Monday, January 18, 2010

Using Behavioral Economics to motivate workers

If you are going to adopt incentive compensation, try the following.  Instead of promising workers increased pay for performance, tell them that they have been "provisionally" awarded a bonus, but that the bonus will be taken away if they do not perform.  As predicted by prospect theory,
The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system. Economists have always been advocates of using carrots and sticks. But they may not have emphasised appearances enough. Carrots, this research suggests, may work better if they can somehow be made to look like sticks.

1 comment:

  1. Although the fear of loss proved to be a better motivator, I wonder what the hidden cost of this decision looks like re: company culture. For example, employees motivated by fear may experience job insecurity and increased levels of stress. When we consider the Lincoln Electric example in which employees were paid by quantity and quality of units produced, the company is at risk of age-discrimination as older employees may no be able to produce as quickly as younger employees, and encouraged sick workers to still come to work. They were driven by a fear of underproduction and subsequent decrease in pay, but one must weigh the trade offs between increased production and sick workers at the office/possible age discrimination lawsuits. The one benefit of fear motivation is that it holds the employee accountable for the loss of their bonus, but this type of system also requires a clear, definitive measure of productivity.