The trouble with employee financial incentives

In the current economic climate, many companies are pulling out all stops to improve employee performance particularly for jobs with top and bottom line responsibility such as sales reps, investment bankers and plant managers.  Conventional wisdom (supported by extensive research) says that pay-for-performance incentives in the form of bonuses and commissions are an excellent tool to motivate desired behavior. Interestingly, a recent article published in Knowledge@Wharton, a Wharton School of Business publication, highlights research that shows the opposite; namely, that using financial incentives carry significant costs as well.

The article’s authors, Adam Grant and Jitendra Singh, demonstrate that financial incentive schemes can trigger unintended and counter-productive behaviors that lead to poor organizational dynamics.  The article lists three major concerns:

1.  Unethical actions

In one example, the vegetable brand Green Giant had a problem with insect parts ending up being packaged in its frozen pees. To correct this, management created an incentive plan that rewarded employees for finding contaminants in the products.  Unfortunately, some employees took this as an opportunity to cheat by planting insect parts in the packages in order to collect the bonus.  Clearly, incentives by themselves do not ensure that employees will pursue the the most ethical or moral path to earn them. 

Furthermore, the employees most motivated by incentives could also be most likely to act unethically.  Studies by Wharton management professor Maurice Schweitzer and colleagues showed that individuals most inspired by goal achievement are also more likely to engage in unethical actions such as cheating or overstating their performance.

2.  Pay inequality

By it’s very nature, financial incentives magnify real and perceived pay inequality.  Numerous studies have shown that people judge the fairness of their pay not in absolute terms, but rather in terms of how it compares with the pay earned by peers. As a result, pay inequality can lead to workplace strife when overlooked employees begin to feel jealousy, disappointment and resentment towards high performers.  The result is usually higher employee turnover, reduced collaboration and lower organizational productivity.

A wealth of research underscores the negative implications of pay inequality. In one interesting case, Notre Dame researcher Matt Bloom found that major league baseball teams with larger gaps between the highest-paid and lowest-paid players lose more games, score fewer runs and give up more runs than teams with more equitable pay distributions.

3.  Lower intrinsic motivation

Financial incentives can result in worse, rather than better, performance by diminishing intrinsic behavioral drivers like having pride in ones work or enjoying challenges.  Studies out of the University of Rochester has shown that rewards often undermine a person’s intrinsic motivation to work on interesting or challenging tasks – especially when the rewards are announced in advance or delivered in a controlling manner.  For the employee, what may be seen as fun and rewarding initially can soon be viewed as stressful and less interesting when performance begins to be rewarded.

As a consultant, I have witnessed the aforementioned issues as byproducts of successful pay-for-performance in sectors as diverse as Retail, IT and Manufacturing.  My key takeaway is not that pay for performance strategies should not be tried or do not work.  They do – assuming factors like quality, service and pricing are competititive.  Rather, the lesson is that managers need to design and deploy incentive programs carefully with an eye towards the full organizational impact.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


1 comment so far

  1. Sue Massey on

    Thanks for posting the article, was certainly a great read!

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