Human Capital Incentives?

Transcription

1 Human Capital Incentives? Mario Macis Johns Hopkins University Carey Business School JHU Carey Alumni Webinar September 29, 2014

2 Why link pay to performance? Align workers interests to employer s Selection Retention Standard tool from agency theory High-powered incentives attract more productive individuals Highly productive workers will leave if not rewarded according to their contribution to firm value Better assignment of workers to tasks One of the benefits of measuring performance Fairness Employees should be given (at least part of) the extra value they contribute to create

3 Getting incentives right is hard 1. Need to come up with good performance measure (PM) Ideal PM measures worker s contribution to firm value, and nothing else However, in practice PM just a noisy proxy PM might not capture all relevant tasks PM can be gamed (by both worker and employer) 2. Need to choose the shape of the pay-performance relationship Commission? Lump-sum bonus if worker meets quota? Raise? Promotion? 3. Need to do a good job evaluating performance Quantitative indicators? Do they objectively reflect performance? Subjective evaluations? Evaluate fairly, avoid bias, favoritism,

4 Evidence confirms: incentives can be good, bad, ugly Positive effects on productivity, selection/retention Agricultural workers (Bandiera et al. 2007; Bandiera et al. 2012; Moretti and Perloff 2002; Shearer 1996; Shearer 2004); Repair technicians (Lazear 2000; Lazear and Shaw 2007); IT service workers (Gibbs et al. 2014); Teachers (Duflo et al. 2012); School principals (Miller et al. 2012); Academic referees (Chetty et al. 2014); Health workers (Bossuroy et al. 2014); Blood donors (Lacetera et al. 2013). Evidence of distortions and gaming Navy recruiters (Asch 1990); Salespeople, managers, executives, professionals (Oyer 1998); Bankers (Obloj and Sengul 2012); Software salespersons (Larkin 2014); Teachers (Jacob and Levitt 2003). Design details, specific context matter a great deal: mixed evidence not a surprise Cannot draw general conclusions from any individual study Crucial to accumulate evidence from multiple contexts

5 Lincoln Electric vs. Roy s Plant Lincoln Electric (Berg and Fast, 1983) Manufacturing workers Piece rates (W=bQ) Workers penalized for defects Highly successful Industry leader, etc. Workers source of product/process improvement Open communication Culture of trust Guaranteed employment Company-wide bonus Roy (1952) Manufacturing workers Piece rates (W=a+bQ) Workers penalized for defects Highly dysfunctional Workers did bare minimum, gamed incentive scheme ½ potential productivity No communication No trust Zero-sum game (us vs. them)

6 What about intrinsically motivated agents? Do we still need to provide incentives if the agents are intrinsically motivated? Yes, because intrinsic motivation might lead agents to take undesirable actions Yes, because intrinsic motivation does not guarantee the employee has the right skills But, how do extrinsic incentives interact with intrinsic motivation? Incentives can increase the supply of the desired behavior (Arrow 1972; Solow 1971) Incentives can reduce the desired behavior if they crowd out intrinsic motivation (Deci 1971) if they create doubts about the reason(s) behind the action (Benabou and Tirole 2006) if they create psychological pressure on the agent that leads to choking (Baumeister 1984) if they change the nature of the relationship/implicit contract (Gneezy and Rustichini 2000) If they invite peer comparisons (Larkin, Pierce and Gino 2012) Theory is ambiguous Empirical analyses needed

7 Selected evidence from the lab

8 The candle problem Glucksberg 1962 Incentives for thinking outside the box. N = 139 lab subjects. Incentives worked when problem framed as more straightforward (tacks outside box) Incentives backfired when problem framed as less obvious (tacks inside box)

9 Large stakes and big mistakes Ariely et al Lab in the field in India (N = 87) and lab at MIT (N = 24). Variety of tasks (packing quarters, Simon, labyrinth, darth ball, etc.) Very large incentives ( one month avg. living standard) worsened performance Evidence of chocking under pressure

10 Selected evidence from the field

11 Rewards for blood donors (Lacetera, Macis, Slonim 2014) Effect of economic rewards ($5, 10, 15 gift cards) Large-scale natural field experiment; 72 drives, ~100K Red Cross donors contacted Large, positive effect on donations, increasing with the $ value of the reward No evidence of crowding out (effect stronger for more frequent, long-term donors) Evidence of social spillover effects and substitution effects

12 Rewards for academic referees (Chetty, Saez, Sandor 2014) Field experiment at the Journal of Public Economics 1,500 referees, $100 cash incentive for submitting within 4 weeks Cash reward had largest positive effect on turnaround time No evidence of crowding out of intrinsic motivation (cash subjects do not become slower after incentive is removed) No effect on quality (editor following the ref s recommendation) No spillovers to other journals Cash reduced the length of the report

13 Rewards for new ideas? Ideation increasingly important in modern economies Not just in R&D labs: employees at any level can potentially come up with ways to improve products and processes Many companies use a formal suggestion system (1/3 of workplaces in US and UK [Ohly et al. 2013]) It pays off to think outside the box ( ) Not only do the company and our customers profit from the innovative power of our employees, but also the employees themselves. Margret Suckale, member of the Board of Executive Directors of BASF SE.

14 Rewards for new ideas (Gibbs, Neckermann, Siemroth 2014) Large Asian Tech company Outsourcing of business processes, R&D, software/hardware solutions for clients. Employees encouraged to submit ideas on process and product improvements via an online Idea Portal (pre-dating the study) RCT involving 11,000 employees in 19 key accounts Treatment: points (redeemable for consumer goods at online site) awarded for ideas submitted and approved, and for positive client feedback Reward discontinued after 13 months

15 Rewards for new ideas (Gibbs, Neckermann, Siemroth 2014) Large Asian Tech company Outsourcing of business processes, R&D, software/hardware solutions for clients. Employees encouraged to submit ideas on process and product improvements via an online Idea Portal (pre-dating the study) RCT involving 11,000 employees in 19 key accounts Treatment: points (redeemable for consumer goods at online site) awarded for ideas submitted and approved, and for positive client feedback Reward discontinued after 13 months Findings: 1. Increased participation in the Idea Portal (share of employees submitting ideas). 2. Fewer ideas submitted per potential contributor; No effect on total ideas actually submitted. 3. Higher quality of submitted ideas % of ideas accepted for implementation % of ideas pitched to the client. 4. No evidence of crowding out: treatment effects were no less positive on prior ideators. 5. Participation effect persisted after the rewards were removed; quality effect disappeared.

16 Why do lab and field study tend to differ? Some possible reasons: 1. Results from subjects in laboratory experiments (typically college students) might not always extend to real-world settings. 2. People sort into occupations also based on the structure of compensation E.g., average persons in a lab (or lab-like) experiment might choke under pressure when presented with large monetary incentives to perform tasks, but people who choose to work in industries/positions with strong pay for performance would presumably respond differently 3. Experimenter effects/social desirability bias(es): Subjects who are aware of being part of a study might feel pressure to: adhere to social norms; e.g., people perform certain jobs because it is their duty to do so, not because of monetary incentives conform to stereotypes; e.g. creative people are not motivated by money (Kim 2012)

17 What about employee recognition? I have been salesman of the month for 13 out of the last 12 months. I did so well last February that corporate gave me two plaques in lieu of a pay raise. Dwight K. Schrute, Assistant (to the) Regional Manager, Dunder Mifflin Scranton (PA)

18 The Dirty Laundry of awards (Gubler, Larkin, Pierce 2014) Attendance award program at one industrial laundry plant in US Midwest, workers at 5 plants. All employees with no unexcused absence or tardy in previous month were: 1. Publicly announced at plant-wide meeting 2. Eligible for a $75 gift card Positive effects on desired behavior absent, tardy, minutes late But also evidence of gaming and undermining of intrinsic motivation: N. of unplanned single absences Pre-award perfectly punctual employees 2.5x more likely to be tardy if disqualified in a given month efficiency of high efficiency workers

19 So, do incentives work? Evidence from laboratory experiments indicates that incentives can backfire However, beware of experimenter effects and social desirability bias Evidence from field experiments shows that when designed well, incentives do stimulate the desired behavior Recent field evidence finds positive effects in tasks/occupations where intrinsic motivation is important If designed and framed appropriately, incentives can complement intrinsic motivation Relevant question should be: under which conditions do incentives work/do not work One size does NOT fit all! Companies should run experiments to test the effectiveness of new incentive schemes in their organization Consider small-scale experiments before rolling out company-wide changes: can learn what works and what doesn t and avoid costly mistakes

20 References Ariely, D., Gneezy, U., Loewenstein, G., and Mazar, N., Large Stakes and Big Mistakes, Review of Economic Studies (2009) 76 (2): Asch, B.J., Do incentives matter? The case of navy recruiters. Industrial and Labor Relations Review 43, Boning, B., Ichniowski, C. and Shaw, K., Opportunity Counts: Teams and the Effectiveness of Production Incentives, Journal of Labor Economics 25 (2007): Chetty, R., Saez, E., and Sandor, L What Policies Increase Pro-Social Behavior? An Experiment with Referees at the Journal of Public Economics, Journal of Economic Perspectives 28(3): , Deci, E.L., 1972: The Effects of Contingent and Noncontingent Rewards and Controls on Intrinsic Motivation, Organizational Behavior and Human Performance 8, Duflo, Esther, Rema Hanna, and Stephen P. Ryan "Incentives Work: Getting Teachers to Come to School." American Economic Review, 102(4): Gibbs, M., Neckermann, S., and Siemroth, C A Field Experiment in Motivating Employee Ideas, University of Chicago Working Paper.

21 References Glucksberg, S The influence of strength of drive on functional fixedness and perceptual recognition. Journal of Experimental Psychology 63, Gneezy, U., Meier, S., & Rey-Biel, P., 2011: When and why incentives (don't) work to modify behavior, The Journal of Economic Perspectives, Gneezy, U., & Rustichini, A., 2000: Pay enough or don't pay at all, The Quarterly Journal of Economics, 115(3), Gubler, Timothy, Ian I. Larkin, and Lamar Pierce. "The Dirty Laundry of Employee Award Programs: Evidence from the Field." Harvard Business School Working Paper, No , February Kamenica, E. (2012). Behavioral Economics and Psychology of Incentives. Annu. Rev. Econ., 4(1), Lacetera, N., Macis M., and Slonim, R., Rewarding Volunteers: A Field Experiment Management Science, 2014, 60(5), pp Lazear, Edward, 2000: Performance Pay and Productivity, American Economic Review 90(3), pp Oyer, P., Fiscal year ends and nonlinear incentive contracts: the effect on business seasonality. Quarterly Journal of Economics 113,

22 References Shearer, B., 1996: Piece Rates, Principal-Agent Models, and Productivity Profiles: Parametric and Semi-Parametric Evidence, Journal of Human Resources, Volume 31, Number 2, Spring Shearer, B., 2004: "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment", Review of Economic Studies, vol. 71, no 2, pp