What Do Employees Really Want? Preference-Performance Inconsistencies Regarding Work Incentives * Sofia M. Lourenço ISEG/ULisboa and CSG/Advance Research Center [email protected]Cláudia F. Niza * We thank James Werbel, reviewers and participants at AOM 2015 for helpful comments. We gratefully acknowledge financial support from FCT – Fundação para a Ciência e Tecnologia (Portugal), research grant PTDC/EGE-GES/119607/2010 (national funding). All errors remain our own.
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What Do Employees Really Want?
Preference-Performance Inconsistencies Regarding Work Incentives*
where IMPMONEY (IMPFEED/IMPREC) is the standardized average of the three
questions in 7 point Likert-scales about the importance of monetary incentives
(feedback/recognition) previously described. Equation 3 is estimated with a pooled OLS
regression with standard errors clustered by rep.
Table 4 shows a positive and statistically significant main effect for money and
recognition, and no effect for feedback. These effects are consistent with those reported in table
3. More importantly, the table shows the interactions between the different incentives and the
importance attributed to those incentives which are also consistent with the results of table 3 that
used the incentive rankings. Table 4 shows a negative and statistically significant interaction
between MONEY and IMPMONEY during the experiment (𝜎1=-13.24, p-value<.01). This
suggests that the higher the importance attributed to monetary incentives, the smaller the impact
of monetary incentives on performance. We investigate further this relationship and find, in
untabulated results of equation 1, that monetary incentives have a positive effect on performance
for the group who rates the importance of monetary incentives below median and no effect for
those who rate it above median. The F test for the sum of main effect and interaction with
IMPMONEY is not statistically significant (γ1 + σ1=12.13-8.94= 3.19, F test for 𝛾1 + 𝜎1 = 0 is
0.24, p-value>.10). This evidence confirms that those who rate the importance of monetary
incentives high do not perform differently from the control group, while those who rate the
importance of monetary incentives low actually improve their performance, relatively to the
control group, when they receive this incentive.
Insert Table 4 about here
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Table 4 also shows a positive and significant interaction between feedback and the
importance attributed to feedback (𝜎2=12.30, p-value=<.05). Because the feedback main effect is
not statistically significant per se (𝛾2=3.11, p-value>.10), this positive interaction suggests that
feedback is only effective for those who rate the importance of feedback high. The F-test for the
sum of the main effect of feedback and interaction with IMPFEED confirms our expectation. The
sum is positive and statistically significant (γ2 + σ2=3.11+12.30= 15.41, F-test for 𝛾2 + 𝜎2=0 is
4.27, p-value<.05). We also investigate further this relationship and find, in untabulated results of
equation 1, that feedback has a positive effect on performance for the group who rates the
importance of feedback above median and no effect for those who rate it below median. Thus,
this evidence confirms that those who rate the importance of feedback high improve their
performance relatively to the control group once they start receiving feedback, while those who
rate the importance of feedback low actually do not improve relatively to the control group, when
they receive this incentive.
Lastly, we find that the interaction between recognition and the importance attributed to
recognition is not statistically significant (𝜎3=.10, p-value>.10). Because the recognition main
effect is statistically significant per se (𝛾3=11.41, p-value<.05), the non-significant interaction
suggests that recognition is effective regardless of the importance attributed to recognition. Even
though the F-test for the sum of the main effect of recognition with the interaction with IMPREC
is (weakly) not statistically significant (γ3 +σ3=11.41+.10= 11.51, F-test for 𝛾3 + 𝜎3=0 is
2.38, p-value=.13), our analysis by partitions confirms our speculation. In untabulated results of
equation 1, we find that recognition has a positive effect on performance for both the group who
rates the importance of recognition above median and for the group who rates the importance of
recognition below median. Thus, this evidence confirms that regardless of the ex ante importance
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attributed to recognition, this incentive works for all performers regardless how they rate its
importance as they all improve relatively to the control group once they start receiving
recognition.
Overall, the results presented in table 4 are overwhelmingly consistent with those present
in table 3, and we conclude that H2a is only corroborated for feedback, while H2b is supported
for money and recognition.
To analyze the moderating effects of tenure and past experience with the different
incentives, we run full interacted models of equations 2 and 3 as well as partitions of those
models.
Table 5 and 6 show the results for the moderating effect of tenure. The results show that a
higher tenure is not associated with a better consistency between ex-ante preferences (first ranked
incentive or higher importance ratings) and performance suggesting that these preference
inconsistencies do not seem to result from an insufficient work experience. Untabulated results
show that this is also the case of past experience with the different incentives, similarly
suggesting no learning effects. Therefore, H3a is rejected and H3b is supported.
Robustness tests
To evaluate the robustness of our results, we performed several additional tests. We start
by estimating our models with a Tobit regression to account for the fact that our data is censored
Insert Table 5 about here
Insert Table 6 about here
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at the bottom. Performance is the ratio of sales relative to goals and hence cannot be below 0. The
results reported hold in this specification. We also estimated our models with fixed and random
effects per rep and the results are also qualitatively unchanged. Finally, we explore whether the
importance attributed to a given incentive impacts the effect of the other incentives. We run
equation 3 three times again using as the importance variable i) IMPMONEY, ii) IMPFEED, and
iii) IMPREC. Untabulated results show that there are no statistically significant interactions
between the importance attributed to one incentive and the manipulation of other incentives.
Additionally, the results are consistent with the ones present in table 4, both for the main effects
and the interactions.
DISCUSSION AND CONCLUSION
We use a longitudinal field experiment to examine how preferences for different
incentives (money, recognition and feedback) influence the effectiveness of those incentives on
performance behavior. We analyze ex-post objective performance data from different incentive
manipulations in light of ex-ante incentive preferences collected in the pre-experimental period
via a questionnaire. Results from our study expose several inconsistencies in employee
preferences for performance incentives drawn from a natural organizational setting.
First, we show that average preference rankings do not translate into corresponding
performance levels. Employees attribute a significantly higher importance to monetary incentives
and feedback in terms of their motivational role for job performance and significantly less to
recognition. This rank order in stated preferences for different incentives is robust to the
elicitation method (ordinal or continuous scales). The importance attributed to different
incentives does not significantly vary per age, tenure or income. We find that these stated
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preferences tend to be on average discrepant with actual performance (revealed preferences). Our
results show that on average (and between subjects) employees prefer money and this incentive
yields a significant performance improvement. However, employees overestimate the impact of
feedback because this is the second preferred incentive but yields on average no significant
improvement in performance. This overestimated effect may be due to the frequent use of
feedback in organizations as one of the most common reinforcers to influence employees’
behavior (Balcazar et al. 1985; Kluger & DeNisi, 1996; Alvero et al., 2001). Familiarity may
inflate the perception of effectiveness. Finally, employees underestimate the impact of
recognition as this is the least preferred incentive but yields a performance improvement similar
to money. This is likely due to the discounted impact of peer effects and social comparison
processes in the workplace. Second, by analyzing within subjects preferences and behavior we
find further inconsistencies. Employees who receive their first ranked incentive performed no
better than those who received that incentive but did not rank it first, except for the feedback
condition. Specifically, we find that money only works for those who do not rank it first (or rate
its importance below median), feedback works only for those who rank it first (or rate it above
median), and recognition works for everyone regardless of their preferences. Finally, there is no
evidence of learning effects, which suggests that these biases may be grounded in lay rationalism,
and hence more likely to be resistant to experimental learning because it is not grounded on
cognitive misperceptions (as most forecasting bias are) but in more engrained shared belief
systems that may not be easily confronted.
Our results pose two key questions to be discussed. On one hand why performance is not
improved when employees receive their preferred incentive. On the other hand, why there seems
to be no evidence of learning effects. Regarding the former, it may have been the case that
employees reported their preferences regarding their perception of how different incentives
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impact their motivation, satisfaction or attention in the workplace – and may not know exactly
what improves their objective performance. For instance, employees may react negatively to the
implementation of recognition programs in the organization, expecting to benefit more from
monetary incentives or feedback in terms of their performance and satisfaction. But we call
special attention to the fact the different incentives were not evaluated and ranked in abstract
terms or regarding expected preferences for the general population. The questions were posed
specifically about their impact in employees performance, both their preferred ranking between
incentives and their importance to strive at work (“How important or unimportant is each
characteristic for you to do a good job?; “How important or unimportant is each characteristic to
motivate you to excel in your job?”). Therefore, an overall positive significant relationship
between stated preferences and performance would have been a natural result if employees truly
knew their preferences. It could also be that in most organizations employees do not have voice
regarding which incentives are implemented. People repeatedly accept the default options that
have been chosen by others (Carroll et al 2009). In workplace settings, regulated by contractual
arrangements and hierarchical work relationships, employees may not expect to have any
influence regarding organizational compensation decisions and thus no expectation violation
occurs (Morrison & Robinson 1997) – and this acceptance may prevent employees to perform
poorly when companies implement incentives that were not desired. People may also accept
defaults because they believe that the person who set the default was making a carefully
considered decision (Madrian & Shea, 2001; Beshears et al., 2008) and this effect is a plausible
scenario in employer-employee relationships.
Preference strength moderates performance effects in very distinct ways according to
different incentives and this effect is likely to be explained by the specificity of (expected versus
experienced) utility gains from each incentive. The negative impact of the importance attributed
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to money may be due to the unmet expectations of utility gains from monetary incentives.
Research has shown that people who place too much importance on monetary rewards may
actually be working against their experienced utility because the utility gains from money do not
match the high expectations (Frey & Jengen 2001: Kanhneman et al 1997). On the other hand,
the strong and positive effect of a preference for feedback may be explained by the fact that –
from all three incentives under analysis -feedback is the one that provides the more intangible or
‘intrinsic’ benefits. Thus only employees that report very high importance ratings on such an
incentive are likely to experience the utility gains from receiving it. Finally, the null effect of
preference strength for recognition suggests that public acknowledgment of competence is a
shared preference by all employees (with or without clear awareness on their part). There is
abundant evidence that people underestimate the power of social influence and that individuals
do not fully realize how much their behavior is influenced by the expectation of positive
reinforcement from others (e.g., Carr & Walton, 2014; Exline et al 2004).
Regarding the latter, this question raises more intricate challenges. The absence of
positive results from tenure and experience with incentives (both previous experience and pre-
post experimental changes in reported preferences) do not seem to support most of the proposed
explanations about the sources of preference inconsistencies being grounded in forecasting errors
that should be reduced with experiential learning. In this regard, Meyvis et al 2010 explored why
people might fail to learn from experience, even when the experience itself has not been
forgotten. They propose that, aside from a failure to accurately recall their experience, people
also persist in their forecasting errors because they misremember their initial forecast. A bias to
recall their forecast as consistent with their actual experience obscures people’s forecasting error.
As a result, people are unlikely to realize the need to update their forecasting strategies and
continue to rely on those same strategies for subsequent forecasts. Thus, either people are not
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using experience to update their preferences or (as we propose the most suitable justification) the
reasons lie outside forecasting errors. The results seem to offer support for the lay rationalism
hypothesis which is the mechanism more likely to be resistant to experimental learning because it
is not grounded on cognitive misperceptions (as most forecasting bias are) but in more engrained
shared belief systems that may not be easily confronted.
Nevertheless, overall results show that giving employees what they claim to prefer does
not result in significantly better work performance which is contrary to the assumptions of most
standard theories in economics and management. Taken together these results highlight the
limited predictive power of stated preferences for work incentives with respect to their translation
into objective performance measures. Hence, caution should be used in taking preferences at face
value and actually designing incentive systems based on stated preferences. These inconsistencies
call attention to the need for rethinking how employee reward preferences should be taken into
consideration when developing incentive programs. These results highlight the need for
employee education regarding work motivation because lay conceptions are likely to have a
strong impact in job choices and employee responses to organizational incentive programs
including job satisfaction, organizational commitment and turnover intentions (e.g., Misra et al
2013). There may be the need to consider both tailored incentive programs according to
individual preferences – as it could be the case of feedback – but also the power of fundamental
motivational processes as illustrated by the recognition condition – that appear to strike core
human needs to which employees respond to regardless of their stated preferences. Money seems
to fulfil (on average) preferences for work incentives but the key insight to be conveyed to
employees should be that an overemphasis placed on the importance on monetary incentives may
be counterproductive by reducing the experienced utility from money.
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This study is not without caveats. Although field experiments score high on internal
validity, the generalization of the results may be a concern as the field experiment was done in a
single research site. As such, the characteristics of this firm and of its employees may play a role.
For example, the fact that participants are paid an hourly wage poses the question that our results
may not apply to more fixed-pay contractual arrangements. Theory also cautions about the
measurement of incentive preferences. Different elicitation methods may lead to different
answers about those preferences. We tried to overcome this issue, by using two different methods
and the results our overwhelmingly consistent.
These limitations represent several avenues for future research. On one hand, it would be
interesting to analyze whether our results hold in settings where employees are paid a fixed salary
at the end of the month and not an hourly wage. This type of contracts may lead to different
preferences as monetary incentives may be more or less relevant in total pay. On the other hand,
and to avoid the criticism associated with a stated preference, future studies can give employees
the actual choice of their incentive (and not just a stated preference) and analyze performance
after the implementation of the desired incentive.
32
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40
Table 3. Treatment effects and macthing1)
Dependent variable:
Average sales/goals per rep-week
(1) (2)
MONEY 2.95
(2.60)
2.08
(3.17)
FEED 1.27
(2.74)
2.94
(2.79)
REC -2.05
(3.05)
-2.67
(3.19)
MONEY*MATCH 1.82
(3.59)
FEED*MATCH -5.78
(4.40)
REC*MATCH 6.41
(5.21)
MONEY*EXP 12.33**
(6.12)
16.70**
(8.00)
FEED*EXP 4.66
(5.27)
-2.14
(5.49)
REC*EXP 13.10**
(5.08)
13.43**
(5.37)
MONEY*MATCH*EXP -8.57
(9.57)
FEED*MATCH*EXP 20.07**
(8.28)
REC*MATCH*EXP -1.23
(7.31)
Week dummies Yes Yes
F tests
𝛾1+ 𝜎1=0 1.26
𝛾2+ 𝜎2=0 5.73**
𝛾3+ 𝜎3=0 3.46*
N 432 432
Reps 119 119
Adjusted R-squared .41 .41
1) Polled OLS regression with clustered standard errors per rep. Coefficients (standard errors) are reported. Constant is included
but not reported. All tests are two-sided, * denotes significant at 10% level, ** at 5% level, *** at 1% level. MONEY is a dummy
variable that is equal to 1 if the sales rep received the monetary incentive treatment and is equal to zero otherwise. FEED is a
dummy variable that is equal to 1 if the sales rep received the feedback treatment and is equal to zero otherwise. REC is a dummy
variable that is equal to 1 if the sales rep received the recognition treatment and is equal to zero otherwise. EXP is a dummy
variable that is equal to 1 in the eight weeks of the experimental period and is equal to zero otherwise. MATCH is a dummy
variable that is equal to 1 if the sales rep was randomly allocated to the 1st ranked incentive and is equal to zero otherwise.
41
Table 4. Treatment effects and importance ratings
Dependent variable: Average sales/goals per rep-week (1)
IMPMONEY .79
(1.32)
IMPFEED -2.82
(1.86)
IMPREC 3.08*
(1.67)
MONEY 2.11
(2.58)
FEED .11
(2.80)
REC -3.43
(3.22)
MONEY*IMPMONEY -.79
(2.13)
FEED* IMPFEED -1.95
(3.04)
REC* IMPREC -3.08
(2.42)
IMPMONEY*EXP -2.16
(2.63)
IMPFEED*EXP -1.55
(4.80)
IMPREC*EXP .17
(4.06)
MONEY*EXP 12.13**
(5.30)
FEED*EXP 3.11
(5.45)
REC*EXP 11.41**
(5.39)
MONEY*IMPMONEY* EXP -8.94**
(4.14)
FEED*IMPFEED*EXP 12.30**
(5.36)
REC*IMPREC*EXP .10
(3.57)
Week dummies Yes
F tests
𝛾1+ 𝜎1 0.24
𝛾2+ 𝜎2 4.27**
𝛾3+ 𝜎3 2.38
N 432
Reps 119
Adjusted R-squared .42
42
1) Polled OLS regression with clustered standard errors per rep. Coefficients (standard errors) are reported. Constant is included
but not reported. All tests are two-sided, * denotes significant at 10% level, ** at 5% level, *** at 1% level. MONEY is a dummy
variable that is equal to 1 if the sales rep received the monetary incentive treatment and is equal to zero otherwise. FEED is a
dummy variable that is equal to 1 if the sales rep received the feedback treatment and is equal to zero otherwise. REC is a dummy
variable that is equal to 1 if the sales rep received the recognition treatment and is equal to zero otherwise. EXP is a dummy
variable that is equal to 1 in the eight weeks of the experimental period and is equal to zero otherwise. IMPMONEY is the
standardized average importance attributed to monetary incentives. IMPFEED is the standardized average importance attributed
to feedback. IMPREC is the standardized average importance attributed to recognition.
43
Table 5. Treatment effects, matching, and tenure1)
Dependent variable:
Average sales/goals per rep-week
(1) (2) (3)
Sample All High Tenure Low Tenure
STDTEN*EXP 2.75
(3.03)
MONEY*EXP 15.99*
(8.17)
24.30***
(6.55)
8.91
(13.89)
FEED*EXP .22
(4.97)
3.22
(5.54)
-11.79
(11.88)
REC*EXP 13.06**
(5.42)
16.30**
(8.03)
12.69
(7.66)
MONEY*EXP*STDTEN -4.50
(4.50)
FEED*EXP*STDTEN 14.13
(10.37)
REC*EXP*STDTEN -2.27
(5.52)
MONEY*MATCH*EXP -10.42
(10.22)
-3.56
(6.99)
-7.47
(15.85)
FEED*MATCH*EXP 17.63**
(8.55)
23.39*
(13.27)
19.84
(12.73)
REC*MATCH*EXP 1.24
(7.96)
6.04
(8.97)
-17.46**
(8.22)
MONEY*MATCH*EXP*STDTEN 5.99
(4.89)
FEED*MATCH*EXP*STDTEN -18.14*
(9.90)
REC*MATCH*EXP*STDTEN 28.13
(29.57)
Week dummies Yes Yes Yes
F tests
𝛾1+ 𝜎1=0 9.95*** 0.02
𝛾2+ 𝜎2=0 4.13** 0.82
𝛾3+ 𝜎3=0 10.31*** 0.60
N 432 214 218
Reps 119 55 64
Adjusted R-squared .40 .48 .34
1) Polled OLS regression with clustered standard errors per rep. Coefficients (standard errors) are reported. For ease of
presentation, constant and pre-experimental variables and interactions are included but not reported. All tests are two-sided, *
denotes significant at 10% level, ** at 5% level, *** at 1% level. MONEY is a dummy variable that is equal to 1 if the sales rep
received the monetary incentive treatment and is equal to zero otherwise. FEED is a dummy variable that is equal to 1 if the sales
rep received the feedback treatment and is equal to zero otherwise. REC is a dummy variable that is equal to 1 if the sales rep
received the recognition treatment and is equal to zero otherwise. EXP is a dummy variable that is equal to 1 in the eight weeks of
the experimental period and is equal to zero otherwise. MATCH is a dummy variable that is equal to 1 if the sales rep was
randomly allocated to the 1st ranked incentive and is equal to zero otherwise. STDTEN is the standardized average of tenure in the
company.
44
Table 6. Treatment effects, importance ratings and tenure1)
Dependent variable:
Average sales/goals per rep-week
(1) (2) (3)
Sample All High Tenure Low Tenure
STDTEN*EXP 10.35
(11.56)
IMPMONEY*EXP -4.24
(2.76)
-5.41*
(3.11)
-1.05
( 4.31)
IMPFEED*EXP -2.94
(5.11)
7.43
( 5.51)
-7.81
(7.80)
IMPREC*EXP .71
(4.96)
-4.41
( 3.87)
1.45
(9.15)
IMPMONEY*EXP*STDTEN -9.15
(7.49)
IMPFEED*EXP*STDTEN 2.18
(5.73)
IMPREC*EXP*STDTEN -3.28
(2.65)
MONEY*EXP 10.91*
(6.44)
21.38***
(6.47)
12.69
(9.69)
FEED*EXP .63
(6.37)
12.67*
(7.11 )
-7.81
(10.43)
REC*EXP 7.35
(5.61)
20.32**
(7.70)
3.93
(7.44)
MONEY*EXP*STDTEN -9.40
(11.22)
FEED*EXP*STDTEN -8.21
(18.46)
REC*EXP*STDTEN -4.91
(11.11)
MONEY*IMPMONEY* EXP -4.34
(4.94)
-3.66
(6.70)
-14.27*
(7.69)
FEED*IMPFEED*EXP 14.65**
(6.02)
12.99
(8.09)
15.78
(10.76)
REC*IMPREC*EXP 5.60
(5.33)
.23
(5.32)
1.32
(7.08)
MONEY*IMPMONEY* EXP*STDTEN 20.31**
(9.39)
FEED*IMPFEED*EXP*STDTEN .91
(12.05)
REC*IMPREC*EXP*STDTEN 19.50
(14.34)
Week dummies Yes Yes Yes
N 432 214 218
Reps 119 55 64
Adjusted R-squared .41 .47 .35
45
1) Polled OLS regression with clustered standard errors per rep. Coefficients (standard errors) are reported. For ease of
presentation, constant and pre-experimental variables and interactions are included but not reported. All tests are two-sided, *
denotes significant at 10% level, ** at 5% level, *** at 1% level. MONEY is a dummy variable that is equal to 1 if the sales rep
received the monetary incentive treatment and is equal to zero otherwise. FEED is a dummy variable that is equal to 1 if the sales
rep received the feedback treatment and is equal to zero otherwise. REC is a dummy variable that is equal to 1 if the sales rep
received the recognition treatment and is equal to zero otherwise. EXP is a dummy variable that is equal to 1 in the eight weeks of
the experimental period and is equal to zero otherwise. IMPMONEY is the standardized average importance attributed to
monetary incentives. IMPFEED is the standardized average importance attributed to feedback. IMPREC is the standardized
average importance attributed to recognition. STDTEN is the standardized average of tenure in the company.