TO MOTIVATE EMPLOYEES, GIVE AN UNEXPECTED BONUS (OR PENALTY)

Employees can be more motivated by the anticipation of a reward or punishment than the actual payoff.

APRIL 2018 NO. 141

In the 1992 film Glengarry Glen Ross, an executive played by Alec Baldwin presents a unique motivational scheme to a trio of down-on-their-luck real estate salesmen.

There will be a new contest, he tells them, to see who can bring in the most sales. “First prize is a Cadillac Eldorado,” he says. “Second prize is a set of steak knives. Third prize is you’re fired.”

This might seem an extreme way to motivate employees (and, of course, fails spectacularly in the movie). But companies hold so-called tournaments based on relative performance all the time to incentivize workers.

Just how much those systems spur people on may depend on how fair your workplace thinks they are.

“We tend to attribute favorable outcomes to our own abilities, but when things go wrong, we try and find other reasons to explain it,” says Susanna Gallani, an assistant professor in the Accounting and Management Unit at Harvard Business School.

WHICH REWARDS MOTIVATE WORKERS?

In a new working paper written with doctoral student Wei Cai, Subjectivity in Tournaments: Implicit Rewards and Penalties in Subsequent Performance, she finds that those perceptions can have a lot more to do with how employees are motivated than the actual consequences they receive.

Motivation is important in business for one reason: In the contract between employers and employees, it’s simply not possible to spell out how employees’ roles will need to expand to meet every contingency.

“Maybe there is an epidemic of the flu and everyone needs to work overtime, or there is an exogenous increase in demand,” Gallani says. “There is so much left unwritten.”

Because of that, employers rely on employee motivation to go above and beyond the contract and do what’s in the best interest of the organization.

“If you feel like you are being given a gift more than you thought you would earn, then you tend to go above and beyond to restore this balance”

Incentive mechanisms to motivate employees can take many forms, whether it’s tangible rewards or punishment, comparing one employee’s reputation versus another’s, or peer pressure to work on behalf of the larger group. All of those forms of incentive influence individual decisions, which are driven by expectations of future outcomes.

“We make choices in anticipation of what the consequences of those choices will be,” Gallani says. “If I work hard, I will get a bonus or greater respect from my peers or simply the confirmation that I am a good employee—so I will make choices to exhibit high levels of effort.”

In some cases, tournament incentives are structured in such a way that when some employees triumph, others fail. General Electric’s “vitality curve,” for example, made employees in the top 20 percent of performance eligible for raises and promotions, while those in the bottom 10 percent risked being demoted or fired. Industries such as investment banking, consulting, and academia routinely include “up and out” systems in which employees are either promoted or fired. While these systems are intended to spur hard work and high levels of performance, they also introduce potential risks.

The determination of winners and losers in a tournament-based reward system is rarely based on purely objective measures, such as how many sales employees make or how many units they produce. “The objective performance measures don’t take into consideration whether the machine broke down or whether someone is still learning the job,” Gallani explains.

To compensate, managers often inject an element of subjectivity into the competition to even out the scores, by taking into consideration factors that might be outside of the control of the employees or contingencies not foreseeable at the time the employee signed the contract. While subjectivity can improve the precision of the performance evaluation, it might also be open to bias. “Maybe you don’t like that worker, so you are biased consciously or unconsciously against him,” says Gallani.

Whether or not that bias exists, humans’ natural tendency to look for someone else to blame often makes employees believe that bias exists. Gallani and Cai decided to test the effects of those perceptions in a real-world scenario involving an anonymous Chinese company that operates in printing processes.

The company, which Cai found while she was home in China on winter break, runs a tournament-style reward scheme for departments, with each ranked on a 100-point system. Each month, the best performing department receives a bonus, while the worst performing department receives a pay cut. Determining whether departments were awarded the bonus or pay cut depends on objective rankings in the point system, but also on the subjective evaluation by top managers.

“It’s not just about who gets the reward or the penalty, but who was expecting to”

What makes the company perfect for research is that it publishes the objective monthly scores for each department alongside the actual winners and losers. Thus, departments can see any discrepancy between objective and subjective results, which happens about 50 percent of the time. In cases where employees thought they would be rewarded but weren’t, Gallani and Cai called that an “implicit punishment,” while in the opposite case, in which employees thought they would be punished but weren’t, they called it an “implicit reward.”

They found that when employees received rewards—whether they were actual or implicit—they tended to be more productive afterward. In the case of the implicit rewards, Gallani speculates that the extra effort is due to a principle of reciprocity. “If you feel like you are being given a gift more than you thought you would earn, then you tend to go above and beyond to restore this balance,” she says.

On the other hand, those employees who were punished, or who didn’t receive the reward they anticipated, tended to be less productive.

PERCEPTIONS ARE WORTH MORE THAN MONEY

Surprisingly, Gallani and Cai found that the productivity boost or lag in response to an actual reward or punishment was short-lived in comparison to those from implicit consequences. (While they couldn’t say exactly how much longer the effects lasted, they liken it to the difference between a short-term and medium-term effect.)

In other words, the feeling of getting an unanticipated bonus or penalty was more motivating to employees than actually getting a bonus or penalty they earned—perhaps because they interpreted it as a result of bias either for or against them by their bosses.

“It’s not just about who gets the reward or the penalty,” says Gallani, “but who was expecting to.”

Ultimately, such tournament-style motivation schemes may be a zero-sum game, Gallani and Cai found, with the increased productivity of the winners and decreased productivity of the losers canceling each other out to create a statistically negligible overall effect.

The study’s findings are relevant for practice in that they point to side effects of tournament performance evaluation schemes that might undermine effectiveness of incentive systems. In particular, this study shows that the effects of rewards and punishments have wide-ranging consequences that impact not only the receivers of rewards and penalties, but also their colleagues, Gallani says.

Additionally, this study shows that workers are motivated not only by the prospect of receiving a reward or a punishment, but also by the methodology by which rewards and punishments are assigned.

Source: Harvard Business School | Working Knowledge

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