Financial incentives can backfire, new research reveals
MASSACHUSETTS, UNITED STATES — Recent studies have shown that monetary bonuses, long considered a reliable tool for motivating employees, can actually have the opposite effect.
Two large-scale experiments conducted by Harvard Business Review in retail settings have uncovered unexpected consequences of financial incentives, challenging conventional wisdom about employee motivation.
Attendance bonus increases absenteeism
Researchers in a German retail chain implemented an attendance bonus for apprentices across 232 stores. Contrary to expectations, the monetary incentive led to a significant increase in absence days. The study revealed that employees who received the bonus began to view attendance differently.
“Many participants reported feeling a significantly weaker feeling of obligation to come to work when not sick and that they felt less guilty about staying at home. The bonus had apparently signaled to the employees that perfect attendance was not considered “normal” and expected,” the researchers noted.
Profit-sharing bonus undermines performance reviews
Another experiment involving 224 stores in a discount retail chain yielded equally surprising results. While bi-weekly performance review meetings with district managers increased profits by more than 7%, the addition of a profit-sharing bonus for store managers negated this positive effect entirely.
The researchers found that “the monetary bonus wiped out the sizeable value of the review conversations entirely.” The bonus appeared to change the nature of these conversations, leading to increased self-reliance among store managers and less candid discussions about problems.
Understanding the psychology behind incentives
These findings highlight the complex relationship between financial rewards and employee behavior.
Jean Tirole and Roland Bénabou’s work on reputational motivation offers insight into this phenomenon. They suggest that “financial rewards can undermine the reputational motivation for performing an activity, as they can ‘create doubt about the true motive’ for which an action is taken.”
The studies underscore the importance of considering incentives’ signaling effects. As the researchers point out, “Incentives wield significant influence over organizational dynamics, yet their efficacy is contingent upon many contextual factors.”
Moving forward, managers are advised to evaluate potential incentive programs carefully, considering not only their direct effects but also the unintended messages they may convey.
