Team-Based Rewards Structures and Their Impact on Team Trust

Introduction and Objectives

By Courtney Calinog (MSLOC student)

Trust is a critical ingredient to ensuring a healthy team dynamic, with its absence dramatically hindering team success in any organizational context. As a result, the establishment and continual fostering of team trust is an important yet challenging task facing managers, coaches, consultants and organizational effectiveness practitioners alike.

Team trust can be influenced by a variety of factors, including the structures organizations put in place to reward their employees. An analysis of team-based rewards, in particular, suggests several interesting implications regarding their impact on team trust. While they can be highly effective when implemented correctly, team-based rewards can also be a trigger for team trust challenges. A deeper understanding of these dynamics can help the MSLOC community design and promote healthy team reward structures in their academic and professional pursuits.

This article will provide an overview of trust in teams as a well as a summary of team-based rewards structures. Through the lens of team trust, it will review the perceived benefits of team-based rewards, including a summary of the conditions where they can be the most effective. In addition, it will explore potential drawbacks to team-based rewards and their impact on trust. Finally, a case study demonstrating the successful implementation of team-based rewards in a low trust team will be reviewed.

Trust and Team-Based Rewards Defined

Trust

According to Ferrin and Dirks (2003), interpersonal trust is defined as “an individual’s belief that another individual makes efforts to uphold commitments, is honest, and does not take advantage given the opportunity” (p. 19). At the same time, Rousseau, Sitkin, Burt and Camerer (1998) recognize interdependence and risk as the two conditions that must exist for trust to arise. In other words, trust is best built in an interdependent team context where individuals must come together to share information and collaborate. Furthermore, there is a notable element of risk involved for individuals deploying effort towards a team goal when there is no guarantee that team members will reciprocate (Ferrin & Dirks, 2003).

Team-Based Rewards

For an increasing number of organizations, implementing a compensation plan that rewards employees for successful teamwork provides great synergy with their organizational model. Companies that have such plans take various approaches to structuring team-based rewards, including programs such as incentive pay, recognition, profit sharing and gainsharing. (See Table 1) Human resources professionals that use these plans indicate they can be an effective way to reward team performance, but “must be carefully structured to avoid unintended consequences that could undermine individual initiative and business goals” (Bolch, 2007, p.91).

Types of Team-Based Pay

Benefits and Acceptance of Team-Based Rewards

With the increasing emphasis on team-based work in organizations, research suggests a growing acceptance and interest in team-based rewards, with organizations embracing the “conventional wisdom that team-based pay is the best way to encourage cooperation” (Merriman, 2008). According to a survey conducted by a leading compensation association called WorldatWork, 83 percent viewed team-based variable pay programs as effective (Thompson, 2008). In addition, the University of Southern California’s Center for Effective Organizations indicates that 85% of Fortune 1000 companies used team-based pay to some degree in 2005, up from 59% in 1990 (Merriman, 2008, p. 32).

Fueling this interest is the perception that “such pay systems are likely to enhance members’ pro-social behaviors and as a result, boost members’ capabilities, flexibility, responsiveness, and productivity” (Bamberger & Levi, 2009, p. 301). Among many benefits, team-based rewards can foster collaboration and teamwork, allow team goals to be clearly integrated with organizational objectives and provide incentive for the whole team to improve (Haines & Taggar, 2006).

Optimal Conditions for Team-Based Rewards

While the benefits of team-based rewards are clear, there are certain conditions strongly correlated to trust under which they are more likely to be successful. The first is in teams with a high level of task interdependence (noted by Rousseau et al. (1998) as a pre-condition to trust) and belief in the value of teamwork. When team members are highly interdependent and must rely on each other for support or information to reach their desired goals, they are more likely to realize the value of teamwork. Consequently, what Haines and Taggar refer to as a high “team rewards attitude” (TRA), reflecting a positive attitude toward receiving team-based rewards, would “flow from the realization that, in situations of high task interdependence, the desired performance or output can only be achieved through teamwork” (p. 197). Therefore, teams with high trust and task interdependence are more likely to achieve high team rewards attitude.


The establishment of objective, fair processes and measurable rewards criteria is also closely linked to the success and acceptance of team-based rewards. Generally speaking, team members feel more comfortable when performance criteria are based on objective standards (Thompson, 2008). According to Maurer (2010), “measurable project rewards seem to restrict opportunities for free-riding, opportunistic behavior or favoritism. This reduces suspicion and encourages project partners to trust each other” (p. 635). In addition, cooperation amongst team members is often enhanced by teams’ perception of fairness, which “starts with an allocation of rewards that members consider equitable” (Merriman, 2008, p. 32).

Pitfalls to Avoid: How Can Team-Based Rewards Undermine Team Trust Dynamics?

Although research suggests team-based rewards are most effective in high trust situations, their presence alone can be unsettling to team trust dynamics. As an example, even if a fair and objective team-based rewards system is in place, team members may still be reluctant or unwilling to monitor each other or determine their coworkers’ pay (Thompson, 2008). In addition, according to Bolch (2007), leveraging peer feedback to single out and reward individual team members with extra recognition (and pay) is “a surefire way to sabotage the team dynamic—unless the group receives a bonus and divvies the funds among themselves… When teams perform highly, it is the interaction [among] team members, not the members themselves, that creates the high performance. If you ask such members who was singly responsible for the high performance of the team, they'll say 'Huh?' or 'We were,' and mean it" (Avery, 2007, as cited in Bolch, 2007, p. 92).

Perceived disparity regarding the contributions of individual team members can also generate reduced cooperation and/or motivational loss in a team-based rewards environment. According to Haines and Taggar (2006), team-based rewards “may fail to recognize individual differences and can sometimes encourage free riding (withholding effort in the belief that rewards can be received by letting others do the work), potentially leading to reduced cooperation and team failures” (p. 194). Consequently, team-based rewards “‘may be difficult for people to accept,’ says Jay Schuster, a partner in the Los Angeles-based compensation consulting firm Schuster-Zingheim and Associates. ‘The notion that some of an individual’s pay is at risk based on someone else’s behavior or by the team overall is a hard sell’ ”(Garvey, 2002, p.74). Thompson (2008) also recognizes the potential for motivational loss, characterized by social loafing or free riding, when team-based rewards are used. This may be driven by feelings of inequity when other team members don’t pull their weight, but rewards are still allocated based on equality. This perception of unfairness may be particularly prominent for high performers who have “a general tendency to evaluate team-based rewards as distributively unfair” (Cable & Judge, 1994; DeMatteo & Eby, 1997; DeMatteo et al., 1997; Duffy, Shaw & Stark, 1999; Yamagashi, 1988; as cited by Haines & Taggar, 2006, p. 202).

Finally, if implemented incorrectly, team-based rewards can increase destructive and/or competitive behavior between and within teams in organizations, rather than fostering cooperation. This can lead to the sub-optimization of organizational goals (Thompson, 2008). According to Bolch (2007), fostering competition for rewards between teams “promotes impermeable boundaries on the teams—i.e., a lack of information sharing and collegiality. Therefore, attempting to award the best of middling or low-performing teams among a group of middling or low-performing teams will provide a negative return on investment" (p. 92). Similarly, team performance appraisal systems that provide a fixed reward to be divided within a team are destructive because they put individual team members in competition for rewards (Thompson, 2008).

A Case Study: One Organization’s Journey Implementing Team-Based Rewards in a Low Trust Team Environment

As cited by the Harvard Business Review (Merriman, 2008), one U.S.-based global manufacturing company implemented a successful, multi-faceted approach to designing rewards for teams. The guidelines, which take into account both individual and team performance, were outlined by Merriman (2008) to include:

  • "Listen to employees. When converting three siloed departments to a dozen multifunctional teams focused on customer accounts, the company queried a cross section of employees and learned that they were very resistant to team-based compensation.
  • Identify specific roles. The firm established a system of differentiated compensation based on the specialized skills each member provides to a team. Because each person has a unique function, it’s relatively easy for managers to identify individual contributions. Employees are evaluated on measures such as job knowledge and work quality.
  • Be consistent about evaluation. All members of a given team are evaluated by one manager rather than an array of functional managers.
  • Unite teams through recognition. The company encourages teamwork and cooperation by acknowledging individuals’ contributions to their teams and explicitly tracking and communicating the teams’ role in the company’s success" (p. 32).

Within this case study, the organization acknowledged their employees’ feeling that it was unfair to have a significant portion of pay tied to the performance of team members they didn’t fully trust, and deduced that this feeling of unfairness was disruptive to teamwork. Consequently, they made no attempt to forcibly unite teams through collective compensation. Instead, by acknowledging individuals’ contributions to their teams while explicitly recognizing and communicating the teams’ role in the company’s success, they successfully avoided the challenges that can be encountered by low-trust teams in a team-based rewards environment. (Merriman, 2008)

Conclusion

Team-based rewards have both potential benefits and drawbacks for an organization, especially in the context of team trust. While they can be successful in highly interdependent team environments when reward measurements are fair and clear, they can also result in motivational loss, competitive behavior and feelings of discomfort by team members who are reluctant to determine each other’s pay when such preconditions aren’t in place. As evidenced in the HBR case study, it’s important for managers to take these dynamics into account when designing a team-based rewards program and remember that there is not a one size fits all approach.

References

Bamberger, P. A. & Levi, R. (2009). "Team-based reward allocation structures and the helping behaviors of outcome-interdependent team members " Journal of Managerial Psychology 24(4): 300-327.

Bolch, M. (2007). "Rewarding the Team." HRMagazine 52(2): 91-93.

Ferrin, D. L. & Dirks, K. T. (2003). "The Use of Rewards to Increase and Decrease Trust: Mediating Processes and Differential Effects " Organization Science 14(1): 18-31.

Garvey, C. (2002). "Steer Teams with the Right Pay." HRMagazine 47(5): 70.

Haines, V. & Taggar, S. (2006). "Antecedents of Team Reward Attitude." Group Dynamics: Theory, Research, and Practice 10(3): 194-205.

Maurer, I. (2010). "How to build trust in inter-organizational projects: The impact of project staffing and project rewards on the formation of trust, knowledge acquisition and product innovation." International Journal of Project Management 28(7): 629-637.

Merriman, K. (2008). "Low Trust Teams Prefer Individualized Pay." Harvard Business Review 86(11): 32.

Rousseau, D. M., Sitkin, S. B., Burt, R.S. & Camerer, C. (1998). "Not so different after all; A cross-discipline view of trust." Acad. Management Rev. 23(3): 393-404.

Thompson, L. L. (2008). Making the team: a guide for managers Upper Saddle River, New Jersey, Pearson Education, Inc.

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