More on carrots and sticks

I just received the Career Innovation Newsletter containing a link to an article When Performance-Related Pay Backfires. It previews a day of discussion of recent research on performance related pay that was held on June 30 2009 at the London School of Economics (LSE)

One piece of research, by Samuel Bowles and Sandra Reyes of the Santa Fe Institute, was an analysis of 51 separate experimental studies of financial incentives in employment relations' . The paper has the rather daunting title of "Economic Incentives and Social Preferences: A Preference-Based Lucas Critique of Public Policy". The Abstract is not for the faint-hearted:

Policies and explicit incentives designed for self-regarding individuals sometimes are less effective or even counterproductive when they diminish altruism, ethical norms and other social preferences. Evidence from 51 experimental studies indicates that this crowding out effect is pervasive, and that crowding in also occurs. A model in which self-regarding and social preferences may be either substitutes or complements is developed and evidence for the mechanisms underlying this non-additivity feature of preferences is provided. The result is a preference-based analogue to the Lucas Critique restricting feasible implementation to allocations that are supportable given the effect of incentives on preferences.

But this has been simplified for those of us not deep in the academic research sphere. Dr Bernd Irlenbusch from the LSE's Department of Management translates:

'We find that financial incentives may indeed reduce intrinsic motivation and diminish ethical or other reasons for complying with workplace social norms such as fairness. As a consequence, the provision of incentives can result in a negative impact on overall performance,'

(In my current mode of trying to learn some Chinese, through the BBC, I find there are two modes of writing it one is in 'simplified characters' the other 'complex characters', also known as 'traditional form'. This seems an apt parallel between academic writing and newspaper reporting of it.)

Another research paper mentioned was Dr Oriana Bandiera's who, with two colleagues, researched team incentives. Her abstract opens with

Team incentives can affect productivity both through changes in worker effort and in
team composition. We present evidence from a field experiment that allows us to compare three common team incentive schemes: piece rates, performance feedback, and tournaments. Theory illustrates that when workers face a trade-off between matching by ability and by social ties, providing stronger incentives can lead high ability workers to prefer to form teams with similarly skilled colleagues instead of colleagues they are socially linked to.

What the newspaper article does not mention is another piece of research conducted by Bandiera on Matching Firms, Managers, and Incentives

"This paper aims to provide evidence on the match between firms and managers through the adoption of different managerial practices. Using a survey specifically designed for this purpose we collect detailed information on managerial incentive policies – both explicit as performance bonuses and implicit as career advancement – and on the individual characteristics of managers and firms. Informed by incentive theory, we collect measures of the managers' talent and risk aversion, as both variables affect the managers' preference towards different incentive schemes."

What the researchers find is that there is a correlation between a manager's risk appetite, talent, and choices about incentive schemes.

The power of incentives is positively correlated with managers risk tolerance and measured ability and where incentives are more powerful managers exert more effort, are paid more and are more satisfied, as implied by our theory. We also show that firms that offer high powered incentives perform better and this result holds even after controlling for the type of ownership." (They investigated family owned and 'widely' owned companies.)

These various pieces of research led me to the (fairly obvious) conclusion that designing workable incentive schemes is a complex undertaking – what works for one person/organization does not work for another. Again the notion of a flexible or menu based scheme came to mind.

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