Study Advises Tying Bonuses to Efficiency : Compensation: Employees work better that way, report says, than when rewards are based on the company’s profit.

Paying bonuses to people for working efficiently or improving product quality may be more effective in boosting a company’s performance than giving rewards tied to the bottom line, a new study shows.

Researchers who conducted a two-year study of 432 plans at 300 companies nationwide said companies that emphasize improving operations rather than increasing sales and profit typically get back $3 for every dollar spent rewarding workers.

The study suggests that employees will perform better when “you’re measuring closer to home, closer to where an employee lives or works,” said Elizabeth J. Hawk, a project director and compensation consultant for Monsanto Co. Also, firms that base worker bonuses on revenue and profit ended up paying 40% more in rewards than those who tied such plans to operational gains, she said.

The study was released Tuesday at the American Compensation Assn.’s national conference in Anaheim. The educational and research organization, based in Scottsdale, Ariz., includes 14,000 consultants and practitioners who manage compensation and benefits programs.

The study, sponsored by a consortium including the American Compensation Assn., GTE, Maritz Inc., Monsanto Co., Motorola Inc. and the Travelers Corp., was conducted to evaluate a trend toward rewarding employees for accomplishing performance goals. Such programs are relatively new: Researchers noted that most of the plans they studied were started within the last two years.

“The ‘80s was the time for experimentation for this thing, and the ‘90s is clearly the time for broad-based implementation of these plans,” said Jerry L. McAdams, another project director and vice president for performance-reward resources at Maritz Inc.

Companies are discovering that “it’s going to be the creativity and energy of the work force that is going to make a difference,” he added. “Organizations are realizing that employees are assets that can be marshaled to accomplish corporate goals. It is an important strategic move that makes good business sense.”

The study focused on 1 million employees, primarily in non-management positions, at companies with 20 or more workers. It excluded reward programs that were actually merit-pay plans, which offer extra compensation based on individual performance reviews. Researchers mailed surveys to managers of 2,200 performance-reward plans. Of those, 432 surveys were returned.

Much of the research found that the conventional wisdom is true: the greater the reward offered, the greater the effort. The typical firm in the study gave rewards averaging $710 per worker annually. In return, that typical company gained $2,210 per worker.

“Some of this doesn’t sound like rocket science to compensation professionals,” Hawk said. “We’ve been saying some of these things for years. But the important thing for us is that we can prove it.”

Researchers found that performance-reward plans worked better when tailored to a company’s own goals, rather than copied from another firm’s program. The study also showed that companies are better off when employees play a major role in creating the plans.

“To use a paraphrase from Abraham Lincoln: The best plans are of the people, by the people and for the people,” Hawk said.

The study also showed no major differences in the success levels of reward plans at service-oriented companies compared with manufacturers. And 24% of the plans studied were in place at unionized workplaces.

Such programs “can be successful in a variety of business environments,” Hawk said.

Companies that tie future pay raises to job performance have been criticized, Hawk said, because they give no weight to seniority. The study found that such incentive programs are effective, however, in increasing teamwork among workers. Such systems are in place at 16% of the companies surveyed, she said.

Researchers also found that reward plans tended to pave the way toward making a company more open and participatory.

“Conventional wisdom would say you address the culture and environment of a company first,” Hawk said. But in many cases, she said, reward systems actually lead to corporate changes.