Most managers would agree that motivated, productive employees are crucial for organizational success, regardless of company size, industry, or corporate strategy. The question is how to motivate them. Offering employees performance-based incentive pay is one common approach, and it usually takes one of two forms: bonuses are offered to individuals based on assessments of their performance, or bonuses are offered as organization-wide incentives, such as profit-related pay or share ownership.

Sometimes, these incentives work in ways managers intended them to. But there are ways in which these methods of performance pay can backfire, causing contentious behaviors among employees, complaints about unfair pay distribution, or overwork and stress. Although these critical issues represent real problems for many businesses, little progress has been made in gathering evidence on how different incentive pay schemes — performance-related pay, profit-related pay, and share ownership — might affect employee well-being.

We wanted to learn more about this relationship. Our study, published in Human Resource Management Journal, examined the extent to which each payment scheme was associated with employees’ experience of well-being, as measured by job satisfaction, organizational commitment, and trust in management. It also explored the relationship between the schemes and employees’ experiences of high work intensity and how this might explain any undesirable influence of incentive pay on well-being.

We used data from face-to-face structured interviews conducted in 1,293 private-sector workplaces across the United Kingdom. The interviewees were senior managers with responsibility for employment relations, personnel management, human resources, or financial management. The main issues covered in the interviews related to workplace characteristics, recruitment and training initiatives, pay determination, payment systems, and workplace performance. We also gathered employee data through questionnaires distributed to a random selection of five to 20 employees in each workplace where the management interviews were conducted. This amounted to 13,657 employees. The survey provided information on working arrangements, working hours, work intensity, and well-being. Data from the management interviews were then matched with employees’ reports about their subjective experiences of work.

Our analysis showed that performance-related pay was positively associated with job satisfaction, organizational commitment, and trust in management. Profit-related pay did not have similar positive effects; in fact, some levels of profit-related pay resulted in employees being less committed and trusting management less. This contradicts previous studies, in which profit-sharing initiatives have been associated with positive employee outcomes.

Our analysis did reveal some important nuances about profit-related pay. Specifically, any positive effects are dependent on the extent to which profit-related pay is available to a large proportion of the workforce. At low to medium levels of employee participation in profit-related pay, we found lower levels of job satisfaction, organizational commitment, and trust in management. However, at high levels of employee participation, we found higher levels of employee well-being.

When it comes to share ownership, however, we found a direct negative relationship with job satisfaction and no significant relationships with employees’ commitment and trust in management. High employee uptake of share ownership also revealed no significant relationships with employee well-being.

Of the three incentive pay schemes examined, only performance-related pay was positively associated with the perception that work is more intense. In many ways this makes sense: People may feel individual pressure to work harder in order to obtain an individual reward. But, on a concerning note, we found that experiencing this kind of pressure partially, but not completely, offset some of the positive influences performance-related pay can have on job satisfaction, organizational commitment, and trust in management.

What should managers keep in mind? The positive relationship between performance-related pay and all three well-being outcomes indicates that employees may see increases in pay as a reasonable and even positive trade-off for contributing toward organizational success. Contrary to what many employers believe, organization-wide incentives such as profit-related pay and share-ownership may not generate such positive effects, as they were found to have negative relationships with employee well-being. The exception to this argument is the case of high employee participation in profit-related pay, where, if the mechanisms for distributing organizational profits are perceived to be equitable, more employees are likely to benefit and consequently experience job satisfaction, organizational commitment, and trust in management.

But our results regarding work intensity and individual-based incentive pay should give managers pause. In some circumstances, performance-related pay may be experienced as a burden that only provides extra pay for workers through an intensification of the work process. This raises critical questions regarding the extent to which individual-based incentives can influence employee well-being in a sustainable way.