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PSY 6450PSY 6450Unit 8 Unit 8

Performance and PayPerformance and Pay

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ScheduleSchedule

Exam (35 points) on Monday, 11/26Exam (35 points) on Monday, 11/26 Monday after Thanksgiving breakMonday after Thanksgiving break

Reminder - if you want your project grade Reminder - if you want your project grade before ME2, projects are due Monday, before ME2, projects are due Monday, 12/0312/03 Otherwise, final due date during final exam Otherwise, final due date during final exam

week, Monday, 12/10week, Monday, 12/10

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A Little IntroductionA Little Introduction

My main thematic line of research has been My main thematic line of research has been the effects of individual and small group the effects of individual and small group monetary incentives on employee monetary incentives on employee performance and satisfactionperformance and satisfaction

Most of that work has been “bridge” Most of that work has been “bridge” researchresearch

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Bridge ResearchBridge Research

Bridge researchBridge research Laboratory simulations that address practical Laboratory simulations that address practical

questions from organizational settingsquestions from organizational settings The main advantage of bridge researchThe main advantage of bridge research

Isolation of the effects of incentives from Isolation of the effects of incentives from administrative and organizational changesadministrative and organizational changes

The main disadvantage of bridge researchThe main disadvantage of bridge research Relevancy to actual work settingsRelevancy to actual work settings

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Relevancy to Work SettingsRelevancy to Work Settings

Caution is good (and recommended)Caution is good (and recommended) Reviews, though few in number, have Reviews, though few in number, have

indicated that the results of field studies indicated that the results of field studies and laboratory studies are similarand laboratory studies are similar Jenkins (1986), Jenkins, Mitra, Gupta & Shaw (1998)Jenkins (1986), Jenkins, Mitra, Gupta & Shaw (1998) Hantula (2001)Hantula (2001) Bucklin & Dickinson (2001)Bucklin & Dickinson (2001)

We have found similarities as wellWe have found similarities as well Frisch & Dickinson (1990)Frisch & Dickinson (1990) LaMere, Dickinson, Henry, Henry & Poling (2000)LaMere, Dickinson, Henry, Henry & Poling (2000)

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How I Got My Start:How I Got My Start: The Practical Beginning The Practical Beginning

Union National Bank, Little Rock, ARUnion National Bank, Little Rock, AR Individual monetary incentive systems implemented in Individual monetary incentive systems implemented in

early 1980searly 1980s William B. Abernathy, H. Hall McAdams, Wayne Dierks, William B. Abernathy, H. Hall McAdams, Wayne Dierks,

Kathleen McNallyKathleen McNally

By the late 1980s, 75 systems had been installed, By the late 1980s, 75 systems had been installed, covering 70% of the bank’s 485 employeescovering 70% of the bank’s 485 employees

Productivity increases of 200%-300%Productivity increases of 200%-300% Net profit per employee $11,000 compared to $4,950 for Net profit per employee $11,000 compared to $4,950 for

other Little Rock banksother Little Rock banks

Program committee for ABAProgram committee for ABA While scheduling, call from someone importantWhile scheduling, call from someone important

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How I Got My Start:How I Got My Start:The Academic BeginningThe Academic Beginning

The role of financial compensation in The role of financial compensation in industrial motivationindustrial motivation

Opsahl & Dunnette (1966)Opsahl & Dunnette (1966)

Appealed to researchers to conduct Appealed to researchers to conduct controlled laboratory studies because:controlled laboratory studies because:

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Opsahl & Dunnette, 1966Opsahl & Dunnette, 1966

“Strangely, in spite of the large amounts of money spent and the obvious relevance of behavioral theory for industrial compensation practices, there is probably less solid research in this area than in any other field related to worker performance.” (p. 94)

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Individual Monetary Incentives:Individual Monetary Incentives:Research Since 1966*Research Since 1966*

20 years later: 28 systematic studies of 20 years later: 28 systematic studies of individual monetary incentivesindividual monetary incentives

Jenkins (1986)Jenkins (1986) 12 years after that: 39 systematic studies 12 years after that: 39 systematic studies

of individual monetary incentivesof individual monetary incentivesJenkins et al. (1998)Jenkins et al. (1998)

Meta-analytic reviewMeta-analytic review Individual incentives hadIndividual incentives had an overall effect size of .34 an overall effect size of .34

*excludes survey studies

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Group Incentive Research*Group Incentive Research*

~13 published studies ~13 published studies Honeywell-Johnson et al., 2002; Culig, 2005Honeywell-Johnson et al., 2002; Culig, 2005

Only 8 have compared the effects of Only 8 have compared the effects of individual incentives and small group individual incentives and small group incentives (N = 2-12 group members)incentives (N = 2-12 group members) My students and I have done 3 of thoseMy students and I have done 3 of those

* excludes survey studies* excludes survey studies

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Prevalence in Business:Prevalence in Business:Individual Monetary IncentivesIndividual Monetary Incentives

90% of Fortune 1000 companies have 90% of Fortune 1000 companies have some type of individual incentive plansome type of individual incentive plan

Ledford, Lawler, & Mohrman (1995)Ledford, Lawler, & Mohrman (1995)

47% of 1045 companies surveyed by 47% of 1045 companies surveyed by Hewitt had individual incentive plansHewitt had individual incentive plans Rewards were based on specificRewards were based on specific

employee performance criteriaemployee performance criteria

Hewitt Associates (2005)Hewitt Associates (2005)

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Prevalence in Business:Prevalence in Business:Group Monetary IncentivesGroup Monetary Incentives

87% of Fortune 1000 companies have 87% of Fortune 1000 companies have work group or team incentiveswork group or team incentives

Lawler, Mohrman, & Ledford Lawler, Mohrman, & Ledford (1998)(1998)

Fortune 1000 companies increased their Fortune 1000 companies increased their use of work group or team incentives by use of work group or team incentives by 50% between 1987 and 199650% between 1987 and 1996

Ledford & Hawk (2000)Ledford & Hawk (2000)

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About The Beginning AgainAbout The Beginning Again

My students and I began this research In the My students and I began this research In the late 1980s when only about 20 systematic late 1980s when only about 20 systematic studies had been conductedstudies had been conducted

We began with questions raised by both Union We began with questions raised by both Union National Bank and Opsahl & DunnetteNational Bank and Opsahl & Dunnette What relationship is there between the % of What relationship is there between the % of

incentive pay and performance?incentive pay and performance? What relationship is there between the absolute What relationship is there between the absolute

amount of the incentive offered and performance?amount of the incentive offered and performance? Are small group incentives just as effective as Are small group incentives just as effective as

individual incentives?individual incentives? Do small group incentives decrease the performance Do small group incentives decrease the performance

of high performers?of high performers?

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Caveat: Quote of the DayCaveat: Quote of the Day

“A careful examination of criticisms of monetary pay-for-performance systems indicates not that they are ineffective, but that they are too effective.” (p. 597)

Baker, Jensen, & Murphy (1988)

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Finally, SO1: Three goals and three types of Finally, SO1: Three goals and three types of

equity related to eachequity related to each 1.1. To attract and retain good employees - External equityTo attract and retain good employees - External equity

Are the salaries/pay of employees competitive with what other companies Are the salaries/pay of employees competitive with what other companies

are offering, both in the local community as well as in the particular industryare offering, both in the local community as well as in the particular industry 2.2. To insure that the salary attached to a particular job is fair in To insure that the salary attached to a particular job is fair in

terms of the importance of the job to the organization - Internal terms of the importance of the job to the organization - Internal equityequityThis goal has nothing to do with how well a particular individual performs This goal has nothing to do with how well a particular individual performs the job - it only relates to the relative worth of the job to the organization (but the job - it only relates to the relative worth of the job to the organization (but influenced by supply and demand)influenced by supply and demand)

3.3. To motivate and reward employees - Individual equityTo motivate and reward employees - Individual equityDoes the pay system encourage high performers? Are higher performers Does the pay system encourage high performers? Are higher performers paid more than lower performers?paid more than lower performers?

(computer programmers vs. secretaries, Business and engineering profs vs psychology vs English, behavior analysts tend only to focus on 3) )

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SO2: The Motivation Problem with SO2: The Motivation Problem with Hourly and Salary PayHourly and Salary Pay

You get what you pay forYou get what you pay forIf you pay for hours, you get hours, not performance. Economically it If you pay for hours, you get hours, not performance. Economically it makes more sense for employees to take as much time as possible makes more sense for employees to take as much time as possible to complete their work. And, if you can finagle overtime, all the to complete their work. And, if you can finagle overtime, all the better (Overtime = 150% or 200% of base)better (Overtime = 150% or 200% of base)

ConsequencesConsequences In hourly wage systems, there are clear consequences for In hourly wage systems, there are clear consequences for performing below a minimally acceptable performance level performing below a minimally acceptable performance level (criticism, threats of dismissal), but there are no clear consequences (criticism, threats of dismissal), but there are no clear consequences for performing above that level. Thus, hourly wage systems tend to for performing above that level. Thus, hourly wage systems tend to support minimally acceptable performancesupport minimally acceptable performance

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SO2: The Motivation Problem with SO2: The Motivation Problem with Hourly and Salary PayHourly and Salary Pay

Merit pay hourly increasesMerit pay hourly increasesEven if companies adopt a “merit pay” policy, there is still Even if companies adopt a “merit pay” policy, there is still a weak link between performance and pay.a weak link between performance and pay.Why? Merit pay is almost always based on annual Why? Merit pay is almost always based on annual subjective performance appraisals. And, as indicated in subjective performance appraisals. And, as indicated in previous units, self-assessments often do not agree with previous units, self-assessments often do not agree with supervisory assessments (we rate ourselves higher than supervisory assessments (we rate ourselves higher than our supervisors rate us); hence employees do not our supervisors rate us); hence employees do not believe their pay is related to their performance in a believe their pay is related to their performance in a meaningful waymeaningful way

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SO3: Skinner on IncentivesSO3: Skinner on Incentives We know, without a doubt that monetary We know, without a doubt that monetary

incentives will increase performance butincentives will increase performance but They have been given a bad rap - perhaps They have been given a bad rap - perhaps

for good reasons - many object to themfor good reasons - many object to them Primary reason - they are exploitativePrimary reason - they are exploitative

And they can be, but they don’t have to be - don’t And they can be, but they don’t have to be - don’t throw the baby out with the bath water!throw the baby out with the bath water!

Skinner maintained that incentive systems may, in Skinner maintained that incentive systems may, in fact, be less aversive than hourly pay systemsfact, be less aversive than hourly pay systems

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SO3A: According to Skinner, what maintains SO3A: According to Skinner, what maintains

performance under hourly wage systems?performance under hourly wage systems?

No one works on Monday morning because he is No one works on Monday morning because he is reinforced by a paycheck on Friday afternoon. The reinforced by a paycheck on Friday afternoon. The employee who is paid by the week works during the employee who is paid by the week works during the week to avoid losing a standard of living which depends week to avoid losing a standard of living which depends upon a weekly wage. A supervisor who can discharge upon a weekly wage. A supervisor who can discharge him is an essential part of the system. Rate of work is him is an essential part of the system. Rate of work is determined by the supervisor (with or without the pacing determined by the supervisor (with or without the pacing stimuli of a production line), and special aversive stimuli of a production line), and special aversive contingencies maintain quality. The pattern is therefore contingencies maintain quality. The pattern is therefore still aversive.still aversive.Somewhat better contingencies are available under Somewhat better contingencies are available under schedules of reinforcement based on counters rather schedules of reinforcement based on counters rather than clocks. (ratio schedules of reinforcement)than clocks. (ratio schedules of reinforcement)

(what Skinner is pointing out here is that hourly wage systems control behavior via aversive contingencies - use this as a defense of reward systems ingeneral, by the way)

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SO3B: Skinner on incentive systemsSO3B: Skinner on incentive systemsSkinner readily acknowledges that incentive systems can and have Skinner readily acknowledges that incentive systems can and have been misused, but notes that incentive systems:been misused, but notes that incentive systems:May evoke feelings of confidence, certainty of success, and May evoke feelings of confidence, certainty of success, and enjoyment arising from a sense of mastery and effectiveness, and enjoyment arising from a sense of mastery and effectiveness, and interest in the job interest in the job as occurs when behaviors are frequently as occurs when behaviors are frequently reinforcedreinforced..

Note that Skinner is not addressing performance issues here, but Note that Skinner is not addressing performance issues here, but rather addressing the fact that incentive systems may be less rather addressing the fact that incentive systems may be less aversive emotionally.aversive emotionally.

Also, note the italicized section - this is importantAlso, note the italicized section - this is important Incentive systems are no different in this respect than any type of Incentive systems are no different in this respect than any type of

reinforcement system where individuals are frequently reinforcedreinforcement system where individuals are frequently reinforced Respondent behavior interpretation:Respondent behavior interpretation:

R (work) ––> Sr (incentives)R (work) ––> Sr (incentives)CS (incentives) ––> CR (feelings of confidence, etc.)CS (incentives) ––> CR (feelings of confidence, etc.)

(anectodal - MI disposal aunt, happier, loyal, improved marriage; UNB proof operators, Kate acousted in grocery store - don’t hire anyone else))

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SO4: Bucklin & Dickinson, intro, NFESO4: Bucklin & Dickinson, intro, NFE Bucklin and I were interested in determining whether Bucklin and I were interested in determining whether

different types of monetary incentive systems affected different types of monetary incentive systems affected behavior differently (not whether incentives were behavior differently (not whether incentives were effective, we knew they were)effective, we knew they were)

We discovered, as did Jenkins et al., simply was not a lot We discovered, as did Jenkins et al., simply was not a lot of researchof research

Only three thematic lines of research that have Only three thematic lines of research that have investigated/manipulated parameters of incentive investigated/manipulated parameters of incentive systemssystems Percentage of incentive earned:Percentage of incentive earned: 5 studies5 studies Schedules of reinforcement:Schedules of reinforcement: 8 studies8 studies Per piece amount:Per piece amount: 2 studies2 studies

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SO4: Bucklin & Dickinson intro, cont, NFESO4: Bucklin & Dickinson intro, cont, NFEThree Thematic LinesThree Thematic Lines

The percentage of total pay or base pay earned The percentage of total pay or base pay earned in incentive payin incentive pay 3%-100% of total wages or base pay wages earned in 3%-100% of total wages or base pay wages earned in

incentive payincentive pay Schedules of reinforcementSchedules of reinforcement

Incentives delivered on different fixed and variable ratio Incentives delivered on different fixed and variable ratio schedules (CRF, FR2, VR2, VR4)schedules (CRF, FR2, VR2, VR4)

Linear, accelerating and decelerating piece rate Linear, accelerating and decelerating piece rate pay systemspay systems Piece rate amount remains constant, increases or Piece rate amount remains constant, increases or

decreases as the number of pieces completed decreases as the number of pieces completed increasesincreases

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SO4A: ConclusionsSO4A: Conclusions

Will be provided in lectureWill be provided in lecture

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SO4B: ImplicationsSO4B: Implications

It appears that you don’t have to worry a It appears that you don’t have to worry a lot about the details of how lot about the details of how incentives/consequences are related to incentives/consequences are related to performance - as long as they ARE related performance - as long as they ARE related in some type of ratio schedule, delivered in some type of ratio schedule, delivered fairly frequently, and supported by some fairly frequently, and supported by some type of on-going feedback system.type of on-going feedback system.

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SO5: Three reasons why it is not surprising that profit SO5: Three reasons why it is not surprising that profit sharing has not been shown to increase performancesharing has not been shown to increase performance

(intro, NFE)(intro, NFE)

In the study objectives I describe some popular types of In the study objectives I describe some popular types of “nontraditional” pay systems“nontraditional” pay systems Profit sharingProfit sharing Gain sharingGain sharing Bonus or lump sum paymentsBonus or lump sum payments Group incentive plansGroup incentive plans Individual incentive plansIndividual incentive plans Pay for skill and knowledgePay for skill and knowledge Employee stock ownership plansEmployee stock ownership plans

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SO5: Three reasons why it is not surprising that profit SO5: Three reasons why it is not surprising that profit sharing has not been shown to increase performancesharing has not been shown to increase performance

(still intro, nfe)(still intro, nfe)

First, note that I have not referred to all of these as First, note that I have not referred to all of these as “incentive” systems or pay-for-performance plans“incentive” systems or pay-for-performance plans In order for me (Abernathy agrees) to classify a pay system as an In order for me (Abernathy agrees) to classify a pay system as an

incentive or pay-for-performance system it must use a incentive or pay-for-performance system it must use a predetermined formula to tie compensation to objective predetermined formula to tie compensation to objective performance, operational or economic measures. performance, operational or economic measures.

This eliminates:This eliminates: Bonus and lump sum payments, pay for skill and knowledge, Bonus and lump sum payments, pay for skill and knowledge,

and employee stock ownership plansand employee stock ownership plans

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SO5: Three reasons why it is not surprising that profit SO5: Three reasons why it is not surprising that profit sharing has not been shown to increase performancesharing has not been shown to increase performance

(still intro, nfe)(still intro, nfe)

Of these, profit sharing is the most prevalentOf these, profit sharing is the most prevalent Also represents the “other end of the continuum” Also represents the “other end of the continuum”

from individual incentives with respect to two very from individual incentives with respect to two very important variables that affect performanceimportant variables that affect performance Number of individuals whose performance contributes Number of individuals whose performance contributes

to the determination of how much money each to the determination of how much money each employee getsemployee gets

Disbursement system - how frequently the money is Disbursement system - how frequently the money is disburseddisbursed

So I am going to analyze this system, and you So I am going to analyze this system, and you can do similar analyses for the ones “in between”can do similar analyses for the ones “in between”

(in any event, back to profit sharing)

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SO5: Essential features of profit sharing (NFE)SO5: Essential features of profit sharing (NFE)

When annual profits are above a predetermined When annual profits are above a predetermined level, part of those profits are distributed to level, part of those profits are distributed to employeesemployees

Formulas for distribution are quite complicated, Formulas for distribution are quite complicated, but usually the amount of money that is but usually the amount of money that is distributed to any one employee is based on a distributed to any one employee is based on a percentage of the employee’s salary, thus percentage of the employee’s salary, thus employees do NOT get the same amountemployees do NOT get the same amount

The money is usually distributed annually, or The money is usually distributed annually, or more commonly, placed directly into the more commonly, placed directly into the employee’s retirement account (tax benefits)employee’s retirement account (tax benefits)

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SO5: The first reason why profit sharing often SO5: The first reason why profit sharing often does not increase employee performancedoes not increase employee performance

Profits are based on the aggregate performance Profits are based on the aggregate performance of all members of the organization. Thus of all members of the organization. Thus (depending upon the size of the company) one (depending upon the size of the company) one person’s performance contributes only a very person’s performance contributes only a very small proportion to the total performance of the small proportion to the total performance of the organization. Hence a person’s performance is organization. Hence a person’s performance is not strongly related to his/her pay.not strongly related to his/her pay. Even with only 100 employees, any one individual’s Even with only 100 employees, any one individual’s

performance contributes only 1% to the total performance contributes only 1% to the total performance of the organizationperformance of the organization

In small companies, however, profit sharing might just In small companies, however, profit sharing might just affect performance affect performance

(in sos, but not explained adequately for the exam; mistake - it’s not that everyone gets a small $$)

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SO5: The second reason why profit sharing SO5: The second reason why profit sharing often does not increase employee performanceoften does not increase employee performance

Profits are often affected by factors that (a) have Profits are often affected by factors that (a) have little to do with the performance of individuals little to do with the performance of individuals and (b) are outside of their control such as - and (b) are outside of their control such as - include following in answer:include following in answer: Mergers, acquisitions, building a new factory or plant, Mergers, acquisitions, building a new factory or plant,

investment of funds in research (bonuses highly investment of funds in research (bonuses highly uncertain and unpredictable)uncertain and unpredictable)

Union National Bank - the performance of the proof operators Union National Bank - the performance of the proof operators actually had little to do with the overall profitability of UNBactually had little to do with the overall profitability of UNB

(in sos but not explained adequately; what is the main factor that influences bank profits?)

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SO5: The third reason why profit sharing often SO5: The third reason why profit sharing often does not increase employee performancedoes not increase employee performance

Annual distribution of profit-sharing bonuses or Annual distribution of profit-sharing bonuses or distribution of money into retirement accountsdistribution of money into retirement accounts Simply too delayed to have much effect on Simply too delayed to have much effect on

performanceperformance

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Percentage of Base Pay or Total Pay Earned in Percentage of Base Pay or Total Pay Earned in Incentive PayIncentive Pay

(next several SOs relate to the incentive percentage studies)

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Percentage of IncentivePercentage of Incentive

In many incentive systems employees In many incentive systems employees receive a base pay and can earn receive a base pay and can earn additional money in incentives when additional money in incentives when performance exceeds a specified standardperformance exceeds a specified standard

Given that the total amount that can be Given that the total amount that can be earned remains constant, as the earned remains constant, as the percentage increases, more of a person’s percentage increases, more of a person’s pay becomes dependent upon pay becomes dependent upon performanceperformance

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Incentives as a Percentage of Total PayIncentives as a Percentage of Total Pay

Total PayTotal Pay Percentage Percentage of Incentiveof Incentive

Hourly PayHourly Pay Incentive Incentive PayPay

$10.00$10.00 0%0% $10.00$10.00 $0.00$0.00

$10.00$10.00 25%25% $7.50$7.50 $2.50$2.50

$10.00$10.00 50%50% $5.00$5.00 $5.00$5.00

$10.00$10.00 75%75% $2.50$2.50 $7.50$7.50

$10.00$10.00 100%100% $0.00$0.00 $10.00$10.00

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Percentage of Incentive Studies:Percentage of Incentive Studies:Main Research Questions (NFE)Main Research Questions (NFE)

What is the lowest percentage of incentive What is the lowest percentage of incentive pay that affects performance?pay that affects performance?

Do different percentages of incentive pay Do different percentages of incentive pay affect performance differently?affect performance differently?

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SO9: SO9: What’s the “magic” percentage of What’s the “magic” percentage of incentive according to compensation experts?incentive according to compensation experts?

(based on tradition - WWII, war labor relations board)

Will be provided in lectureWill be provided in lecture

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Authors Subjects Task Percent of total or base pay

Riedel et al.(1988)

Collegestudents

Formscoded

0%, 25%, 50% 75%, 100%, 125% of base pay

Frisch &Dickinson(1990)

Collegestudents

Partsassembled

0%, 3%, 11%, 20%, 35% of total pay (0%, 10%, 30%, 60%, 100%of base pay)

Dickinson &Gillette(1993)

Collegestudents

Dataentry,computer

27%, 100% of total pay

LaMere et al.(1996)

Truckdrivers

Job pointsearned

0%, 3%, 6%, 9%of total pay

Matthews &Dickinson(2000)

Collegestudents

Qualityinspection,computer

0%, 10%, 100%of total pay

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SO10 : Employee perceptions of fairness SO10 : Employee perceptions of fairness of incentive percentagesof incentive percentages

If employees do If employees do notnot have a high degree of control over have a high degree of control over their performance, why are they likely to perceive their performance, why are they likely to perceive highhigh percentages of incentive to be unfair?percentages of incentive to be unfair? A sizable portion of their total earnings will be based A sizable portion of their total earnings will be based

on factors outside of their control (i.e., can’t control on factors outside of their control (i.e., can’t control their own earnings much), and further,their own earnings much), and further,

If those factors fluctuate from day to day or week to If those factors fluctuate from day to day or week to week, their earnings will not be predictableweek, their earnings will not be predictable

People have fixed living expenses:People have fixed living expenses: Apt rent or home mortgageApt rent or home mortgage Car paymentsCar payments Expenses for kidsExpenses for kids

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SO11: Employee perceptions of fairness SO11: Employee perceptions of fairness of incentive percentagesof incentive percentages

If employees If employees dodo have a high degree of control over their have a high degree of control over their performance, why are they likely to perceive performance, why are they likely to perceive lowlow percentages of incentive to be unfair?percentages of incentive to be unfair?

With low percentages of incentives, base pay constitutes With low percentages of incentives, base pay constitutes a relatively high portion of their total earnings and the a relatively high portion of their total earnings and the incentive earnings constitute a relatively low portion, thus:incentive earnings constitute a relatively low portion, thus:Differences in performance Differences in performance between individualsbetween individuals will not will not be adequately reflected in differences in earningsbe adequately reflected in differences in earnings That is, low performers will earn just about as much as high That is, low performers will earn just about as much as high

performersperformers Not related to the fact that individuals won’t make a lot more Not related to the fact that individuals won’t make a lot more

money if they perform better - that is a satisfaction issue, not a money if they perform better - that is a satisfaction issue, not a fairness issue: This is a common error by students on the exam!fairness issue: This is a common error by students on the exam!

(some have had trouble with this in the past)

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Frisch & Dickinson, 1990Frisch & Dickinson, 1990 Participants: 75 college studentsParticipants: 75 college students Five conditionsFive conditions

Hourly pay: (0% of pay)Hourly pay: (0% of pay) Incentives: Incentives:

Planned: 10%, 30%, 60%, or 100% of base pay Planned: 10%, 30%, 60%, or 100% of base pay Actual: Actual: 3%, 13%, 25%, 54% of base pay (can’t calculate this

until after the study is over and you know how much participants actually earned - we assumed participants would perform better than they did)

Sessions: Fifteen 45-minute sessionsSessions: Fifteen 45-minute sessions Task: Simple assembly taskTask: Simple assembly task

Assembling parts from bolts, nuts and washersAssembling parts from bolts, nuts and washers Measure: Number of correctly assembled partsMeasure: Number of correctly assembled parts

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Hourly payHourly pay

Incentive pay

25%54% 3%13%

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Summary of Results: Summary of Results: Frisch & DickinsonFrisch & Dickinson

Participants who were paid incentives Participants who were paid incentives performed significantly better than those performed significantly better than those who were paid hourly who were paid hourly

Participants who were paid incentives Participants who were paid incentives performed comparably, regardless of the performed comparably, regardless of the percentage percentage 3%, 13%, 25%, and 54%3%, 13%, 25%, and 54%

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SO13A: The relationship between the amount SO13A: The relationship between the amount of pay earned and the percentage of incentiveof pay earned and the percentage of incentive

0%3%

13%25%

54%

Least $$

Most $$

Inverse relationship between the amount earned and incentive percentage

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SO13B: Why is that relationship important?SO13B: Why is that relationship important?

It helps answer the following two questions:It helps answer the following two questions: Did people perform better because they earned Did people perform better because they earned

more money?more money? In other words, does the total amount of money In other words, does the total amount of money

earned affect performance? Is that a critical earned affect performance? Is that a critical determinant of performance?determinant of performance?

Did people perform better because they Did people perform better because they received more money per piece (per part received more money per piece (per part assembled?)assembled?) In other words, does the amount of the per piece In other words, does the amount of the per piece

incentive affect performance?incentive affect performance?

(students have had trouble with this so in the past, so I want to start with this material - the actual answers are on the next slide)

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SO13B: So, why is that relationship important?SO13B: So, why is that relationship important?

Participants who earned incentives made Participants who earned incentives made less moneyless money than those who were paid than those who were paid hourly, but hourly, but performed significantly betterperformed significantly better; ; thus the total amount of money earned thus the total amount of money earned cannot account for the higher performancecannot account for the higher performance

Participants in the four incentive groups Participants in the four incentive groups received different per piece incentives, yet received different per piece incentives, yet they performed the same, thus the per they performed the same, thus the per piece incentive did not affect performancepiece incentive did not affect performance

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SO 14: Frisch & Dickinson:SO 14: Frisch & Dickinson:Particularly Interesting ResultsParticularly Interesting Results

Those who received only Those who received only 3%3% of their of their base pay in incentives - only 11¢base pay in incentives - only 11¢ per 45-per 45-minute session - performed significantly minute session - performed significantly better than those paid hourly better than those paid hourly

Higher percentages of incentives did not Higher percentages of incentives did not result in better performance - rather result in better performance - rather participants who earned different participants who earned different percentages of incentives performed the percentages of incentives performed the samesame

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LaMere et al. Field Study, 1996, introLaMere et al. Field Study, 1996, intro There is actually only one study objective for the exam There is actually only one study objective for the exam

over this study, but it was a very important study from our over this study, but it was a very important study from our perspectiveperspective

We had found that We had found that a very low incentive percentage (3%) significantly a very low incentive percentage (3%) significantly

increased performance andincreased performance and higher incentive percentages did not increase higher incentive percentages did not increase

performanceperformance Was that an artifact of the study being conducted in the Was that an artifact of the study being conducted in the

laboratory?laboratory? In the LaMere et al. field study we were able to examine In the LaMere et al. field study we were able to examine

the effects of three incentive percentages (3%, 6%, and the effects of three incentive percentages (3%, 6%, and 9%) on the performance of actual workers9%) on the performance of actual workers

SO15: Lowest and highest incentive percentage examined?

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LaMere et al. Field Study, 1996, introLaMere et al. Field Study, 1996, intro

Participants: 22 roll-off truck driversParticipants: 22 roll-off truck drivers Deliver large waste disposal dumpsters to Deliver large waste disposal dumpsters to

commercial and construction sitescommercial and construction sites Multiple baseline design across 2 groupsMultiple baseline design across 2 groups

Hourly pay: G1, 20 weeks; G2 34 weeksHourly pay: G1, 20 weeks; G2 34 weeks 3% incentive: G1, 28 weeks, G2: 15 weeks3% incentive: G1, 28 weeks, G2: 15 weeks 6% incentive: Both groups, 39 weeks6% incentive: Both groups, 39 weeks 9% incentive: Both groups, 107 weeks 9% incentive: Both groups, 107 weeks

(collected data for almost 4 years!)

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LaMere et al. Field StudyLaMere et al. Field Study

Incentive payIncentive pay Per job incentive for above average weekly Per job incentive for above average weekly

performanceperformance Controlled for different types of jobs and the number of Controlled for different types of jobs and the number of

miles drivenmiles driven Lost incentives for the week for a chargeable accidentLost incentives for the week for a chargeable accident Received as part of weekly paycheck, but the amount Received as part of weekly paycheck, but the amount

of incentives was listed separately on the pay stubof incentives was listed separately on the pay stub FeedbackFeedback

Daily self-recorded feedback Daily self-recorded feedback Group performance was graphed weekly and publicly Group performance was graphed weekly and publicly

postedposted

50

Results: LaMere et al.Results: LaMere et al.

Both groups significantly increased their Both groups significantly increased their performance when the incentive system performance when the incentive system was introducedwas introduced

Both groups maintained their high Both groups maintained their high performance for the rest of the study performance for the rest of the study (almost 3 years)(almost 3 years)

Both groups performed comparably when Both groups performed comparably when paid 3%, 6% and 9% incentivespaid 3%, 6% and 9% incentives

51

Conclusions: LaMere et al.Conclusions: LaMere et al.

Results supported our laboratory studyResults supported our laboratory study Small percentages of incentives, as low as Small percentages of incentives, as low as

3% of total pay, can significantly increase 3% of total pay, can significantly increase performanceperformance

Higher percentages do not result in Higher percentages do not result in incrementally better performanceincrementally better performance

Small percentages of incentives can Small percentages of incentives can sustain performance over time (3%-9%) sustain performance over time (3%-9%)

52

SO17: Conclusions: SO17: Conclusions: Percentage of Incentive StudiesPercentage of Incentive Studies

Results of all five studies have been Results of all five studies have been consistent (3% - 100% of total pay)consistent (3% - 100% of total pay) Different incentive percentages resulted in the Different incentive percentages resulted in the

same level of performance: that is, higher same level of performance: that is, higher incentive percentages have not increased incentive percentages have not increased performance moreperformance more

Low percentages of incentive, as low as 3%, Low percentages of incentive, as low as 3%, have significantly increased performancehave significantly increased performance

(I realize this is basically the same answer as the answer to SO14: why the results of Frisch & Dickinson were particularly interesting - but I wanted youto note those results before we got to this point in the article.)

53

SO20: What is the major question SO20: What is the major question with respect to this research?with respect to this research?

Feedback was readily available in every study Feedback was readily available in every study but one, thus the major question:but one, thus the major question:

Did performance feedback sustain performance across Did performance feedback sustain performance across the incentive percentages? That is, if feedback was not the incentive percentages? That is, if feedback was not provided, would performance differ as a function of provided, would performance differ as a function of different incentive percentages?different incentive percentages?

(skipping sos 18&19 - you can do those on your own)

54

Schedules of Reinforcement, introSchedules of Reinforcement, intro

Results of comparisons of different schedules of Results of comparisons of different schedules of delivery (reinforcement) are ambiguous at bestdelivery (reinforcement) are ambiguous at best

Although incentive pay increased performance in Although incentive pay increased performance in 7 of 8 studies, no uniform differences emerged 7 of 8 studies, no uniform differences emerged as a function of the schedule of deliveryas a function of the schedule of delivery

The preponderance of data from well controlled The preponderance of data from well controlled laboratory studies, absent implementation laboratory studies, absent implementation problems in the field, suggest that different ratio problems in the field, suggest that different ratio schedules of delivery result in comparable schedules of delivery result in comparable performanceperformance

55

SO21: Two factors that could account for the performance SO21: Two factors that could account for the performance differences in applied studies of ratio schedules differences in applied studies of ratio schedules (give example)(give example)

Although the data suggest that performance Although the data suggest that performance does not differ under different schedules of does not differ under different schedules of delivery, sometimes performance has been delivery, sometimes performance has been better under one schedule than anotherbetter under one schedule than another These differences have occurred only in applied These differences have occurred only in applied

settings, not well controlled laboratory studies settings, not well controlled laboratory studies What are the two factors?What are the two factors?

Rule statementsRule statements Social contingenciesSocial contingencies

56

ExampleExample

Results were very different in two very Results were very different in two very similar studies that compared hourly pay similar studies that compared hourly pay with a VR scheduleswith a VR schedules In one workers performed better when paid In one workers performed better when paid

hourlyhourly than when they received the incentives than when they received the incentives (Yukl & Latham, 1975)(Yukl & Latham, 1975)

In the other workers performed much better In the other workers performed much better when they received the incentives than when when they received the incentives than when they were paid hourly they were paid hourly (Latham & Dossett, 1978)(Latham & Dossett, 1978)

57

Yukl & Latham:Yukl & Latham: Hourly pay betterHourly pay better

Participants were tree plantersParticipants were tree planters Received a base payReceived a base pay $4.00 on a VR2 for planting a bag of trees$4.00 on a VR2 for planting a bag of trees

VR2 was achieved by tossing a coin and VR2 was achieved by tossing a coin and having workers guess “heads” or “tails”having workers guess “heads” or “tails” Workers had a one-in-two (50%) chance of getting Workers had a one-in-two (50%) chance of getting

the $4.00 each time, which probabilistically equals the $4.00 each time, which probabilistically equals a VR2 schedulea VR2 schedule

58

Yukl & Latham: Hourly pay betterYukl & Latham: Hourly pay better Several workers believed that the coin toss was gambling Several workers believed that the coin toss was gambling

and the “devil’s doing” and sinfuland the “devil’s doing” and sinful One of the supervisors was a part-time minister who also One of the supervisors was a part-time minister who also

believed the above, and thus did not always implement believed the above, and thus did not always implement the coin toss as plannedthe coin toss as planned

One worker believed management had cheated her on One worker believed management had cheated her on her taxes with respect to the incentives and told othersher taxes with respect to the incentives and told others Management had made a mistake but by the time it was Management had made a mistake but by the time it was

discovered and fixed, the study was overdiscovered and fixed, the study was over What the workers said about the incentives:What the workers said about the incentives:

The VR schedule was “unfair”The VR schedule was “unfair” ““Too much of a risk”Too much of a risk” “ “ A real let-down to lose after you have planted 1,000 trees” (one A real let-down to lose after you have planted 1,000 trees” (one

bag = 1,000 seedlings)bag = 1,000 seedlings)

(study conducted in the Bible belt in the south; yet in the other study…..)

59

Latham & Dossett: Incentives betterLatham & Dossett: Incentives better

Participants were from the same company, but Participants were from the same company, but were beaver trapperswere beaver trappers

Received a base payReceived a base pay $4.00 on a VR4 schedule for each beaver $4.00 on a VR4 schedule for each beaver

trappedtrapped VR4 was achieved by placing four different colored VR4 was achieved by placing four different colored

marbles in a bag and having workers guess the color marbles in a bag and having workers guess the color of the marble before they drew oneof the marble before they drew one

Workers had a one-in-four (25%) chance to be correct, which Workers had a one-in-four (25%) chance to be correct, which probabilistically equals a VR4probabilistically equals a VR4

60

Latham & Dossett: VR Incentives betterLatham & Dossett: VR Incentives better

All workers gathered around while a worker All workers gathered around while a worker “guessed” the color of the marble and cheered “guessed” the color of the marble and cheered when he guessed correctlywhen he guessed correctly

What the supervisor said about the variable What the supervisor said about the variable scheduleschedule The guys want to get on the variable schedule. The men The guys want to get on the variable schedule. The men

are inspired by it. They get a real kick out of it.are inspired by it. They get a real kick out of it. What the workers said about the schedule:What the workers said about the schedule:

We really get psyched out by the variable, manWe really get psyched out by the variable, man Like the variable, it adds something to the jobLike the variable, it adds something to the job It makes the job more exciting and fun; there is real It makes the job more exciting and fun; there is real

excitementexcitement

61

SO22: Oah & Dickinson:SO22: Oah & Dickinson:Linear vs Accelerated Piece Rate PayLinear vs Accelerated Piece Rate Pay

Does accelerated incentive pay affect Does accelerated incentive pay affect performance differently than linear performance differently than linear incentive pay?incentive pay? Linear incentive pay: The employee earns the Linear incentive pay: The employee earns the

same incentive pay regardless of how same incentive pay regardless of how productive he/she isproductive he/she is

Accelerated incentive pay: The employee Accelerated incentive pay: The employee earns more and more incentive pay the more earns more and more incentive pay the more productive he/she is productive he/she is

(SO: results - introduce the article)

62

Accelerated vs. Linear Pay, introAccelerated vs. Linear Pay, intro

Reward magnitude question:Reward magnitude question: The harder you run the harder it is to run The harder you run the harder it is to run

faster, therefore,faster, therefore, Do employees perform better when they Do employees perform better when they

receive increasingly more incentive pay for receive increasingly more incentive pay for higher and higher levels of performance?higher and higher levels of performance?

(more technically, as response effort (more technically, as response effort increases, is more and more money required increases, is more and more money required to increase performance?)to increase performance?)

63

Oah & Dickinson, 1992, introOah & Dickinson, 1992, intro

Modeled after the proof operator incentive Modeled after the proof operator incentive system at Union National Banksystem at Union National Bank

Participants: 40 college studentsParticipants: 40 college students Task: Data entry taskTask: Data entry task

Checks of different cash values were Checks of different cash values were presented on the computer screen and Ps presented on the computer screen and Ps entered the cash valuesentered the cash values

64

Oah & Dickinson, 1992, introOah & Dickinson, 1992, intro

Two conditionsTwo conditions Linear relation between performance and payLinear relation between performance and pay

Incentive amount remained the sameIncentive amount remained the same 1.5 exponentially-increasing relation between 1.5 exponentially-increasing relation between

performance and payperformance and pay Sessions: Fifteen 45-minute sessionsSessions: Fifteen 45-minute sessions Measure: Number of correctly completed Measure: Number of correctly completed

checkschecks

65

66

SO22: AnswerSO22: Answer

ResultsResults Participants in the two groups performed Participants in the two groups performed

comparablycomparably Participants in the 1.5 exponential group Participants in the 1.5 exponential group

earned significantly more moneyearned significantly more money ConclusionsConclusions

Linear and accelerated incentive pay did not Linear and accelerated incentive pay did not affect performance differently (more piece affect performance differently (more piece rate pay was not better)rate pay was not better)

The amount of incentive pay did not affect The amount of incentive pay did not affect performance differentlyperformance differently

67

SO26: Two factors that influence satisfaction ratings SO26: Two factors that influence satisfaction ratings with different types of incentive pay planswith different types of incentive pay plans

Exposure to all of the pay systems you are going to ask Exposure to all of the pay systems you are going to ask employees about (behavioral choice is the best method employees about (behavioral choice is the best method to obtain satisfaction data)to obtain satisfaction data) If you use a between group design and each participant is If you use a between group design and each participant is

exposed to only one pay system and then asked to rate his/her exposed to only one pay system and then asked to rate his/her satisfaction with it, you get different ratings than if each satisfaction with it, you get different ratings than if each participant is exposed to all pay systems before rating his/her participant is exposed to all pay systems before rating his/her satisfaction with it satisfaction with it

Makes sense - participants can only make meaningful ratings Makes sense - participants can only make meaningful ratings and comparisons after exposure to the different pay systemsand comparisons after exposure to the different pay systems

Probably true for other types of interventions as well - not just Probably true for other types of interventions as well - not just pay systems, so it is a good thing to keep in mind when doing pay systems, so it is a good thing to keep in mind when doing researchresearch

(no consistent data with respect to employee satisfaction with different types of pay systems - fixed vs incentive or different types of incentive pay)

68

SO26: Two factors that influence satisfaction ratings SO26: Two factors that influence satisfaction ratings with different types of incentive pay planswith different types of incentive pay plans

The amount of money employees earn under the The amount of money employees earn under the different pay systems - not surprisingly, “The pay system different pay systems - not surprisingly, “The pay system I like best is the one where I earn the most money.”I like best is the one where I earn the most money.” It is VERY difficult to equalize the amount of money individuals It is VERY difficult to equalize the amount of money individuals

earn under various pay conditions and systemsearn under various pay conditions and systems The optimal situation would be where a person earns, let’s say, The optimal situation would be where a person earns, let’s say,

$6.00 an hour when paid hourly and $6.00 an hour when paid $6.00 an hour when paid hourly and $6.00 an hour when paid incentivesincentives

With incentive systems, however, a person’s performance With incentive systems, however, a person’s performance determines how much he or she will earn, and it is very hard to determines how much he or she will earn, and it is very hard to predict how well a person will perform when you are setting up predict how well a person will perform when you are setting up the incentive rates at the beginning of a study the incentive rates at the beginning of a study

(this is very influential factor and one that makes it difficult to assess employee satisfaction with different pay systems)

69

SO24: Do results from the lab SO24: Do results from the lab generalize to actual work settings?generalize to actual work settings?

Reviews of incentive studies, though few in Reviews of incentive studies, though few in number, have indicated that the results of field number, have indicated that the results of field studies and laboratory studies are similarstudies and laboratory studies are similar Jenkins (1986), Jenkins, Mitra, Gupta & Shaw (1998)Jenkins (1986), Jenkins, Mitra, Gupta & Shaw (1998) Hantula (2001)Hantula (2001)

We have found similarities as wellWe have found similarities as well Frisch & Dickinson (1990)Frisch & Dickinson (1990) LaMere, Dickinson, Henry, Henry & Poling (2000)LaMere, Dickinson, Henry, Henry & Poling (2000)

In both, performance increased significantly when participants In both, performance increased significantly when participants received only 3% of their total or base pay in incentivesreceived only 3% of their total or base pay in incentives

In both, higher percentages of incentives did not increase In both, higher percentages of incentives did not increase performance furtherperformance further

(as I indicated earlier - important!!)

70

SO24: Also true for other IVsSO24: Also true for other IVs Locke, E. A. (1986) (Ed.). Locke, E. A. (1986) (Ed.). Generalizing from laboratory to Generalizing from laboratory to

field settingsfield settings. Lexington, MA: D.C. Heath & Company. Lexington, MA: D.C. Heath & Company Each article in the book analyzed the extent to which the results Each article in the book analyzed the extent to which the results

of laboratory and field studies were similar for a particular of laboratory and field studies were similar for a particular performance improvement interventionperformance improvement intervention

When there was sufficient data to make the comparison, every When there was sufficient data to make the comparison, every review reported that the results in laboratory and field settings review reported that the results in laboratory and field settings were similarwere similar

True for monetary incentives, feedback, goal setting, training, True for monetary incentives, feedback, goal setting, training, participation (among others)participation (among others)

Interestingly, the author who reviewed feedback (Kopelman) Interestingly, the author who reviewed feedback (Kopelman) reported that while the general effects of feedback were the reported that while the general effects of feedback were the same in both settings, the effects of feedback were actually less same in both settings, the effects of feedback were actually less in lab studies; that is, the results from the laboratory in lab studies; that is, the results from the laboratory underestimatedunderestimated the extent to which feedback affected the extent to which feedback affected performance in actual work settings performance in actual work settings

This makes sense - why, based on what you learned about feedback This makes sense - why, based on what you learned about feedback in U6?in U6?

(next slide, quote from Locke)

71

SO24: Quote from Locke, p. 6 SO24: Quote from Locke, p. 6 (NFE)(NFE)

Both college students and employees appear to respond Both college students and employees appear to respond similarly to goals, feedback, incentives, participation, similarly to goals, feedback, incentives, participation, and so forth, perhaps because the similarities among and so forth, perhaps because the similarities among these subjects (such as in values) are more crucial than these subjects (such as in values) are more crucial than their differences. Task differences do not seem to be their differences. Task differences do not seem to be overwhelmingly important. Perhaps all that is needed is overwhelmingly important. Perhaps all that is needed is that the participants in either setting become involved in that the participants in either setting become involved in what they are doing.what they are doing.

(handy book to know about)

72

SO25: Honeywell-Johnson et al. articleSO25: Honeywell-Johnson et al. article

Purpose of the study (NFE)Purpose of the study (NFE) To compare the effects of individual and small To compare the effects of individual and small

group monetary incentives on the performance group monetary incentives on the performance and satisfaction of and satisfaction of high performershigh performers

Secondary purposeSecondary purpose To assess the feasibility of using simulated To assess the feasibility of using simulated

groups to examine the effects of small group groups to examine the effects of small group incentives on performanceincentives on performance

(we examined small group incentives, but results may well generalize to any type of performance consequence that is dependent upon the group’s performance:grade on a project or in a class??)

73

SO25A: Conceptually why might individual incentives control SO25A: Conceptually why might individual incentives control performance more effectively than small group incentives?performance more effectively than small group incentives?

When individuals are paid individual incentives, the When individuals are paid individual incentives, the amount of pay they earn is directly dependent on their amount of pay they earn is directly dependent on their own performance. Thus, they have complete control over own performance. Thus, they have complete control over what they earnwhat they earn

With small group incentives, the amount of pay workers With small group incentives, the amount of pay workers receive is not only dependent on their own performance, receive is not only dependent on their own performance, but on the performance of others in the group. Thus, but on the performance of others in the group. Thus, they can’t influence their earnings to the same extent as they can’t influence their earnings to the same extent as they can when they are paid individual incentivesthey can when they are paid individual incentives

(both points are important)

74

SO25B: On the other hand, why might small group incentives control SO25B: On the other hand, why might small group incentives control performance just as well as individual incentives?performance just as well as individual incentives?

When the group is small, certainly when the group is When the group is small, certainly when the group is only 2 – 3 members, the individual can still greatly only 2 – 3 members, the individual can still greatly influence the performance of the group, and hence his or influence the performance of the group, and hence his or her pay. There is still a pretty tight contingency between her pay. There is still a pretty tight contingency between performance and pay (Malott’s certainty factor?).performance and pay (Malott’s certainty factor?).

But, as the group size increases, the individual’s But, as the group size increases, the individual’s contribution to the group’s performance becomes less contribution to the group’s performance becomes less and less, and earnings are not as dependent upon their and less, and earnings are not as dependent upon their own performanceown performance

75

SO26: Summarize the results of studies that have compared individual SO26: Summarize the results of studies that have compared individual incentives and equally-divided small group incentives, intro incentives and equally-divided small group incentives, intro

Equally-divided small group incentives are the most Equally-divided small group incentives are the most common type of small group incentives in business and common type of small group incentives in business and industryindustry

The incentives that a person gets depends upon how The incentives that a person gets depends upon how well the entire group performswell the entire group performs

Each individual in the group gets the same amount of Each individual in the group gets the same amount of incentive, regardless of his or her contributionincentive, regardless of his or her contribution For example, if a group completes an average of 100 widgets For example, if a group completes an average of 100 widgets

per hour during the week, each member earns an additional per hour during the week, each member earns an additional $100.00 per week in incentives ($1.00 per widget in the average)$100.00 per week in incentives ($1.00 per widget in the average)

If one worker averages only 90 widgets per hour and another If one worker averages only 90 widgets per hour and another averages 110, they both get the same amount of incentiveaverages 110, they both get the same amount of incentive

(include range of participants in the small groups in these studies - this is important)

76

SO26: Summarize the results of studies that have compared individual SO26: Summarize the results of studies that have compared individual incentives and equally-divided small group incentives, intro incentives and equally-divided small group incentives, intro

Only five studies have compared performance when Only five studies have compared performance when individuals were paid individual incentives and when they individuals were paid individual incentives and when they were paid small group incentiveswere paid small group incentives

Groups have ranged in size from 2 - 12 membersGroups have ranged in size from 2 - 12 members In 4 of the 5 studies, equally-divided small group In 4 of the 5 studies, equally-divided small group

incentives sustained performance as well as individual incentives sustained performance as well as individual monetary incentivesmonetary incentives

While there are not a lot of satisfaction data available, While there are not a lot of satisfaction data available, when satisfaction was examined, participants reported when satisfaction was examined, participants reported that they were equally satisfied with the individual and that they were equally satisfied with the individual and small group incentives small group incentives

(include range of participants in the small groups in these studies - this is important)

77

SO27A: When would an individual be expected to SO27A: When would an individual be expected to perform the same when paid individual incentives and perform the same when paid individual incentives and

small group incentives and why?small group incentives and why? When all members of the small group, including When all members of the small group, including

the individual, perform at approximately the same the individual, perform at approximately the same levellevel

Why?Why? If all group members perform at approximately If all group members perform at approximately

the same level, then their pay would not differ the same level, then their pay would not differ much when they were paid individual much when they were paid individual incentives and when they were paid small incentives and when they were paid small group incentivesgroup incentives

(this seems to be a difficult notion for students to understand: example on next slide)

78

SO27A: When would an individual be expected to SO27A: When would an individual be expected to perform the same when paid individual incentives and perform the same when paid individual incentives and

small group incentives and why?small group incentives and why? If all group members perform at approximately the same level, then If all group members perform at approximately the same level, then

their pay would not differ much when they were paid individual their pay would not differ much when they were paid individual incentives and when they were paid small group incentivesincentives and when they were paid small group incentives Assume: under the individual incentive condition, a person is paid Assume: under the individual incentive condition, a person is paid

1010¢ ¢ per widget assembled. If the individual assembled 50 widgets, per widget assembled. If the individual assembled 50 widgets, he or she would earn $5.00 in incentive payhe or she would earn $5.00 in incentive pay

Assume: under the group incentive condition, each individual gets Assume: under the group incentive condition, each individual gets paid 10paid 10¢ ¢ per widget based on the average performance of the per widget based on the average performance of the members of the group. If each individual in a 5-person group members of the group. If each individual in a 5-person group assembled 50 widgets the total number of widgets assembled by assembled 50 widgets the total number of widgets assembled by the group would be 250, and the individual would still earn $5.00 the group would be 250, and the individual would still earn $5.00 in incentive payin incentive pay

250/5 = 50, 50 X 10250/5 = 50, 50 X 10¢ ¢ = $5.00= $5.00 Essentially, the pay contingency is the same for the above individual Essentially, the pay contingency is the same for the above individual

whether or not he or she is paid individual or small group monetary whether or not he or she is paid individual or small group monetary incentives. We analyze contingencies from the perspective of the incentives. We analyze contingencies from the perspective of the behaverbehaver. .

(we know, as does the individual of course, that they are being paid either individual or small group incentives, but if they get paid the same, the contingencybetween their performance and pay is the same under both pay systems)

79

SO27B: When would an individual be expected to perform better SO27B: When would an individual be expected to perform better when paid individual incentives and perform worse (decrease when paid individual incentives and perform worse (decrease

performance) when small group incentives? Why?performance) when small group incentives? Why?

When an individual was a high performer in comparison to When an individual was a high performer in comparison to the other members in the groupthe other members in the group

Why?Why? A top performer would earn less money when he or A top performer would earn less money when he or

she was paid small group incentives than when she or she was paid small group incentives than when she or she was paid individual incentives because of the she was paid individual incentives because of the lower performance of the other members of the grouplower performance of the other members of the group

Hence, over time, the high performer may decrease his Hence, over time, the high performer may decrease his or her performance because his or her earnings or her performance because his or her earnings decreasedecrease

(example on the next page)

80

SO27B: When would an individual be expected to perform better SO27B: When would an individual be expected to perform better when paid individual incentives and perform worse (decrease when paid individual incentives and perform worse (decrease

performance) when small group incentives? Why?performance) when small group incentives? Why? Assume: under the individual incentive condition, a person is paid 10Assume: under the individual incentive condition, a person is paid 10¢ ¢

per widget assembled. If the individual assembled 50 widgets, he or per widget assembled. If the individual assembled 50 widgets, he or she would earn $5.00 in incentive payshe would earn $5.00 in incentive pay

Assume: under the group incentive condition, each individual gets paid Assume: under the group incentive condition, each individual gets paid 1010¢ ¢ per widget based on the average performance of the members of per widget based on the average performance of the members of the group. the group. Also, now assume each of the other individuals in a 5-person group Also, now assume each of the other individuals in a 5-person group assembled assembled 3535 widgets. The total number of widgets assembled by the widgets. The total number of widgets assembled by the group would be 190 (4 members X 35 = 140, plus the 50 widgets group would be 190 (4 members X 35 = 140, plus the 50 widgets assembled by the top performer). assembled by the top performer). The individual would only earn $3.80 in incentive pay.The individual would only earn $3.80 in incentive pay. 190/5 = 38, 38 X 10190/5 = 38, 38 X 10¢ ¢ = $3.80= $3.80

Our top performer thus may perform lower when paid small group Our top performer thus may perform lower when paid small group incentives than when paid individual monetary incentivesincentives than when paid individual monetary incentives Recognizing of course that if he or she did increase performance, he or she Recognizing of course that if he or she did increase performance, he or she

would earn even less money in incentives. For example, if our top would earn even less money in incentives. For example, if our top performer now only assembled 35 widgets, he or she would earn only performer now only assembled 35 widgets, he or she would earn only $3.50 in incentive pay - however, the small difference between $3.50 and $3.50 in incentive pay - however, the small difference between $3.50 and $3.80 might not be sufficient to keep our top performer making 50 widgets$3.80 might not be sufficient to keep our top performer making 50 widgets

81

SO27: Thought question SO27: Thought question (NFE)(NFE) - what are the - what are the implications of this analysis for team/group projects in implications of this analysis for team/group projects in classes or business settings?classes or business settings?

Anyone want to share his or her thoughts Anyone want to share his or her thoughts on this?on this?

82

Honeywell-Johnson et al., intro (NFE)Honeywell-Johnson et al., intro (NFE)

Participants were 4 college studentsParticipants were 4 college students Task was a computerized task with four sub-Task was a computerized task with four sub-

tasks presented simultaneouslytasks presented simultaneously Memory task, arithmetic task, visual monitoring task Memory task, arithmetic task, visual monitoring task

and an auditory monitoring taskand an auditory monitoring task DV: points earned for correct responsesDV: points earned for correct responses Design: ABCB, 5-10 2-hour sessions per phaseDesign: ABCB, 5-10 2-hour sessions per phase

A = hourly pay with feedbackA = hourly pay with feedback B = individual incentives with feedbackB = individual incentives with feedback C = small group monetary incentives C = small group monetary incentives

83

Honeywell-Johnson et al., intro (NFE)Honeywell-Johnson et al., intro (NFE)

Group incentive conditionGroup incentive condition Participants were told that they were members of a 10-person Participants were told that they were members of a 10-person

group and their data would be combined with the point scores of group and their data would be combined with the point scores of the other nine members to determine the amount of incentivethe other nine members to determine the amount of incentive

Worked on networked computers to increase “believability” of this Worked on networked computers to increase “believability” of this deceptiondeception

At the end of the study, each participant was asked how many At the end of the study, each participant was asked how many members were in their group, and all responded “10”members were in their group, and all responded “10”

Their comments (some rather nasty and hostile) during the group Their comments (some rather nasty and hostile) during the group incentive condition indicated they believed they were in a group of incentive condition indicated they believed they were in a group of 1010

The group’s average performance was contrived/calculated in a The group’s average performance was contrived/calculated in a manner that insured that the participant’s performance was manner that insured that the participant’s performance was always quite a bit higher than the group’s average performancealways quite a bit higher than the group’s average performance

84

SO28:SO28: Results of the study andResults of the study and what they indicate what they indicate

Three of the four participants performed Three of the four participants performed an average of 14% lower (12%, 14%, and an average of 14% lower (12%, 14%, and 16%) when they were paid small group 16%) when they were paid small group monetary incentives than when they were monetary incentives than when they were paid individual incentivespaid individual incentives

The data suggest that high performers are The data suggest that high performers are indeed likely to decrease their indeed likely to decrease their performance when paid small group performance when paid small group monetary incentives (with N=10 members)monetary incentives (with N=10 members)

85

SO29SO29 29A: Which of the three pay systems did all four 29A: Which of the three pay systems did all four

high performers prefer?high performers prefer? All preferred the individual monetary incentive system All preferred the individual monetary incentive system

Even though they found the individual incentive system to be Even though they found the individual incentive system to be more stressful than the hourly pay condition (which was the more stressful than the hourly pay condition (which was the least stressful of all three)least stressful of all three)

All four said they preferred the individual monetary incentive All four said they preferred the individual monetary incentive system because they earned the most money system because they earned the most money

While this is a confound - it is also the case that in actual work While this is a confound - it is also the case that in actual work settings high performers would always earn more when they were settings high performers would always earn more when they were paid individual incentives than when they were paid small group paid individual incentives than when they were paid small group incentives, so I am not overly concerned about this confoundincentives, so I am not overly concerned about this confound

29B: Which of the three pay systems did the 29B: Which of the three pay systems did the majority of performers (3 of 4) find to be the majority of performers (3 of 4) find to be the mostmost stressful?stressful? The small group monetary incentive systemThe small group monetary incentive system

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SO29, NFE, but interesting…SO29, NFE, but interesting… The preference data are interestingThe preference data are interesting

Most people would probably assume that the individual Most people would probably assume that the individual incentive pay would be the most stressful of the three incentive pay would be the most stressful of the three pay systems, yet three of the four reported that the pay systems, yet three of the four reported that the group incentive system was the most stressfulgroup incentive system was the most stressful

Also, in spite of the fact that three of the four Also, in spite of the fact that three of the four participants found the hourly pay to be the participants found the hourly pay to be the least least stressful, all four preferred the individual incentive paystressful, all four preferred the individual incentive pay

We have confirmed the effects of group incentives on high We have confirmed the effects of group incentives on high performers in a subsequent study conducted by Dr. performers in a subsequent study conducted by Dr. McGee as her doctoral dissertation. It has been published McGee as her doctoral dissertation. It has been published in the in the Performance Improvement QuarterlyPerformance Improvement Quarterly (ISPI funded (ISPI funded the research)the research)

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QUESTIONS OR COMMENTS?QUESTIONS OR COMMENTS?

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Theory behind profit-sharingTheory behind profit-sharing Profit-sharing was not originally developed to increase Profit-sharing was not originally developed to increase

employee performance; rather it is based on “macro-employee performance; rather it is based on “macro-economic theory” (good of the company and the society)economic theory” (good of the company and the society)

Profit-sharing would increase the flexibility of labor costs Profit-sharing would increase the flexibility of labor costs for organizations (not decrease labor costs)for organizations (not decrease labor costs) When profits went up, labor costs would go upWhen profits went up, labor costs would go up When profits went down, labor costs would go downWhen profits went down, labor costs would go down

When profits were down, profit-sharing was supposed to When profits were down, profit-sharing was supposed to protect the company by automatically decreasing labor costsprotect the company by automatically decreasing labor costs

Protect the employees because the company could afford to Protect the employees because the company could afford to keep more employees rather than lay them offkeep more employees rather than lay them off

Ultimately, both of the above would protect the country’s Ultimately, both of the above would protect the country’s economyeconomy

Fewer people would lose their jobs and prevent the economy Fewer people would lose their jobs and prevent the economy from a deeper recessionfrom a deeper recession

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However, the catch….However, the catch….

Cost savings to companies was based on the Cost savings to companies was based on the notion that the base wages of employees would notion that the base wages of employees would be below market value. When profits were high, be below market value. When profits were high, employee wages would be above market value; employee wages would be above market value; when profits were low, employee wages would when profits were low, employee wages would be below market value. It has not worked out that be below market value. It has not worked out that way - rather predictably, perhaps, profit-sharing way - rather predictably, perhaps, profit-sharing has become “gravy.” Base salaries are at market has become “gravy.” Base salaries are at market value, so companies do pay out more when value, so companies do pay out more when profits are good, but don’t recoup sufficient labor profits are good, but don’t recoup sufficient labor costs when profits go down. costs when profits go down.