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10/18/2013

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I think I posted on the idea of loss aversion a few years back and I think if done in conjunction with other incentives it might be a nice way to break up monotony and add some interest to an incentive program. I don't think it is the best way to manage a compensation program with incentives - two very different things.

It is easy to say from an academic standpoint that the loss aversion technique yields better results within an experiment- but hard to imagine how this would work over time in the real world. That is always the problem with these kinds of claims (Drive by Dan Pink had similar flaws IMO).

Fear is also a very good motivator but it makes no sense to constantly threaten and employee with dismissal or put an employee in a cage with a tiger in order to get performance.

Sometimes these experiments are interesting - and might have application in very narrow, tactical and specific instances - but rarely can you run a business with them.

Paul:

Here are a couple of links I found to posts you've done on the topic - included for the benefit of readers (who if they are not reading your stuff, they dang sure well oughta be!)

http://www.symbolist.com/blog/2010/10/is-this-an-incentive-or-is-it-gambling-can-betting-increase-program-success/

http://www.symbolist.com/blog/2012/08/harvard-profs-must-be-reading-my-posts-incentives-and-loss-aversion/

I can see where it might have interesting possibilities for non-cash incentives, but retain my own "aversion" to the idea of doing it with cash.

You're right, as always - success in the world of experiments (particularly those done with students and not in the workplace) is not the same as sustained success in the real world.

Thanks for weighing in!

Here is a link to a similar article I wrote in Oct. 2012. http://www.compensationcafe.com/2012/10/incentives-before-the-fact.html

Two links in post --- one from Peter Cappelli and one describing a study conducted with teachers in the Chicago public school system.

http://www.hreonline.com/HRE/view/story.jhtml?id=533350761

http://news.uchicago.edu/article/2012/08/08/student-performance-improves-when-teachers-given-incentives-upfront

There is sometimes already an aspect of loss aversion embedded in many compensation plans, although it is not often highlighted. This is related to how incentives are structured and communicated. For example, when incentives are thought of as as 'extra pay' - often for doing 'something extra' beyond good performance, the incenitve can be seen as pure upside. These are often called "bonuses".

However, if incentives are part of a variable pay approach whereby part of annual target compensation has to be earned through performance every year (or whatever the period happens to be), then there is a risk of 'losing' a part of that TTCC.
That's not all bad, IMHO, and is in gerneal a better way to structure variable pay in most cases than through "bonuses" which can cause conflicts between "my job" and "my bonus opportunity".

I appreciate that you pointed out that any incentive can have unintended consequences. We are complicated. What motivates us is complicated. How others around us internalize the incentive is complicated.

Incentives, either negative or positive, with enough momentum can shape culture. Typically negative incentives are meant for a quick fix. Using the same negative incentive can become cultural over time.

Take 'naming the person who made the mistake' as an example of a negative incentive that is a short term solution to changing behavior. It works. That mistake is likely not to happen again - risks are avoided. As a culture, no risk can have long term consequences of lack of innovation and engagement.

In creating incentives it is important to look at the individual, the short term and long term consequences, and the shaping of the culture. Incentives should be initiated with these spheres of influence in mind.

Jacque:

Thanks for sharing your post and the other links. I like your take: Is this a bad idea, or just a mean one? I think it's both. Agree. Just because a technique has been shown to push people into action doesn't necessarily mean we should embrace it indiscriminately. As Paul notes, I can see how this could have application in narrow, tactical ways - but I haven't yet encountered a situation where I felt it was a good idea.

Mark:

Very interesting take. What you're describing sounds like it might revolve more around the positioning and communication of a reward, versus its structure. To the degree that a bonus/incentive is considered an entitlement, its "loss" may be perceived as a negative incentive. I'm not sure, though, that an entitlement or target has the same clear "line of sight" as a true negatively-framed incentive - which is what makes the latter so powerful in driving action.

Mary Therese:

Great points, all. Yes, we are complicated and the nature of our work together is complicated too. Narrowly conceived, overly simplistic and short-sighted incentives nearly always backfire ... and you note well why and how that can happen.

Thanks for the thoughts and comments, all!

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