many years of work experience," as Alavi explains the finding. Employees who maintain a good relationship with their supervisor and team also cope better with increased pressure levels. "The pressure to perform is less of a problem for those who, for example, have delivered fairly consistent performance in the past or have many years of work experience," as Alavi explains the finding. Employees who maintain a good relationship with their supervisor and team also cope better with increased pressure levels. The results thus can also be used to draw pragmatic conclusions and recommendations for managerial circles.

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Detailed article in Rubin

A detailed article on the topic can be found in the science magazine Rubin:
https://news.rub.de/english/2021-03-16-business-research-variable-pay-schemes-can-make-workers-ill.

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