Effects of performance-based financial incentives on work performance: A study of technical-level employees in the private sector in Sri Lanka

Abstract

O rganizations off er attractive fi nancial incentive packages to attract and retain people with high-quality skills and thereby stay competitive (Hutson, 2000;Lawton & Chernyshenko, 2008). e literature also suggests the possibility of maintaining more than one incentive package within a single organization in order to meet needs and desires of diff erent employee groups (Lawler, 1990). is article presents results of a study that investigated the eff ects of design features of performance-based fi nancial incentives on work performance of technical-level employees attached full-time to diverse organizations belonging to the private service sector in Sri Lanka.Although it is expected that fi nancial incentives increase individual eff ort and thereby produce "incentivized" behavior, previous research conducted in both controlled laboratory studies and fi eld studies provides inconclusive results. For instance, some studies provide evidence that fi nancial incentives increase individual eff ort and thereby produce incentivized behavior (Bonner & Sprinkle, 2002;Stone, Bryant, & Wier, 2010), while other studies provide evidence that fi nancial incentives fail to produce desired behavior (Wolf & Zwick, 2008) and create negative organizational outcomes such as decreased trust and cooperation (Stone et al., 2010). e current study attempted to explain whether performance-based fi nancial incentives could have an infl uence on work performance of technical-levelThe objective of the study is to investigate the e ect of performancebased nancial incentives on work performance. The study hypothesized that the design features of performancebased nancial incentive schemes themselves may in uence individuals' work performance. For the study, survey methodology was used and 93 technical-level employees who were subjected to a performance-based incentive scheme for at least 2 years in their rms responded. Regression analysis was used for data analysis. It was found that the design features of performance-based nancial incentives schemes explain 51% of the variance in work performance. Six of the incentive scheme factors, including the goals of incentive scheme, employee participation in setting goals, incentive scheme type, and payout frequency, have signi cant positive impact on work performance. Overall, the ndings suggest that well-designed and carefully implemented incentive schemes have signi cant positive impact on work performance.

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