An Undesired Effect of Cash Incentives

Most career sales jobs have a commission pay structure. In addition, many companies pay bonuses in attempt to motivate employees to stretch themselves and improve performance. Pay for performance is a time-honored compensation strategy, but recent research shows that people who are rewarded based on performance think differently about money than people who receive a fixed salary.

The performance pay approach risks encouraging workers to focus on pay and not on the work. According to a report, commission-based workers express more desire for money than people who receive fixed salaries – even when the amounts they earn are similar.

In a study by Loran Nordgren, an associate professor of management and organizations at Northwestern University’s Kellogg School of Management, participants were asked to find grammar mistakes in text. One group was compensated via an incentive of 10 cents per error corrected, up to $1. The other group got a flat payment of $1.

When asked afterward how much they thought about money during the task, participants in the performance-incentive group rated the frequency of money-related thoughts at 4.38 out of 7, compared with 2.87 in the salary group.

Nordgren and co-author Julia D. Hur, a Ph.D. student at Kellogg, wanted to test things in the real world, so they surveyed 460 salespeople at dozens of dealerships for a large auto company in Asia. At half the dealerships, the salespeople’s salaries depended entirely on commissions. The other dealerships were largely salary-based, with only 10 percent of pay coming from commissions.

The researchers asked the salespeople how much they wanted money, how much attention they paid to it, and how satisfied they were with their jobs. Commission-based salespeople rated their desire for money at 4.93, while those in the fixed salary dealerships rated it at 4.32. The difference remained significant even when the researchers controlled for factors such as estimated income, job satisfaction and job security.

Nordgren and Hur say the study is not evidence that cash incentives are always a bad idea. They state that companies should recognize a cash-for-performance pay structure may shape employee values, consciously or subconsciously.

“It certainly is not consequence-free,” Nordgren says. For instance, employees who become more materialistic may ask for higher pay, or the focus on money among coworkers could hurt morale. If firms ask employees why they work there, “they don’t want the first answer to be ‘Because my principal concern is money, and this place pays me more,’” Nordgren says. “That’s the last thing they want to hear.”