History and Effectiveness of Pay Systems: A Study on Individual and Group Monetary Incentives

1. Schedule: Today and Wednesday, Lecture Monday, 11/14, Exam PSY 6450Unit 6 Performance and Pay

2. History of my interest in pay systems • Union National Bank, Little Rock, AR • Individual monetary incentive systems implemented in early 1980s • William B. Abernathy, H. Hall McAdams, Wayne Dierks, Kathleen McNally • By the late 1980s, 75 systems had been installed, covering 70% of the bank’s 485 employees • Productivity increases of 200%-300% • Net profit per employee $11,000 compared to $4,950 for other Little Rock banks • Program committee for ABA • While scheduling, call from someone important (Aamodt mentions UNB)

3. History of my interest in pay systems • The role of financial compensation in industrial motivation Opsahl & Dunnette (1966) • Appealed to researchers to conduct controlled laboratory studies because:

4. Opsahl & 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)

5. Individual Monetary Incentives:Research Since 1966* • In 1986, 20 years later: only 28 systematic studies of individual monetary incentives Jenkins (1986) • 12 years after that: 39 systematic studies of individual monetary incentives, lab & field Jenkins et al. (1998) • Meta-analytic review • Individual incentives had an overall effect size of .34 (medium) • Studies conducted by operant/expectancy researchers had stronger effects than goal-setting or cognitive *excludes survey studies (interesting – we know how to set up contingencies – note one category for OBM/expectancy)

6. Individual Monetary Incentives:Research Since 1966 • Things are a bit better now: 116 studies of individual incentives, lab and field (actually SO26) (Garbers & Konradt, 2014) • Meta-analytic review • Similar to Jenkins et al., individual incentives had an overall effect size of .32 (again, medium effect size) (broader search, Germany and included more European journals, but still if you think about it, not a lot of studies – there are thousands of studies related to goal setting)

7. Group Incentive Research* • 13 published studies as of 2005, Culig 2005 • 30 studies were found by Garbers & Konradt (2014) • Garbers & Konradt found that team-based monetary incentives increased performance more than individual incentives • Condly et al. (2003) found similar results: team-based monetary and non-monetary tangible incentives increased performance more than individual monetary and non-monetary tangible incentives in field studies, but only based on nine team-based studies • Only 8 studies have directly compared the effects of individual incentives and small group incentives (N = 2-12 group members) • My students and I have done 3 of those • No difference between individual and small group incentives • No direct/experimental studies of groups with more than 12 members * excludes survey studies

8. Prevalence in Business:Individual Monetary Incentives • 90% of Fortune 1000 companies have some type of individual incentive plan • 54% of 1300 companies surveyed by WorldatWork had individual incentive plans, exclusive of sales representatives • Rewards were based on specific employee performance criteria • 90% of 1,200 companies surveyed by Aon Hewitt reported shifting more of their compensation to individual variable pay plans, the highest % shift in 39 years (AmericanCompensationAssociation; 2010; Hewitt, 2015)

9. Prevalence in Business:Group Monetary Incentives • 87% of Fortune 1000 companies have work group or team incentives • Fortune 1000 companies increased their use of work group or team incentives by 50% during the past decade (given prevalence of both; lack of research is rather startling)

10. Effectiveness of monetary incentives • Jenkins et al. (1998) and Garbers & Konradt (2014) • Individual incentives: effect sizes of .32 and .34 • Garbers & Konradt (2014) • Team-based incentives: effect size of .45

11. Relative effectiveness of monetary incentives vs. other types of rewards • Condly et al. (2003), individual and group combined • Monetary incentives: effect size of .79 (27% gain in perfrmce) • Non-monetary tangible incentives: effect size of .38 (13% gain) • Stajkovic & Luthans (2003) meta-analysis of results of field studies in business organizations (72 studies) • Money improved performance 23% • Social recognition improved performance 17% • Objective feedback improved performance 10% • The combination of all three improved performance 45% (would be interesting to compare money vs. other types of tangible rewards in a direct study)

12. My research on incentive pay systems • My students and I began this research In the late 1980s when only about 20 systematic studies had been conducted • We began with questions raised by both Union National Bank and Opsahl & Dunnette • What relationship is there between the % of incentive pay and performance? • What relationship is there between the absolute amount of the incentive offered and performance? • Are small group incentives just as effective as individual incentives? • Do small group incentives decrease the performance of high performers? (provides some context for this unit as well as the Bucklin & Dickinson and Honeywell et al. article – and study objectives over that material)

13. Caveat: 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)

14. Finally, SO1: Components of a compensation plan • Security • Base pay (market value and job evaluation) • Benefits • Adjustments • Location (NYC vs. upstate NY) • Shift • Incentive: motivate and reward employees • Variable Pay • Individual • Group (Aamodt does not include this) • Organizational (computer programmers vs. secretaries, Business and engineering profs vs psychology vs English, behavior analysts tend only to focus on 3) )

15. SO2: The Motivation Problem with Hourly and Salary Pay • You get what you pay for If you pay for hours, you get hours, not performance. Economically it makes more sense for employees to take as much time as possible to complete their work. And, if you can finagle overtime, all the better (Overtime = 150% or 200% of base) • Consequences In hourly wage systems, there are clear consequences for performing below a minimally acceptable performance level (criticism, threats of dismissal), but there are no clear consequences for performing above that level. Thus, hourly wage systems tend to support minimally acceptable performance

16. SO3: Skinner on incentives • We know, without a doubt that monetary incentives will increase performance but • They have been given a bad rap - perhaps for good reasons - many object to them • Primary reason - they are exploitative • And they can be, but they don’t have to be - don’t throw the baby out with the bath water! • Skinner maintained that incentive systems may, in fact, be less aversive than hourly pay systems

17. SO3A: According to Skinner, what maintains performance under hourly wage systems? No one works on Monday morning because he is reinforced by a paycheck on Friday afternoon. The employee who is paid by the week works during the week to avoid losing a standard of living which depends upon a weekly wage. A supervisor who can discharge him is an essential part of the system. Rate of work is determined by the supervisor (with or without the pacing stimuli of a production line), and special aversive contingencies maintain quality. The pattern is therefore still aversive. Somewhat better contingencies are available under schedules of reinforcement based on counters rather 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 in general, by the way)

18. SO3B: Skinner on incentive systems Incentive systems: May evoke feelings of confidence, certainty of success, and enjoyment arising from a sense of mastery and effectiveness, and interest in the job as occurs when behaviors are frequently reinforced. • Note that Skinner is not addressing performance issues here, but rather addressing the fact that incentive systems may be less aversive emotionally. • Also, note the italicized section - this is important; include in your answer • Incentive systems are no different in this respect than any type of reinforcement system where individuals are frequently reinforced • Respondent behavior interpretation: R (work) ––> Sr (incentives) 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))

19. SO4: Descriptions of popular pay plans (NFE) • I just want to reassure you, I will not ask you any questions over this material, but I wanted to explain them to you because Aamodt did mention them • In SO6, I will talk a bit about profit sharing

20. Bucklin & Dickinson, intro, NFE • Barbara and I were interested in determining whether different types of monetary incentive systems affected performance differently (not whether incentives were effective, we knew they were) • We discovered, as did Jenkins et al., simply was not a lot of research • Only three thematic lines of research that have investigated/manipulated parameters of incentive systems • Percentage of incentive earned: 5 studies • Schedules of reinforcement: 8 studies • Per piece amount: 2 studies

21. Bucklin & Dickinson intro, cont, NFEThree Thematic Lines • The percentage of total pay or base pay earned in incentive pay • 3%-100% of total wages or base pay wages earned in incentive pay • Schedules of reinforcement • Incentives delivered on different fixed and variable ratio schedules (“CRF”, “FR2”, “VR2”, VR4”) • Linear, accelerating and decelerating piece rate pay systems • Piece rate amount remains constant, increases or decreases as the number of pieces completed increases

22. SO5A: Conclusions, for exam • Incentives increase performance • The critical determinant of performance is the ratio schedule contingency between performance and pay; that is, that • Individuals earn a specified amount of money for the number of work units they complete • Variations in the parameters of the incentive system do not appear to affect performance differently (quite unexpected - simple rule, the harder I work, the more I earn)

23. SO5B: Implications You don’t have to worry a lot about the details of how incentives/consequences are related to performance - as long as they ARE related in some type of ratio schedule, delivered fairly frequently, and supported by some type of on-going feedback system.

24. SO6: Three reasons why it is not surprising that profit sharing often does not increase performance • Profit sharing is the most prevalent variable pay plan • Also represents the “other end of the continuum” from individual incentives with respect to two very important variables that affect performance • Number of individuals whose performance contributes to the determination of how much money each employee gets • Disbursement system - how frequently the money is disbursed • So I am going to analyze this system, and you can do similar analyses for the ones “in between”

25. SO6: Essential features of profit sharing • When annual profits are above a predetermined level, part of those profits are distributed to employees • Formulas for distribution are quite complicated, but usually the amount of money that is distributed to any one employee is based on a percentage of the employee’s salary, thus employees do NOT get the same amount • The money is usually distributed annually, or more commonly, placed directly into the employee’s retirement account (tax benefits)

26. SO6: The first reason why profit sharing often does not increase employee performance • Profits are based on the aggregate performance of all members of the organization. Thus (depending upon the size of the company) one person’s performance contributes only a very small proportion to the total performance of the organization. Hence a person’s performance is not strongly related to his/her pay. • Even with only 100 employees, any one individual’s performance contributes only 1% to the total performance of the organization • In small companies, however, profit sharing might just affect performance (in sos, but not explained adequately for the exam; mistake - it’s not that everyone gets a small $$)

27. SO6: The second reason why profit sharing often does not increase employee performance • Profits are often affected by factors that (a) have little to do with the performance of individuals and (b) are outside of their control such as mergers, acquisitions, building a new factory or plant, investment of funds in research, product recalls making bonuses uncertain and the amount unpredictable (include these examples in your answer) • Union National Bank - the performance of the proof operators actually had little to do with the overall profitability of UNB (what is the main factor that influences bank profits?)

28. SO6: The third reason why profit sharing often does not increase employee performance • Annual distribution of profit-sharing bonuses or distribution of money into retirement accounts • Simply too delayed to have much effect on performance

29. Intro: Percentage of Incentive, Sos 9-15 • In most incentive systems employees receive a base pay and can earn additional money in incentives when performance exceeds a specified standard • Given that the total amount that can be earned remains constant, as the percentage increases, more of a person’s pay becomes dependent upon performance

30. Incentives as a Percentage of Total Pay

31. Percentage of Incentive Studies:Main Research Questions (NFE) • What is the lowest percentage of incentive pay that affects performance? • Do different percentages of incentive pay affect performance differently?

32. SO9: What’s the “magic” percentage of incentive according to compensation experts? • Magic number is 30% • Performance will not be affected if the percentage is less than 30% • Performance will not be appreciably higher if the percentage is greater than 30% (but in article; based on tradition - WWII, war labor relations board)

34. Frisch & Dickinson, 1990 • Participants: 75 college students • Five conditions • Hourly pay: (0% of pay) • Incentives: • Planned: 10%, 30%, 60%, or 100% of base pay • 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 sessions • Task: Simple assembly task Assembling parts from bolts, nuts and washers • Measure: Number of correctly assembled parts

35. Summary of Results: Frisch & Dickinson • Participants who were paid incentives performed significantly better than those who were paid hourly • Participants who were paid incentives performed comparably, regardless of the percentage • 3%, 13%, 25%, and 54% of base pay (graph next)

36. 25% 54% 3% 13% Incentive pay Mean number of quality parts Hourly pay Hourly pay Sessions

37. SO11A: The relationship between the amount of pay earned and the percentage of incentive Most $$ 0% 3% 13% 25% 54% Least $$ Mean dollars earned Sessions Inverse relationship between the amount earned and incentive percentage

38. SO11B: Why is that relationship important? • It helps answer the following two questions: • Did people perform better because they earned more money? • In other words, does the total amount of money earned affect performance? Is that a critical determinant of performance? • Did people perform better because they received more money per piece (per part assembled?) • In other words, does the amount of the per piece 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)

39. SO11B: So, why is that relationship important? • Participants who earned incentives made less money than those who were paid hourly, but performed significantly better; thus the total amount of money earned cannot account for the higher performance • Participants in the four incentive groups received different per piece incentives, yet they performed the same, thus the per piece incentive did not affect performance (in the past, this has given students some trouble; material in italics is important)

40. SO12: Frisch & Dickinson:Particularly Interesting Results • Those who received only 3% of their base pay in incentives - only 11¢per 45-minute session - performed significantly better than those paid hourly • Higher percentages of incentives did not result in better performance - rather participants who earned different percentages of incentives performed the same

41. LaMere et al. Field Study, 1996, intro • There is actually only one study objective for the exam over this study, but it was a very important study from our perspective • In Frisch & Dickinson we had found that • a very low incentive percentage (3%) significantly increased performance and • higher incentive percentages did not increase performance • Was that an artifact of the study being conducted in the laboratory? • In the LaMere et al. field study we were able to examine the effects of three incentive percentages (3%, 6%, and 9%) on the performance of actual workers SO13: Lowest and highest incentive percentage examined?

42. LaMere et al. Field Study, 1996, intro • Participants: 22 roll-off truck drivers • Deliver large waste disposal dumpsters to commercial and construction sites • Multiple baseline design across 2 groups • Hourly pay: G1, 20 weeks; G2 34 weeks • 3% incentive: G1, 28 weeks, G2: 15 weeks • 6% incentive: Both groups, 39 weeks • 9% incentive: Both groups, 107 weeks (collected data for almost 4 years!)

43. LaMere et al. Field Study, 1996, intro • Participants: 22 roll-off truck drivers • Deliver large waste disposal dumpsters to commercial and construction sites • Multiple baseline design across 2 groups • Group 1 • Hourly pay, 20 weeks • 3% incentive: 28 weeks • 6% incentive: 39 weeks • 9% incentive107 weeks • Group 2 • Hourly pay, 34 weeks • 3% incentive: 15 weeks • 6% incentive: 39 weeks • 9% incentive107 weeks (collected data for almost 4 years!;mb for only hourly/first incdntive pay; then 6% and 9% implemented simultaneously

44. Roll-off Trucks

45. LaMere et al. Field Study • Incentive pay • Per job incentive for above average weekly performance • Controlled for different types of jobs and the number of miles driven • Lost incentives for the week for a chargeable accident • Received as part of weekly paycheck, but the amount of incentives was listed separately on the pay stub • Feedback • Daily self-recorded feedback • Group performance was graphed weekly and publicly posted

46. Results: LaMere et al. • Both groups significantly increased their performance when the incentive system was introduced • Both groups maintained their high performance for the rest of the study (almost 3 years) • Both groups performed comparably when paid 3%, 6% and 9% incentives

47. Conclusions: LaMere et al. • Results supported our laboratory study • Small percentages of incentives, as low as 3% of total pay, can significantly increase performance • Higher percentages do not result in incrementally better performance • Small percentages of incentives can sustain performance over time (3%-9%)

48. SO15: Conclusions: Percentage of Incentive Studies • Results of all five studies were consistent (3% - 100% of total pay) • Different incentive percentages resulted in the same level of performance: that is, higher incentive percentages have not increased performance more • Low percentages of incentive, as low as 3%, have significantly increased performance (I realize this is basically the same answer as the answer to SO12: why the results of Frisch & Dickinson were particularly interesting - but I wanted you to note those results before we got to this point in the article.)

49. SO15: Contrasting results, Oah & Lee, 2011 (this part of the SO, NFE) • Workers in a simulated study (N=4) were more productive when they earned 100% of their pay in incentives than when they earned 10% of their pay in incentives • Conducted the study because they felt our laboratory simulation was faulty • Our sessions and study were too short • In this study 4 participants attended 30 six-hour sessions • Our alternate off-task activities (computer games) were not sufficiently reinforcing (if there is nothing else interesting to do, participants may spend all of their time “working” which may mask any differences between/among incentive amounts) • Allowed access to the internet • Selected two pairs of friends who worked at the same time to increase the likelihood of socializing as an off-task activity (doesn’t account for LaMere et al. but % increases were not experimentally controlled)

50. SO15: Contrasting results, Oah & Lee, 2011 (this part of the SO, NFE) • Different results may be due to the fact that actual percentage of incentives for the 10% condition was too low • Ps actually earned only an average of 1.6% of their pay in incentives which may have been too low • 2 of 4 Ps performed the same under 1.6% and hourly • When data for all four were combined and statistically analyzed, no statistically significant difference between 1.6% and hourly • Different results may be due to his experimental design which was an alternating treatments design – contrast effects • Within-subject vs. group designs: Komaki & Goltz, 2001 • Important research question that needs to be examined, my lab, Kyle is planning on doing (moving to schedules of reinforcement)