Why do bonuses sometimes backfire? It’s because each incentive design choice both signals information about your own beliefs and intentions as an employer and shapes the signaling value of employee behavior within the organization. If you don’t think through these signals carefully, you may end up approving a bonus scheme with results that are the opposite of what you intend. This article offers a way to help you align the signals your incentive scheme sends with your performance goals.
More than 30 years ago, author and lecturer Alfie Kohn, in a rather controversial but often cited HBR article, claimed that “rewards typically undermine the very processes they are intended to enhance.” Yet until recently, nearly all scientific studies that have documented such “backfiring” effects have been confined to laboratory experiments or field settings outside of the firm. This may cause some to question whether these effects are really present in commercial contexts. Our new research, which consists of two large field experiments in retail organizations, demonstrates that they do indeed occur.
One of the studies showed unequivocally that the provision of a monetary attendance bonus increased absence days. The other revealed that the added value of performance review conversations was wiped out when they were combined with a monetary bonus. In both cases, a well-intentioned financial reward ultimately had crucial and costly unintended effects, largely because of signals about expected behavior given by the incentives.
To understand what was going on, let’s look at the two studies in turn.
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