Show me the money - The behavioural science of reward

Published: March 2015
 
This report provides an overview of relevant research in behavioural science for those who have a responsibility for, or an interest in, employee reward and identifies how these can be applied to make pay and benefit practices more effective.
 
It is for all those people management and public policy professionals who have a role, or interest, in the design and implementation of pay and benefit systems in organisations. 
 
Base pay, pay structures and the market
We explore the implications of individuals’ subjective valuing of rewards, and their approach to equity, for the setting of pay rates. We examine how individuals estimate their own worth, and how they respond to the prospect of progression in pay scales (or barriers to it).
 
Variable pay
We look at how individuals respond to incentives of various kinds. We consider the different effects on people’s behaviour of financial and non-financial incentives, deferred rewards and team or organisation-wide incentives.
 
Pensions and benefits
We examine employee responses to pensions and benefits as rewards. We particularly focus on how cognitive biases and rules of thumb affect behaviour in relation to pensions. We also consider how people respond to choice in flexible benefits and the withdrawal of benefits.
 
Executive reward
We look first at how cognitive biases affect executives’ responses to reward packages of different kinds and how this shapes their behaviour, for better or worse. We then examine how the decisions of remuneration committees can themselves be influenced by biases and decision-making heuristics.
1. Pay and reward decisions have an emotional or subjective component.
 
2. Individuals’ preference and satisfaction levels in relation to reward are dynamic, not fixed. External events, for example a recession, can affect individuals’ confidence, altering their satisfaction with current reward offers.
 
3. Pay and reward also has a social context, in that we value not only our individual need but make comparison with others. This may be deep-rooted in the functioning of the human brain.
 
4. The implications of pay and reward are highly complex, as individuals and organisations need to assess not only present but also future need.
 
5. Financial or similarly tangible incentives may ‘crowd out’ people’s underlying (intrinsic) motivations.
 
6. Money may have distinctive and powerful effects on behaviour, more so than those engendered by other rewards of equivalent value.
 
7. The complexity of decisions around reward means that people use shortcuts (heuristics), which influence their decision-making.
 
8. Choices in benefits or pensions may be responded to as a cost rather than an opportunity, and should thus be limited and meaningful.
 
9. Deferred reward implies sacrificing immediate consumption for a future reward. We tend to undervalue the future reward, so employers need to counter this through education and communication.
 
10. Risk and uncertainty in reward (for example, in a performance-linked bonus) may reduce the subjective value that employees place on it and can affect their behavioural responses.
Are you dealing with jobs that rely on high levels of autonomy, mastery and purpose?
If so, it may be less appropriate to link pay directly with individual performance.
 
How important is collaborative behaviour in your organisation or department?
This can be encouraged by team-based reward and backed up by individual reward and/or recognition.
 
How much choice do you offer employees in their benefit packages?
Too much can be treated as a cost, so restrict the number of options to a few meaningful ones if possible.
 
When did you last refresh your organisation’s benefit offering?
The value placed on a benefit by an employee can reduce over time.
 
How aware are your employees of the value of their pension contributions?
Raising understanding through financial education and communication increases the value people place on pensions.
Download the full report below