Demotivating? Amazon announces changes to pay for performance model

Amazon’s newly announced compensation plan offers higher financial rewards to employees who demonstrate sustained high performance over four consecutive years, allowing top-performing employees to earn up to 110 per cent of their salary band, surpassing previous caps.

At the same time, the company reduced incentive levels for first-time high achievers, dropping their payout from 80 per cent to 70 per cent of their designated pay range.

Although Amazon's changes are framed as a way to identify and reward varying levels of high performance, the underlying. driver appears to be cost control -- and that won't be lost on employees, according to Yu-Ping Chen, professor of management at Concordia University with a professorship in work motivation

"Amazon’s new pay structure that favours 'consistently high-performing employees' is aligned with a rule of thumb embraced by most for-profit-companies," he says.

"That is, pay for performance. So at the first glance, I must admit that it does make a lot of sense."

However, he adds that this could create internal issues around fairness and employee sense of justice, and ultimately retention. 

"Four consecutive years, it's a real deal breaker, if I'm an employee working in Amazon, because four years is a lot," Chen says.

 "How many employees actually stay in a high tech company for five years? Their idea, their ideology, is really good, but it's not sustainable. That's my biggest concern, [it's not] sustainable for employee retention and employee motivation."

Long-term goals, short-term setbacks

The new model rewards employees who earn a “Top Tier” rating across four annual review cycles.

Chen says this approach risks backfiring due to the psychological and practical limitations of requiring consistently exceptional performance over an extended timeframe.

“Consistent high-performance is not under control of employees, even for the high performers," says Chen.

"Employees’ performance ratings are always influenced by external factors that impact company profits ... for example, Trump’s tariffs will influence Canadian organizations’ profits, as well as employees’ performance rating and this is certainly not something employees can control."

Even dedicated, high-performing employees may find it difficult to maintain top-tier results for four straight years, Chen adds, suggesting that lower thresholds for pay bumps might go further in motivational impact. 

Risk of demotivation and attrition

Amazon’s pay plan may inadvertently undermine the very workforce it aims to reward – Chen says that demanding such sustained excellence could actually reduce employee motivation right where it's most important -- with top performers, and future stars.

"An already good performer tends to have better knowledge and experience, about how to perform better next time," Chen explains.

"On the other hand, employees always struggle a bit before becoming a good performer ... the first time," often only after first performance reviews.

Chen adds that this could also lead to retention issues as newly-hired talent are disappointed by their first results, particularly in high-turnover industries like tech: "It's not high enough to maintain or keep your employees if they can find somewhere else with a more reachable target."

Missed opportunity to nurture new talent

Lowering the rewards for first-time top performers sends a demoralizing message, Chen says. Under the new structure, employees reaching the top tier for the first time receive less compensation than they would have in previous years. This will have a dampening effect on new and incoming employees - a company's valuable future talent. 

"Your company's compensation package will send a message to employees," Chen says, explaining that first-time top-tier employees typically invest significant effort and resources to reach that level, and reducing their rewards not only signals undervaluation but also poses a risk to innovation, as fresh talent leaves.

"If I am a first time top tier performer, I will have a feeling that the company does not value my contribution," he says.

"Because I work so hard to move ... to top tiers, but you only give me 70 per cent of the pay band for my incentives. I will feel undervalued in this company."

Source: Yu-Ping Chen

Rethinking Amazon's incentive timeline

Chen recommends that employers consider a more realistic, "ratcheted" reward cycle.

“If you still want to give top tier performers exceptional rewards, that’s fine, but how about we reduce four years to a shorter time, like two years?” he suggests.

Rather than offering payouts that exceed an employee’s pay band, he recommends sticking within it while maintaining fairness and transparency, better aligning the reward structure with employee expectations and reducing the risk of perceived unfairness.

For Canadian employers seeking to implement or revise performance-based pay structures, Chen suggests retaining strong incentives for emerging high performers while modifying long-term targets for sustainability.

“I would not touch the incentive rate for the first time top tier recipients, because they will be the future stars in your company,” he says.

For longer-term rewards, he proposes a graduated model that increases standards over time.

“From my perspective, if the company decides to have greater cost control by lowering down the incentive rate of each level of performers ... then the standard that consistent high performing employees need to achieve in order to receive their exceptional pay rate needs to be adjusted as well," Chen says.

"I would suggest to implement a ratchet effect in that the performance standard needs to be progressively higher, based on the previous year’s achievement. For example, the performance rating needs to be 3 per cent higher for consecutive years in order to receive exceptional payout. We can call this a ratchet effect."

Ultimately, the goal should be balancing cost control with a system that maintains motivation, recognizes early potential, and sets realistic expectations.

Role of clear communication in compensation

A key concern, according to Chen, is Amazon’s failure to communicate the rationale behind the new model. Employees are not directly told their performance rankings but must infer them from changes in compensation.

As Chen explains, there's no reason for the limited communication, as transparency often has positive results.

"If they make these changes, they have to explain to the employees, either internally via intranet or from internal training. They have to talk to the employees," he stresses.

"Most of the time when employees are informed ...  they will be able to understand the company's situation, and most of the time, they will accept the changes. But without explanation, that will create a lot of problems ... that's why a lot of Amazon employees are frustrated, because internal communication is basically nonexistent."