By Julia D. Hur & Loran Nordgren
The promise of performance incentives starts early. Preschoolers get stickers for good behavior. Later, parents might buy their teenagers pizza for scoring well on tests. And in the business world, employers dangle bonuses for achieving certain goals.
But what do these incentives actually achieve? Researchers have studied their effects primarily from two angles: how well people perform and how they feel about the task for which they are being rewarded. But “there’s really a third question that, to the best of our knowledge, has not been asked,” says Loran Nordgren, an associate professor of management and organizations at the Kellogg School. “Does it affect the value you place on the reward itself?”
In other words, does an employee in a commission-based job feel differently about money than a worker who earns a fixed salary?
The answer appears to be yes, according to new research from Nordgren. He and a coauthor found that people who are rewarded for their performance express more desire for money than people who receive fixed payments—even when the amounts they end up earning are similar.
This increased hunger for money can manifest itself in different ways, such as a greater willingness to complete a tedious task to make money or a decreased willingness to part with earnings by donating to charity.
“It can actually affect their financial decision-making,” says coauthor Julia D. Hur, a Ph.D. student at Kellogg.
“It certainly is not consequence-free.” —Loran Nordgren on performance incentives
What is causing this change in attitude? Nordgren says it may simply be that incentivizing people with money makes them think about money more often—akin to a dieter who keeps passing chocolate cake in the office kitchen or an ex-smoker who sees cigarettes for sale at the grocery store.
“That attention has a way of stoking or increasing desire for those things,” Nordgren says.
Companies that use employee performance incentives therefore might want to consider the potential consequences of increasing workers’ materialism, such as tougher negotiations with employees who want higher salaries or eventually losing workers to better-paying jobs.
The Impact of Performance Incentives
Nordgren and Hur started with a basic test. They asked 95 undergraduate students to solve four maze puzzles. Participants in the “performance incentive” group were paid $1 for each completed puzzle, while those in a second group got a fixed rate of $4 no matter how well they performed. The puzzles were easy enough that most people finished all of them in the allotted time. Afterward, the students answered questions assessing their desire for money on a scale of 1 to 7. A third “baseline” group simply took this survey without doing any puzzles or receiving payment.
As predicted, the students in the performance-incentive group showed more interest in money than those in other groups. Their average rating was 4.4, while the fixed-rate and baseline groups averaged 3.91 and 3.78, respectively.
Another study used similar tasks and rewards, but a different way of measuring desire for money. Participants were given tickets for a raffle with a $100 prize. Each student could fill out up to 70 tickets, but they had to write their name, student ID, and email address on each one.
“It can be a pretty boring, repetitive task,” Hur says. Even so, the performance-incentive participants filled out an average of 14 tickets, while the group that received a fixed payment averaged about eight tickets.
Money on the Brain
The results were more mixed when Nordgren and Hur tested people’s willingness to donate money. When students in a puzzle-solving study had the option to donate up to $4 to charity—their entire earnings from the task—the performance-incentive group did not donate significantly less than those receiving fixed payments. This may be because participants had such limited options in how much they could donate, the researchers said.
However, they saw a different result when they asked participants in a similar experiment how much they would hypothetically donate to five charities and left the amount open-ended. The group receiving a fixed payment estimated an average of $365. The performance-incentive group was more miserly, estimating an average of $180.
The team wanted to better understand what might drive this heightened desire for money. So they asked 80 participants recruited online to find grammar mistakes in texts. Afterward, participants rated how much they thought about money during the task. Even though the incentive payments were small—10 cents per error corrected, up to a total of $1—the participants in the performance-incentive group rated the frequency of money-related thoughts at 4.38 out of 7, compared with only 2.87 in a second group, which was paid a flat rate of $1.
Interestingly, this effect was not limited to money. Rewarding people with other kinds of prizes—like sweets—seems to spur a desire for sweets.
In another grammar-correction study, the researchers paid people with raffle tickets for a drawing to win a box of chocolates. Participants who earned tickets based on performance rated their desire for chocolate about 1 point higher than those who got a fixed number of tickets for the task.
But it is not the case that performance incentives increase people’s desire for everything.
When the team merely described an unrelated product, wireless headphones, people in the performance-incentive group did not seem to want the headphones any more than the group who received a fixed payment. So working toward a specific reward—not simply hearing about one—appears to increase desire for that object, the team says.
Employee Incentives on the Auto Lot
Finally, Hur and Nordgren wanted to test their hypothesis in the real world. Do sales people actually show a stronger desire for money when their income is commission-based?
The researchers surveyed 460 sales people at dozens of dealerships for a large auto company in Asia. At half the dealerships, the sales people’s salaries depended entirely on commissions. The other dealerships were largely salary-based, with only 10% of pay coming from commissions.
The researchers had the sales teams take a survey that asked how much they wanted money, how much attention they paid to it, and how satisfied they were with their jobs.
Commission-based sales people rated their desire for money at 4.93, while those in the fixed salary dealerships rated it at 4.32. The difference remained significant even when the researchers controlled for factors such as estimated income, job satisfaction, and job security.
It is possible that another, unknown factor is responsible for this difference. For example, perhaps people who chose to work at commission-based dealerships had a certain personality trait that made them more materialistic. While the ideal experiment would be to randomly assign people to different workplace incentive schemes and track how their attitudes toward money change over time, “this was actually the closest we could get,” Hur says.
A Shortsighted Strategy?
These findings do not mean that performance incentives are always a bad idea. In some cases, these rewards may make employees more productive. But companies should recognize that workplace incentive schemes may subtly shape employee values, the researchers say.
“It certainly is not consequence-free,” Nordgren says. For instance, employees who become more materialistic may ask for higher pay, or the focus on money among coworkers could hurt morale.
From a cynical perspective, increasing employees’ materialism might seem like a good move. After all, the more people want money, the harder they will work for it.
But this is probably shortsighted. Companies need to attract and retain the best workers they can on a reasonable budget. If firms ask employees why they work there, “they don’t want the first answer to be ‘Because my principal concern is money, and this place pays me more,’” Nordgren says. “That’s the last thing they want to hear.”
Loran Nordgren is the Associate Professor of Management & Organizations.
Julia D. Hur is a contributor to Kellogg Insight.
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