The carrot-and-stick approach – rewards and punishment – is a long-held theory of motivation. It features in some form or other in many animal training, child rearing, and management methods. In modern incarnations applied to the business world, however, sanctions are less fashionable than rewards, the latter often in the form of pay-for-performance. Many companies apply incentive plans to motivate employees, including those in non-executive positions. For instance, in addition to their base salary, sales representatives routinely earn commissions directly tied to their sales figures. Comparable schemes exist in other lines of work, based on the notion – largely supported by empirical evidence – that performance tends to be higher under incentive plans than under flat or hourly wages.
The most common explanation? Reward expectancy. The mere existence of an incentive plan acts as a carrot dangling ahead. It generates anticipation for future rewards, which drives employees to push themselves a bit harder. The future reward needs just be sufficiently desirable to outweigh the cost of the required effort. The more desirable the future reward, the theory goes, the harder employees work.
The performance effect of future rewards – and past ones?
But what happens once employees receive their promised rewards? Do employees slack off when the metaphorical carrot is in their hands? Does it give them a further boost? Or do such payments leave employees without any feelings of obligation or inequity, and so do performance levels remain stable? The latter seems unlikely in case of discretionary bonuses or stock option sales, whose occurrences may be irregular, and their ultimate values unpredictable. That performance remains stable seems more conceivable when a transparent link exists between employee performance and expected pay, such as when incentive payments occur regularly and are predictable.
In an article recently published in the Journal of Management, we studied precisely such a setting of high predictability, in which employees know exactly how much they stand to earn for each completed task. We asked whether, why, and how regular incentive payments influenced employees’ performance. The upshot? Our results could guide HR toward savvier interventions.
What may happen when incentive payments are made?
We began by proposing that employees are rational decision-makers who weigh the costs and benefits of their invested effort at work, but whose attention is a limited resource. Next, we also proposed that incentive payments can be viewed as “recurring temporal markers” – repeated events that temporarily stand out to employees. Together, these two ideas suggest that an incentive payment may periodically bring the costs and benefits of work effort into sharper focus. Much like the receipt of an electricity bill periodically reminds us of the marginal cost of electricity consumption.
In other words, incentive payments are the stimuli making the incentive plan more “salient” to employees. We argued that employees may respond to such enhanced salience in two ways:
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Refocusing: The incentive payment simply reminds employees of the tasks rewarded by the bonus. Thus, employees temporarily improve their performance on those tasks.
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Reciprocation: Employees are grateful for the bonus, which creates ripple effects. They reciprocate toward the employer by working harder even beyond the rewarded tasks.
We predicted that employees would exhibit both behaviours temporarily, after which performance would revert to the prepayment level.
What a study of a firm’s customer-support employees revealed
We put our prediction to the test by analysing the performance of customer-service employees at an online firm in Greece that offered web-hosting services to more than 60,000 customers worldwide. The data spanned more than three years (from 2011 to 2014) and covered both quantitative (e.g., number of phone calls attended, sales revenues) and qualitative (e.g., feedback from customers) measures of performance. During this time, an incentive plan was in place for the firm’s customer-service employees. They were periodically rewarded for their performance across a range of tasks.
We found no evidence that employees refocused on the rewarded tasks following the incentive payment. At first blush, this might suggest that the effects of the incentive plan do not derive from reactive responses to received rewards. They might simply derive from employees’ anticipation of future rewards. However, we did find a temporary and positive effect of incentive payment on sales performance, an outcome not linked to incentives. And the effects were economically meaningful: Our back-of-the-envelope calculation suggested that sales rose by 1.8% as a result of the ripple effects from incentive payments.
Other unincentivised measures also temporarily improved in the period immediately following incentive payment. For example, improved revenues resulted not only from greater sales quantities but also from the sale of more expensive products. Next, phone calls between customer-support employees and customers temporarily increased in duration following incentive payment. And customer-support employees were temporarily more likely to involve back-office technology experts to help improve customer solutions.
Why would unincentivised measures show such patterns following incentive payment? According to our interviews, employees knew that service quality was critical, even though it was hard to measure. The employees also cared about their employer’s esteem. The receipt of the incentive payment periodically reminded them just how lucky they were to be working at a firm offering performance incentives.
These findings have direct practical applications. First, they help managers improve the timing of other HR interventions, such as commitment-building activities or informal feedback. Employers might choose to administer such motivators during the trough of the employee response to a periodic incentive payment. Second, they suggest that firms should cultivate the social dimension of the employment relationship. This way, employees are more likely to respond to periodic incentive payments with enhanced effort on unincentivised yet consequential aspects of their work.
