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Employers Should Reward Workers for Accomplishments, Not Hours Worked

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AUSTIN, Texas – Paying employees based on hours worked is a time-honored tradition in many professions, such as law. But with the COVID-19 pandemic causing many workplace norms to be revisited, new research from The University of Texas at Austin suggests that compensating employees based on their accomplishments rather than on hours worked produces better results.

When organizations with a mix of high- to low-performing employees base rewards on hours worked, all employees see compensation as unfair, and they end up putting in less effort on the job. High performers resent doing more work than their low-performing peers while getting the same reward. Low performers assume their overachieving colleagues will carry the load, while they’re compensated regardless.

This “long-hours culture” is a common phenomenon, and especially in the U.S., said Eric Chan, assistant professor of accounting in the McCombs School of Business at UT Austin and co-author with Steve Kachelmeier, the Randal B. McDonald Chair in Accounting in Texas McCombs; and Xinyu Zhang, assistant professor of accounting at Cornell University.

“We found that for workers with very different abilities, these policies lead to feelings of unfairness and resentment that are very strong, and you get a backfire effect,” Chan said. “For employees with similar abilities, though, we don’t find that adverse effect.”

The research is online in advance in The Accounting Review.

In an initial experiment, Chan and colleagues tasked 142 undergraduate business students at a large public university with completing several rounds of anagram puzzles, where the letters in words or phrases are rearranged to form other words or phrases.

Participants engaged in a practice round to assess their abilities, and then researchers anonymously paired them in two-person “firms.” Each pair had a high-ability worker and low-ability worker. After the practice round and each subsequent round, researchers told students how their partner fared.

Each student completed the puzzles independently, and each correctly solved puzzle earned the pair 400 lira, a fictional currency that researchers converted into U.S. dollars at a rate of 1,000 lira to $1. Money earned went into a shared pot.

One set of students shared the pot based on how long each person worked on the puzzles. Another shared the money based on how many puzzles each team member answered correctly. The researchers found that when compensation was based on time spent completing the puzzles, students of all abilities put forth less effort.

In a second experiment, the researchers had students solve anagrams on their own. These students put in their full effort. The researchers said results suggest that for companies that have workers of varying abilities, flexibility in work hours may pay off more than requiring staff members to punch the clock.

Employers frustrated with workers coming in late or leaving early may be tempted to institute a policy that rewards employees who put in more hours, surmising the policy will help boost the bottom line. “The irony is that such a policy may appear to work,” Kachelmeier said. “You will see more effort in the sense of time.”

However, what employers don’t see are the unintended consequences. Workers can get demoralized, productivity can drop, and employees might choose to find another employer that gives them more freedom and flexibility.

“In the U.S., we’re all racing to see who can sacrifice the most for the job,” Kachelmeier said. “It’s, ‘Look how long and hard we’re working.’ But how much you’re personally sacrificing in hours for the job does have negative consequences, and it’s not just in burnout. It’s also this resentment. Companies have got to give flexibility and let people determine what’s right for them.”

For more information about this research, read the McCombs Big Ideas feature story.