Group incentives and financial performance: the moderating role of innovation

• DOI: http://doi.org/10.1111/1748-8583.12022
• Author: Rhokeun Park,Douglas Kruse
• Published date: 01 January 2014
• Date: 01 January 2014

Group incentives and financial performance: the

moderating role of innovation

Rhokeun Park, College of Business Administration, Hankuk University of Foreign

Studies

Douglas Kruse, School of Management and Labor Relations, Rutgers University

Human Resource Management Journal, Vol 24, no 1, 2014, pages 77–94

Using a nationally representative and multisource data set, this study examines the mediating role of

organisational commitment in the relationship between group incentives and financial performance. The

study also investigates the moderating role of innovation in these relationships. The results demonstrate

that organisational commitment partially mediates the relationship between group incentives and

financial performance. The findings of this study support the hypotheses that the relationships of group

incentives with organisational commitment and financial performance are stronger in more innovative

companies than in less innovative companies. The results provide implications on how group incentives

affect financial performance and which organisations in particular should provide their employees with

group incentive practices.

Contact: Professor Rhokeun Park, College of Business Administration, Hankuk University of

Foreign Studies, 107 Imun-ro, Dongdaemun-gu, Seoul 130-791, Korea. Email: rkpark75@

hufs.ac.kr

INTRODUCTION

According to the 2003 National Organizations Survey (434 full-time employees on

average), 46 per cent of US employees were covered by profit-sharing plans and 23

per cent of employees were covered by gain-sharing plans in 2002 (Kruse et al., 2010).

From the employer side, 62 per cent of US companies were providing their employees with

profit-sharing plans, and 35 per cent of the companies were providing gain-sharing plans

(Kruse et al., 2010). In South Korea, approximately 58 per cent of companies had group

incentive practices that paid bonuses based on team or company performance in 2004 [Korean

Research Institute for Vocational Education and Training (KRIVET), 2007]. With the increasing

use of group incentives, a number of leading scholars have studied group incentive practices

over the past few decades. Group incentives are HR practices that allow employees to share the

company’s financial outcomes (Peterson and Luthans, 2006). These practices include various

forms of group-based, pay-for-performance plans, such as profit-sharing and gain-sharing

plans. Since this study deals with organisational-level variables, it focuses on group incentives

rather than individual incentives.

Research on group incentives has focused on the effects on organisational performance,

especially productivity and financial performance (e.g. Kaufman, 1992; Kruse, 1993; Cooke,

1994; Fernie and Metcalf, 1995; Arthur and Huntley, 2005). These studies support the idea that

group incentives affect organisational performance positively by motivating employees to work

harder and more efficiently because their earnings are tied to the organisation’s performance.

Despite widespread use of group incentives and scholarly interest, our understanding of the

process by which group incentives affect organisational performance still needs further research

(Magnan and St-Onge, 2005). For instance, Kruse (1993) pointed out that previous studies

provided little information on the causal relationships between profit sharing and performance,

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doi: 10.1111/1748-8583.12022

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 1, 2014 77

© 2013 John Wiley & Sons Ltd.

Please cite this article in press as: Park, R. and Kruse, D. (2014) ‘Group incentives and financial performance: the moderating role of innovation’.

Human Resource Management Journal 24: 1, 77–94.

and the mechanisms behind those relationships. Likewise, Long (2000) argued that there was

a lack of evidence on the mechanisms by which profit-sharing plans affect organisational

performance. Based on exchange theory, the current study focuses on organisational

commitment as a pathway through which group incentives affect organisational performance.

Florkowski (1987) asserted that organisational commitment is the most important determinant

of organisation-level performance. We argue that the use of group incentives can enhance the

organisational commitment of employees, which in turn improves organisational performance.

Although literature has established that group incentive plans have positive impacts on

productivity, the impacts on profitability or financial performance have been mixed in previous

studies (Jones et al., 1997; Magnan and St-Onge, 2005). The varied results imply that the effects

of group incentives on financial performance may be contingent on organisational factors.

While a universal approach posits that some HR practices are always more effective than others

in any type of organisation, a contingency approach implies that HR practices are more effective

when they fit with organisational factors (Delery and Doty, 1996; Youndt et al., 1996; Cappelli

and Neumark, 2001; Neal et al., 2005).

The present study explores how the extent of innovation in a company influences the

relationships of group incentives with organisational commitment and financial performance.

Porter (1980) maintained that innovation is one of the most substantial ways for a company to

differentiate itself from its competitors. Given that local and international competition continues

to intensify, innovation is the major challenge for most companies. To date, the studies in the

innovation literature have either investigated the predictors of innovation (with innovation as

a dependent variable; e.g. Monge et al., 1992; Damanpour, 1996) or the impacts of innovation on

the effectiveness and the survival of organisations (with innovation as an independent variable;

e.g. Amabile, 1988; Woodman et al., 1993; Mumford, 2000). In the present study, however, we

examine the interaction effects of group incentives and innovation while considering innovation

as a moderator.

This article has two main objectives. First, it examines the underlying mechanisms through

which group incentives affect financial performance, using organisational commitment as a

mediator. Second, this study investigates the moderating roles of innovation in the relationships

between (a) group incentives and organisational commitment, and (b) group incentives and

financial performance. Thus, the findings of this article have implications for how group

incentives can improve financial performance and which organisations in particular should

provide their employees with group incentive practices.

THEORY AND HYPOTHESES

Organisational commitment as a mediator

A universal approach or a best practice approach posits that certain types of HR practices

always have beneficial effects on outcomes regardless of the organisational context (Pfeffer,

1994; Huselid, 1995; Delery and Doty, 1996; Youndt et al., 1996; Neal et al., 2005). Specifically, the

approach implies that group incentives will improve organisational commitment and financial

performance across all types of organisations, independent of organisational factors. Most

previous studies based on a universal approach have linked group incentives to motivation

theories, such as justice theory (e.g. Welbourne et al., 1995; Dulebohn and Martocchio, 1998;

Kwon et al., 2008), expectancy theory (e.g. Goodman and Moore, 1976) and goal-setting theory

(e.g. Hollensbe and Guthrie, 2000; Locke and Latham, 2002). Along with these motivation

theories, we propose that exchange theory can provide other insights into the relationship

between group incentives and employee attitudes. To our knowledge, the literature has not yet

Group incentives and financial performance

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 1, 201478

© 2013 John Wiley & Sons Ltd.