By Sarah Steimer
Open, diversified and large networks are known to spur innovation at companies, but managers may discourage their development when they implement pay-for-performance incentives. These plans — which typically rely on short-term and quantitative performance metrics — actually prompt employees to build smaller, closed networks.
The findings came from a new Strategic Management Journal study, titled “Pay and networks in organizations: Incentive redesign as a driver of network change.” The article was published Aug. 26 and was written by Hitoshi Mitsuhashi, of the School of Commerce at Waseda University in Tokyo, and Azusa Nakamura, of the Department of Management and Technology at Bocconi University in Milan.
The authors studied the change of incentive plans from those that weakly link short-term individualized contributions with remuneration (for example, seniority-based pay) to those that tightly link them (such as performance-based incentive plans).
They found that performance-based incentives had a few particular effects:
- Employees became more goal-oriented and focused on individual achievement, at the cost of innovation.
- The short timeframes for measuring performance made employees more risk-averse and inhibited long-term thinking.
- Employees became more individualistic and sensitive to their managers giving them credit for their work — versus thinking in a team-centric manner.
“A critical message from these observations is that before engaging in incentive redesign, companies need to understand that, No. 1, (it) influences goals that employees pursue, No. 2, employees might adapt their networks to the renewed goals and, No. 3., the updated networks might not be ones that managers prefer,” Mitsuhashi says.
So what’s the takeaway for managers looking to exert positive influence on employee networks? Think twice before moving to a pay-for-performance incentive model — because it could come at the risk of innovation within your organization.
Mitsuhashi, H., Nakamura, A. (2021). Pay and networks in organizations: Incentive redesign as a driver of network change. Strategic Management Journal. https://doi.org/10.1002/smj.3335.
Sarah Steimer is a Chicago-based writer and editor with experience in magazines, newspapers and multimedia projects. She has covered subject matter that spans local news, marketing, medicine, food and more.