Business Research 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. In 2019, the Betriebskrankenkasse (Company Health Insurance Fund) reported that days of absence due to mental illness had more than doubled in the past ten 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. “Our economic system favours increasing pressure on employees in companies. This is most true in those areas where performance is measurable and incentive schemes are in place. Customer acquisition or turnover – every step is monitored. This creates pressure to perform.” Together with his former PhD student Dr. Kim Linsenmayer and Professor Johannes Habel from the University of Houston, Alavi has now demonstrated in the renowned Journal of Marketing the negative effects that pressure in the form of performance-based remuneration schemes can have on health.

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, they 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.

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“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. “We observed that a low percentage of one to ten per cent variable remuneration, as a percentage of total salary, does not yet have an impact on employee well-being,” says Alavi. According to him, a share of 20 to 30 per cent variable remuneration can even have a performance-enhancing effect. “However, 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.”

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. “These resources or coping strategies help them to withstand the pressure,” says the economist.

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Recommendations for managers

The results can also be used to draw pragmatic conclusions and recommendations for action. “In managerial circles, there are still people who are convinced that putting pressure on employees is the right way to go. Our research shows otherwise,” points out Alavi. “It would make more sense for supervisors to ensure that pay incentive schemes don’t create insecurity and stress in the first place.” The study’s findings suggest that it is more advisable to tailor variable pay schemes to groups of employees and to focus on strategies that can counteract and mitigate negative consequences, such as team-building or stress prevention measures.

Cultural differences

Today, variable remuneration systems are controversial in Germany and Europe, and many companies have already adapted their models. “More and more German companies are realising that the pressure to perform is counterproductive,” says Alavi. The situation is different in the USA. In the American automotive industry, for example, sales employees are paid according to their individual turnover. Why is that? “In the quite individualistic culture, such performance incentives are viewed in a positive light,” explains Alavi. Therefore, it is not surprising that the effect of wage incentive schemes on health has not yet been researched in US marketing research.

Research focus in Bochum

At SMD, Alavi has been researching the topics of stress, pressure to perform, time pressure and social pressure for seven years. Together with Professor Jan Wieseke, also a Chair at SMD, he has recently supervised Dr. Hanaa Ryari’s successful PhD project on the influence of chronic time pressure on sales employees and their performance. For this purpose, Ryari analysed 291 salesperson-buyer relationships at a large furniture company. Her results show that, contrary to the prevailing research opinion, the chronic perception of time pressure does not have an exclusively negative impact on salespeople’s performance. “On the contrary, our study illustrates that low to moderate chronic time pressure can encourage employees to adapt their sales behaviour more flexibly to customers and customer needs,” points out Ryari. However, the research paper also shows that excessive chronic time pressure clearly has a negative impact on performance, i.e., sales behaviour. The study by the Bochum-based research team was published in the renowned Journal of Retailing in June 2020.

Together with PhD student Christina Desernot, Alavi is currently researching the positive, as well as the negative effects that the introduction of new technologies can have on everyday sales. “On the one hand, digital tools facilitate the employees’ daily routine by providing them with additional information on customers or helping them with data analyses. On the other hand, many salespeople feel threatened by increasing automation and fear that they will soon be replaced by digital technologies,” as Desernot summarises the results to date.

Alavi, too, is familiar with pressure to perform and time pressure, be it on the starting line of the RUB run, playing billiards in his spare time or publishing. It was only in December 2020 that the business news magazine Wirtschaftswoche published the current ranking of the most prolific business economists in the German-speaking world. In the category “Die Jungen Wilden – die forschungsstärksten Betriebswirte unter 40 Jahren” (The Young Wild Ones – the most prolific business economists under 40), Alavi ranked 32nd; in the field of marketing research, he came in second. Is the pressure to publish and attract third-party funding beneficial to academia? “That’s rather questionable,” Alavi thinks.