Motivation

To Motivate Employees, Give Them An Unexpected Bonus (Or Penalty)

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By Michael Blanding

Shutterstock

In the 1992 film&nbsp;Glengarry Glen Ross, an executive played by Alec Baldwin presents a unique motivational scheme to a trio of down-on-their-luck real estate salesmen. There will be a new contest, he tells them, to see who can bring in the most sales. “First prize is a Cadillac Eldorado,” he says. “Second prize is a set of steak knives. Third prize is you’re fired.”

This might seem an extreme way to motivate employees (and, of course, fails spectacularly in the movie). But companies hold so-called tournaments based on relative performance all the time to incentivize workers, says Susanna Gallani, an assistant professor in the Accounting and Management Unit at Harvard Business School.

How much those systems spur employees, however, may depend on how fair employees perceive them to be.

“We have a tendency to attribute favorable outcomes to our own abilities, but when things go wrong, we try and find other reasons to explain it,” Gallani says.

Which rewards motivate workers?

In a new working paper written with doctoral student Wei Cai,&nbsp;Subjectivity in Tournaments: Implicit Rewards and Penalties in Subsequent Performance, she finds that those perceptions can have a lot more to do with how employees are motivated than the actual consequences they receive.

Motivation is important in business for one reason: In the contract between employers and employees, it’s simply not possible to spell out how employees’ roles will need to expand to meet every contingency.

“Maybe there is an epidemic of the flu and everyone needs to work overtime, or there is an exogenous increase in demand,” Gallani says. “There is so much left unwritten.”

Because of that, employers rely on employee motivation to go above and beyond the contract and do what’s in the best interest of the organization.

Incentive mechanisms to motivate employees can take many forms, whether it’s tangible rewards or punishment, comparing&nbsp;one employee’s reputation versus another’s, or peer pressure to work on behalf of the larger group. All of those forms of incentive influence individual decisions, which are driven by expectations of future outcomes.

“We make choices in anticipation of what the consequences of those choices will be,” Gallani says. “If I work hard, I will get a bonus or greater respect from my peers or simply the confirmation that I am a good employee—so I will make choices to exhibit high levels of effort.”

In some cases, tournament incentives are structured in such a way that when some employees triumph, others fail. General Electric’s “vitality curve,” for example, made employees in the top 20 percent of performance eligible for raises and promotions, while those in the bottom 10 percent risked being demoted or fired. Industries such as investment banking, consulting, and academia routinely include “up and out” systems in which employees are either promoted or fired. While these systems are intended to spur hard work and high levels of performance, they also introduce potential risks.

The determination of winners and losers in a tournament-based reward system is rarely based on purely objective measures, such as how many sales employees make or how many units they produce. “The objective performance measures don’t take into consideration whether the machine broke down or whether someone is still learning the job,” Gallani explains.

To compensate, managers often inject an element of subjectivity into the competition to even out the scores, by taking into consideration factors that might be outside of the control of the employees or contingencies not foreseeable at the time the employee signed the contract. While subjectivity can improve the precision of the performance evaluation, it might also be open to bias. “Maybe you don’t like that worker, so you are biased consciously or unconsciously against him,” says Gallani.

Whether or not that bias exists, humans’ natural tendency to look for someone else to blame often makes employees&nbsp;believe&nbsp;that bias exists. Gallani and Cai decided to test the effects of those perceptions in a real-world scenario involving an anonymous Chinese company that operates in printing processes.

The company, which Cai found while she was home in China on winter break, runs a tournament-style reward scheme for departments, with each ranked on a 100-point system. Each month, the best performing department receives a bonus, while the worst performing department receives a pay cut. Determining whether departments were awarded the bonus or pay cut depends on objective rankings in the point system, but also on the subjective evaluation by top managers.

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By Michael Blanding

Shutterstock

In the 1992 film Glengarry Glen Ross, an executive played by Alec Baldwin presents a unique motivational scheme to a trio of down-on-their-luck real estate salesmen. There will be a new contest, he tells them, to see who can bring in the most sales. “First prize is a Cadillac Eldorado,” he says. “Second prize is a set of steak knives. Third prize is you’re fired.”

This might seem an extreme way to motivate employees (and, of course, fails spectacularly in the movie). But companies hold so-called tournaments based on relative performance all the time to incentivize workers, says Susanna Gallani, an assistant professor in the Accounting and Management Unit at Harvard Business School.

How much those systems spur employees, however, may depend on how fair employees perceive them to be.

“We have a tendency to attribute favorable outcomes to our own abilities, but when things go wrong, we try and find other reasons to explain it,” Gallani says.

Which rewards motivate workers?

In a new working paper written with doctoral student Wei Cai, Subjectivity in Tournaments: Implicit Rewards and Penalties in Subsequent Performance, she finds that those perceptions can have a lot more to do with how employees are motivated than the actual consequences they receive.

Motivation is important in business for one reason: In the contract between employers and employees, it’s simply not possible to spell out how employees’ roles will need to expand to meet every contingency.

“Maybe there is an epidemic of the flu and everyone needs to work overtime, or there is an exogenous increase in demand,” Gallani says. “There is so much left unwritten.”

Because of that, employers rely on employee motivation to go above and beyond the contract and do what’s in the best interest of the organization.

Incentive mechanisms to motivate employees can take many forms, whether it’s tangible rewards or punishment, comparing one employee’s reputation versus another’s, or peer pressure to work on behalf of the larger group. All of those forms of incentive influence individual decisions, which are driven by expectations of future outcomes.

“We make choices in anticipation of what the consequences of those choices will be,” Gallani says. “If I work hard, I will get a bonus or greater respect from my peers or simply the confirmation that I am a good employee—so I will make choices to exhibit high levels of effort.”

In some cases, tournament incentives are structured in such a way that when some employees triumph, others fail. General Electric’s “vitality curve,” for example, made employees in the top 20 percent of performance eligible for raises and promotions, while those in the bottom 10 percent risked being demoted or fired. Industries such as investment banking, consulting, and academia routinely include “up and out” systems in which employees are either promoted or fired. While these systems are intended to spur hard work and high levels of performance, they also introduce potential risks.

The determination of winners and losers in a tournament-based reward system is rarely based on purely objective measures, such as how many sales employees make or how many units they produce. “The objective performance measures don’t take into consideration whether the machine broke down or whether someone is still learning the job,” Gallani explains.

To compensate, managers often inject an element of subjectivity into the competition to even out the scores, by taking into consideration factors that might be outside of the control of the employees or contingencies not foreseeable at the time the employee signed the contract. While subjectivity can improve the precision of the performance evaluation, it might also be open to bias. “Maybe you don’t like that worker, so you are biased consciously or unconsciously against him,” says Gallani.

Whether or not that bias exists, humans’ natural tendency to look for someone else to blame often makes employees believe that bias exists. Gallani and Cai decided to test the effects of those perceptions in a real-world scenario involving an anonymous Chinese company that operates in printing processes.

The company, which Cai found while she was home in China on winter break, runs a tournament-style reward scheme for departments, with each ranked on a 100-point system. Each month, the best performing department receives a bonus, while the worst performing department receives a pay cut. Determining whether departments were awarded the bonus or pay cut depends on objective rankings in the point system, but also on the subjective evaluation by top managers.

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