A better understanding of behavioural psychology is vital if HR and reward professionals are to improve their pay and benefits strategies.
This is the finding of a new report – Show me the money – the behavioural science of reward – published by the CIPD.
According to the report, behavioural science can teach HR professionals about how employees perceive fairness or how cognitive biases impact employees’ response to different rewards and choices of reward.
It also argues employees’ perception of reward is often defined by the circumstances in which they are given. It cites how giving staff bonuses during tough economic times are perceived as having a much greater value than when the same reward is given during times of prosperity.
Jonny Gifford, research adviser at the CIPD, said: “The research reveals there are a number of behavioural factors that should be considered when shaping a reward programme.” He added: “It must be recognised monetary rewards aren’t everything and that they can even distort people’s motivation. Enticing the workforce with financial incentives and a strong bonus culture can lead to unwanted, risky and even unethical behaviours.”
The report identifies what it calls the ‘endowment bias’ – the tendency staff have to overvalue their own skills and performance compared to others, which has an impact if performance-related pay is deemed not to meet their own expectations. Gifford said: “Because we tend to overestimate our ability, most people find performance-based pay attractive in the first instance, but ultimately disappointing and demotivating.”
Other findings confirm what some HR professionals may have experienced – including that incentive systems based on team or individual performance may build in dissatisfaction and diminishing returns, because staff tend to compare their own contributions more favourably than those of others. It suggests firms need to make the process of choosing rewards simpler because there can be a perception amongst staff that having to make a choice involves a cost to them.
Worryingly, the report finds employees still have a deep psychological need for immediate consumption – which makes communicating deferred benefits – such as pensions – particularly difficult. Charles Cotton, performance and reward advisor at the CIPD, said: “Workplace pension schemes boost employee pay packets by thousands of pounds over the course of their employment but without the instant gratification of seeing that money land in their bank accounts each month, many employees fail to value the schemes.” He added: “When it comes to reward, it’s important that businesses regularly reinforce the total value of the package that they are offering to individuals and pay equal attention to both short and long-term rewards.”
The report concludes: “The time is ripe for a renewed look at how we design and apply reward strategies. There is a growing body of research that provides insights into human behaviour at work that gives a fuller, more nuanced understanding of what incentivises employees. The application of behavioural science insights to people management and development has the potential to be game changing.”