Some things are easy to measure: revenue per quarter, profit margin, average incentive pay received by employees per month, and so forth. Other things, like measuring the increase in revenue or the change in profit per dollar spent on incentive pay, are a bit more difficult. But it's these difficult-to-measure things that are required to justify your incentive budgets.
A new research paper from Guido Friebel, Matthias Heinz, Miriam Krueger and Nicolay Zubanov tackles this question ("Team Incentives and Performance: Evidence from a Retail Chain" American Economic Review, August 2017). In fact, they tackle an even more difficult question: how do team incentives impact an organization's bottom line?
Team incentives can be problematic. Because individual performance is blurred and only joint performance is measured, there may be a tendency for one (or more) team members to "free-ride" on the efforts of others. If you ever did a group assignment in high school, you probably experienced this - some group members did all of the work and other group members didn't pull their weight. In the presence of free-riders, team incentives are weakened; in extreme cases, team incentives may fail to provide any additional motivation, resulting in no gains at all.
Friebel, et al., point out that their question is an important one: teamwork is a common feature of the modern workplace, and team incentives are gaining importance in the global economy. Unlike individual incentives, the effectiveness of team incentives remains an open question.
In order to explore this question, Friebel, et al., conduct a field experiment with a retail bakery chain. The bakery chain employs approximately 1,300 employees across 193 shops. Employees did not know that they were part of an experiment. Half of the shops were randomly selected to receive a team bonus of up to €300 per month, conditioned on pre-existing sales targets. The authors note that the organization of the workplace was not changed in any way; shops continued to operate on a team basis where each worker carries out multiple tasks throughout the day (handling goods delivered, operating ovens, serving customers, etc.).
The results of the experiment are interesting...
Among the shops in the "bonus" group:
- Sales increased by approximately 3 percent;
- Many teams increased their sales beyond the level at which the bonus was capped;
- On average, employee compensation increased by 2.2 percent (and up to 12 percent for some employees);
- For every $1 spent on bonuses, sales revenue increased by $3.80;
- For every $1 spent on bonuses, operational profit increased by $2.10.
The authors note that "[c]ontamination and gaming of the incentive scheme appear to play no role."
Because the bonus was profitable, the organization decided to roll out the bonus scheme to all 193 of their shops. Over the course of six months, the performance of the two groups of shops converged and it is estimated that the profit margin increased by more than 60 percent!
So, should YOU roll out a team bonus scheme in your organization? Before you get too excited, the authors remind us that this experiment demonstrates the potential win-win benefits of providing team incentives; it does not guarantee win-win benefits. Whether a team bonus is right for your organization depends on the type of product or service you provide, the competitive nature of the market(s) in which you compete, knowledge and organizational capabilities, and a host of other factors.
That being said, if you're in a field like retail where there are many units operating with the same technology, with a similar workforce, and under similar competitive situations, you might want to give team incentives a closer look.
Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.