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doi: 10.1111/1748-8583.12080

PROVOCATION SERIES PAPER

Let the evidence speak again! Financial incentives
are more effective than we thought
Jason D. Shaw, Faculty of Business, The Hong Kong Polytechnic University
Nina Gupta, Department of Management, University of Arkansas
Human Resource Management Journal, Vol 25, no 3, 2015, pages 281293

In this essay, the authors rejoin the debate about financial incentive effectiveness. They (a) briefly review
the state of the literature in 1998, (b) highlight new meta-analytic findings and update conclusions
regarding the financial incentivesperformance relationship, (c) address the myth that financial
incentives erode intrinsic motivation, (d) provide explanations for the presumed failure of financial
incentives and (e) offer some concluding thoughts and suggestions for future research.
Contact: Professor Jason D. Shaw, MM, Hong Kong PolyU, Li Ka Shing Tower 1027, Kowloon,
Hong Kong. Email: Jason.Shaw@polyu.edu.hk
Keywords: incentives; motivation; performance
INTRODUCTION

n an editorial nearly two decades ago (Gupta and Shaw, 1998), we outlined the
evidence-based case for the relationship between financial incentives and individual
performance. Drawing on the findings of a meta-analysis of 40 years of financial incentives
research (Jenkins et al., 1998), as well as Cameron and Pierces (1994) meta-analysis of a broader
array of rewards, we showed that financial incentives were indeed strongly and positively
related to individual performance and further, that incentives appeared to have no negative
bearing on intrinsic motivation, as a number of influential scientists (e.g. Deci and Ryan, 1985;
Pfeffer, 1998) and other writers (e.g. Kohn, 1993) had suggested previously. The research-based
conclusions at that time seemed convincing, if not conclusive.
We hoped that the cumulative evidence would change the tone of the conversation in the
literature and popular press away for the notion that financial incentives are harmful and
towards a comprehensive exploration of the when and why of the effectiveness of financial
incentives. Instead, the contrarian voices appeared to became louder, more varied and,
discouragingly, more popular. A new generation of speakers and authors emerged, covering
much the same ground, but with renewed vigour and technological sophistication. With a
laypersons confidence in the tradition of Alfie Kohn (1993, 1998), Dan Pink is a case in point.
His best-selling book (Pink, 2009) and ever-popular internet speeches (nearly 15 million
views at the time of this writing) ignore the accumulated scientific evidence and lambaste
pay-for-performance while purporting to unlock the mystery of human motivation. This is
despite the fact that there is much more scientific evidence now, including primary studies,
qualitative reviews (Fang and Gerhart, 2012; Gerhart and Fang, 2014), and meta-analytic
summations (Cerasoli et al., 2014; Garbers and Konradt, 2014). Not surprisingly, the cumulative
evidence shows that financial incentives relate positively to performance, do not reduce
intrinsic motivation, and, in general, are more effective than we previously thought.
In this essay, we rejoin the debate. In the following paragraphs we (a) briefly review the state
of the literature in 1998, (b) highlight new meta-analytic findings and update our conclusions
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Please cite this article in press as: Shaw, J.D. and Gupta, N. (2015) Let the evidence speak again! Financial incentives are more effective than we
thought. Human Resource Management Journal 25: 3, 281293.

Financial incentives are effective

regarding the financial incentives performance relationship, (c) address the myth that
financial incentives erode intrinsic motivation, (d) provide explanations for the presumed
failure of financial incentives and (e) offer some concluding thoughts and suggestions for
moving forward. In terms of caveats, our review focuses on individual performance outcomes,
primarily performance in workplace settings, although it does include meta-analytic and other
evidence from non-work samples.
We take a broad view of individual performance, but roughly categorise it into quantity
(how much is produced) and quality (how well something is done) dimensions. We also
view individual performance from the organisations perspective, acknowledging that
individuals and other constituents (labour unions) may differ not only in their view of the
level of individual performance, but also in terms of the importance of certain performance
dimensions (e.g. Guest, 2011; Thompson, 2011). We focus on the narrow case of incentives
and individual performance, recognising not only that incentives may not be the best
solution in every situation, but also that factors such as work complexity, coordination
requirements, performance measurement differences, and monitoring systems can affect the
decision to use incentives as well as the type of incentive offered (Marsden and Belfield,
2010). In addition, a number of reviews and editorials have criticised performance-oriented
HR research for a positive normative bent as well as for ambiguity in the causal sequence
between HR practices and performance (e.g. Kaufman, 2010; Shin and Konrad, 2015). These
essays are largely irrelevant for our analyses. This review focuses on individual-level
research with stringent designs in which the use of financial incentives precedes individual
performance measurements.
THE 1990S EVIDENCE SHOWS THAT FINANCIAL INCENTIVES ARE EFFECTIVE
Prior to the mid-1990s, the organisational literature on the effectiveness of financial incentives
was rather sparse and was also lacking in systematic summary evaluations. The most thorough
of the summaries came in the form of qualitative reviews such as Jenkins (1986), Lawler and
Jenkins (1992), and Gerhart and Milkovich (1992). Jenkins (1986) compared financial incentive
studies conducted in the laboratory, the field, and in simulations using a qualitative voting
method. He concluded that the evidence indicated that financial incentives had positive effects
on performance quantity and that effect sizes were generally similar across research designs.
The first quantitative summary of the extrinsic reward literature was conducted by Cameron
and Pierce (1994). Their meta-analysis of 96 extrinsic reward studies using between-group
experimental designs with control groups showed, contrary to assertions by Deci and Ryan
(1985), Lepper et al. (1973) and many others, that extrinsic rewards had no overall negative
bearing on intrinsic motivation. The results of this study raised the ire of proponents of
cognitive evaluation theory (CET) in academia (Lepper et al., 1996; Ryan and Deci, 1996) and
on the speaking-circuit (Kohn, 1996). Cameron and Pierce (1996) responded by conducting
robustness checks of their meta-analytic findings, which yielded similar results (although
Kohns, 1996 suggestion to include a set of poorly designed, no-control-group studies was not
used).
The Cameron and Pierce (1994) study provided the first direct cumulative evidence that
extrinsic rewards were effective and did not diminish intrinsic motivation. The studies
were obtained from the psychology and education literature, however, and did not include
investigations involving actual financial incentives, a legitimate point of criticism. We and
others have highlighted substantive differences between paid work and other situations where
individuals receive extrinsic rewards such as prizes or recognition; these differences could
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cloud or change the conclusions drawn from non-monetary incentive studies. Jenkins et al.
(1998) attempted to rectify this situation by collecting and analysing relevant financial
incentives studies, published over a 40-year period. The inclusion criteria were stringent:
eligible studies had to (a) use non-self-report performance measures, (b) include a control group
or a premeasure of performance and (c) use actual money as the incentive. Among the curious
details of this meta-analysis was that for all we thought we knew about financial incentives
and performance, the number of studies eligible for inclusion was modest only 39, or about
1 study per year over four decades. The results were straightforward. Financial incentives
showed a moderately strong positive relationship with individual performance quantity
( = 0.34), a relationship that was stronger in field settings ( = 0.48) and simulation studies
( = 0.56), than it was in laboratory studies ( = 0.24). Also of note in the results was that task
type did not moderate the size of the incentives performance relationship. An extension of
Deci and Ryans (1985) CET perspective is that the effects of incentives should be more negative
in situations where the tasks are intrinsically pleasing. The meta-analysis results showed not
only positive relationships across all task types, but that the magnitude of the positive
association was the same in mundane and pleasing task situations.
Only six studies in Jenkins et al.s (1998) analysis included measures of performance quality,
or how well tasks were accomplished; financial incentives were not significantly related to
performance quality, although the sign was positive ( = 0.08). The accurate, scientific
conclusion from the results was that financial incentives are significantly and positively related
to performance quantity, but not to performance quality. Much was made about this scientific
conclusion; Kohn, for example, interpreted the performance quality findings, as somehow
indicating that financial incentives are significantly and negatively related to intrinsic motivation
(e.g. see Kohn, 1998). Such interpretations simply defy logic. But, the close of the 1990s left us
with additional questions to be answered. The results showed clearly that financial incentives
and performance were positively related, that declines in intrinsic motivation resulting from the
extrinsic incentives were likely mythical, and that there was a dearth of scientific evidence on
the relationship of financial incentives and performance quality.
THE NEW MILLENNIUM FINANCIAL INCENTIVES ARE MORE EFFECTIVE
THAN WE THOUGHT
Although the meta-analytic evidence of the 1990s revealed a strong pattern of findings in
favour of financial incentives, the paucity of empirical research opened up opportunities for
additional primary research, both primary and summative. It is encouraging that the number
of primary studies has slowly increased, both in the management literature and in other
disciplines including economics, medicine, nursing and education. Primary studies advance
knowledge, but they also advance confusion, as proponents on both sides of the debate pick
and choose studies which support their views. The need for summative studies has been
addressed recently in two new meta-analyses Garbers and Konradt (2014) focused on the
workplace and included studies involving monetary payments, and Cerasoli et al. (2014)
reported a broader meta-analysis of the effects of intrinsic motivation and extrinsic incentives
in the school, work, psychological, and physical domains. These meta-analyses estimated
relationships with incentives across a broader array of performance-related criteria and, in
the latter case, provide strong evidence that extrinsic incentives and intrinsic motivation are
not necessarily antagonistic and are best considered simultaneously (p. 980). In short, the
conclusion from research in these intervening years is that financial incentives are more
effective than we previously thought.
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Similar to the inclusion criteria in Jenkins et al. (1998), studies in the Garbers and Konradts
(2014) meta-analysis (a) were experimental or quasi-experimental designs with pretests or
control groups, (b) focused on financial incentives (not including other extrinsic motivators)
and (c) included non-self-report performance measures. Their overall meta-analytic finding
( = 0.32) for individual performance of all types was nearly identical to Jenkins et al.s (1998)
result, although Garbers and Konradts (2014) literature review yielded nearly four times
more studies (k = 116). A primary extension of this new meta-analysis was the ability to
address performance quality in addition to quantity, a key shortcoming in the prior studies.
These authors discovered that the effect size for financial incentives and performance quality
was actually larger ( = 0.39) than the estimate for performance quantity ( = 0.28). The
association for mixed or undetermined performance outcomes (e.g. ratings of overall
performance by supervisors) was also substantial ( = 0.38). Thus, although performance
quantity studies remain the dominant type in the literature, the growing evidence suggests
that when carefully designed financial incentives are used to predict performance quality,
the relationship is just as strong, perhaps stronger, than the relationship with performance
quantity.
Cerasoli et al. (2014) took a broader approach, surveying literature in the psychological,
educational, medical and business areas and focusing on research that specifically
operationalised intrinsic motivation. Like Cameron and Pierce (1994), these authors took a broad
view of extrinsic incentives including financial payments, prizes, and credits. Their findings
were striking. When extrinsic incentives were not offered, the relationship between intrinsic
motivation and performance was positive, modest and significant ( = 0.27). When extrinsic
incentives were offered, the relationship between intrinsic motivation and performance
was stronger ( = 0.45 when extrinsic incentives were indirectly salient and = 0.30 when
extrinsic incentives were directly salient). The authors drew some interesting conclusions: An
unexpected main effect for incentivization was observed, such that the predictive validity of
intrinsic motivation did not erode, but in fact increased in the presence of incentives. Thus,
incentivization actually boosted the intrinsic motivationperformance link (p. 996).
Two new meta-analyses from health care (Giles et al., 2014) and psychological (Byron and
Khazanchi, 2012) researchers provide strong ancillary evidence as well. Giles et al.s (2014)
meta-analysis revealed that financial incentives relate to a number of functional health-related
behaviors including smoking cessation (short- and long-term) and vaccination compliance. In
a meta-analysis of 34 experimental and 8 non-experimental studies, Byron and Khazanchi
(2012) found that individuals receiving incentives contingent on creative performance were
indeed more creative.
THE MYTH OF INTRINSIC MOTIVATION EROSION
The claim that extrinsic rewards erode intrinsic motivation is popular and persistent among
professional speakers (e.g. Kohn, 1993, 1998; Pink, 2009) and academics (e.g. Pfeffer, 1998)
and is pervasive across many disciplines including management, accounting and education
(see Gerhart and Fang, 2014, for a review). As noted above, this claim has been debunked
quantitatively, but there are other qualitative issues as well.
Academically, the claim is rooted in CET (Deci and Ryan, 1985), and largely based on the
findings from free-time studies (Gerhart and Fang, 2014), where the behavior of children
playing a game is observed when extrinsic rewards are given and when they are withdrawn.
Compared to control conditions, children in extrinsic reward conditions tend to play pleasing
games for a shorter period of time following the removal of the incentive. This effect is interpreted
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as evidence that the use of extrinsic rewards diminishes the childrens inherent pleasure in the
game.
Several authors have pointed to problems with this interpretation. Gerhart and Fang (2014)
questioned the applicability of free-time research to the workplace and to financial
incentives. Bartol and Locke (2000) argued that what people do during the time they are
not being paid is of no importance (p. 108). In addition, there is compelling evidence
(acknowledged by CET founders themselves) that adults and children differ in their ability
to separate the informational and controlling aspects of rewards (Deci et al., 1999: 656).
Indeed, in workplace settings, evidence suggests that people feel more autonomy when they
are paid for performance (Fang and Gerhart, 2012). These and similar issues led Gagn and
Deci (2005) to acknowledge the inherent risks in using CET principles as a foundation for
work motivation.
An additional concern not previously identified is that people could have negative reactions
to the withdrawal of extrinsic rewards, not because money erodes intrinsic motivation, but
because of the arbitrary fashion in which the incentive is removed people do not like arbitrary
and unexplained decisions about their rewards. A recent field experiment (Bareket-Bojmel et al.,
2015) speaks to this issue. In a field experiment, the authors reported a productivity increase
of more than 5 per cent when short-term incentives (cash payments or vouchers) or verbal
rewards were offered. But when monetary incentives were dropped without explanation,
productivity declined. The authors explained their findings with the traditional CET view,
under the assumption that workers intrinsic motivation was damaged. This explanation is
untenable for several reasons. One, we should keep in mind that productivity increased when
incentives were offered. Two, the bonuses appear to have been discontinued without
explanation. Workers most likely were confused and angered by the injustice of the decision,
particularly since their productivity had increased. The withdrawal of the incentive could well
symbolise a punishment for higher productivity. In other words, the problem resides in the
way the incentives were administered (and arbitrarily deactivated) rather than in the use of
extrinsic incentives per se. A surfeit of studies on pay fairness (Shaw and Gupta, 2001; Shaw,
in press, b), unexplained variation in pay (Shaw et al., 2002; Kepes et al., 2009; Trevor et al., 2012;
Conroy et al., 2014; Shaw, 2014), explanations and procedural justice (e.g. Shaw et al., 2003) tell
us clearly that individuals will react negatively attitudinally and behaviorally when unfair
and fickle decisions are made about financial incentives and other important workplace issues.
In short, the corrosive effects of financial incentives on intrinsic motivation in the workplace
are mythical. The evidence conclusively demonstrates their beneficial effects instead (Cerasoli
et al., 2014). What the CET and Bareket-Bojmel et al. (2015) studies show are the negative effects
of treating people arbitrarily and unjustly, a point long emphasised by justice and compensation
researchers.
BUT WHAT ABOUT THE DISCONFIRMING EVIDENCE?
We noted earlier that researchers and professional speakers often pick and choose among
studies to support their particular arguments. The scientific and popular literatures include
examples of the failures of financial incentives studies showing weak or negative effects of
financial incentives on individual performance and other outcomes. This raises the question: If
financial incentives effective, why do disconfirming studies appear in the literature? There are
at least two responses to this conundrum. For one, scientists understand that the results of a
given study may not be representative of the nature of a relationship in the population of
studies. There are differences across studies in terms of sample characteristics, sample size,
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research design, measurement, and, of course, error, which could lead to somewhat different
findings across primary studies. As an example, Park and Shaws (2013) meta-analysis of
the relationship between turnover rates and organisational performance revealed a stable,
moderate-in-magnitude, literature-level correlation between these variables. But, a
stem-and-leaf plot of the correlation distribution across studies reveals a number of studies
with near-zero association and a few with positive associations. It would be simple enough
to cherry-pick a set of studies and make a case that organisations should strive to increase
turnover rates in order to improve performance. This would, of course, be misleading,
inaccurate and irresponsible. This is why meta-analytic results are important. They summate
across the peculiarities and idiosyncrasies of individual studies and give us an indication of the
sign and magnitude of the association, in general. In the case of incentives, summative evidence
clearly shows financial incentives relate positively to performance quality and quantity and
not only have no negative bearing on intrinsic motivation, but seem to enhance its potency in
predicting performance.
Two, a closer examination of many of the failures reveals design and other problems
which were most likely responsible, as in the case of the Bareket-Bojmel et al. (2015) study
discussed above. Almost 40 years ago, Lawler and Rhode (1976) and Kerr (1975) cautioned
against the dysfunctional consequences of control systems and the folly of rewarding A while
hoping for B. Unfortunately, many of these cautions are ignored in the research on financial
incentives. When these issues are accounted for, we find that financial incentives often work
exactly as they are designed, although not always as the designers hoped. The underlying
reasons for the supposed failures can be grouped broadly into three categories problems with
study design, problems with incentive system design and problems with incentive system
implementation. It is to these we turn next.
Problems with study design
Clear examples of problems with study design appear in the pay dispersion literature. Pay
dispersion the spread of pay across employees is, at least in part, attributable to the use
of financial incentives such as merit pay. Pay dispersion is sometimes reported as having
negative effects on employee outcomes (Pfeffer and Davis-Blake, 1992; Pfeffer and Langton,
1993; Bloom, 1999). But, as Gerhart and Rynes (2003) noted, studies reporting such negative
effects usually control for employee performance. Thus, the observed negative effects of
dispersion are attributable to non-performance (and not performance) factors. In other words,
they capture non-financial-incentives-based variance in the spread of pay. When organisations
spread pay based on legitimate performance-related criteria pay dispersion is positively related
to performance (Shaw et al., 2002; Kepes et al., 2009; Trevor et al., 2012), and organisations are
more likely to keep their best performers (Shaw, in press, a). For more detailed reviews of
problems in the design of pay dispersion studies, see Conroy et al. (2014), Gupta et al. (2012)
and Shaw (2014).
Another example of problems in study design occurs in the research by Ariely and
colleagues (e.g. Ariely et al., 2009). This work is often cited by professional speakers to support
the failure of financial incentives. But as Gupta and Conroy (2013) indicate, the studies focused
on the size of the financial incentive and failed to include a no-incentive control condition.
Although the results can be interpreted as demonstrating the effects of incentives of different
size, they cannot be interpreted as indicating whether or not the use of financial incentives, in
general, is effective.
Other problems in study design can also be identified. We offer these two simply as
illustrative of cautions in extrapolating from the results of previous studies.
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Problems with incentive system design

Lawler and Rhode (1976) proposed that, for a control system to be most effective, it must be
complete, objective and influenceable. Even a cursory glance at the popular reports of
ineffective incentive systems demonstrates a clear lack of attention to these recommendations
in incentive system design. Since most research on financial incentives explicitly or implicitly
assumes performance-based incentives (although incentives necessarily neednt be limited to
performance), we focus on performance-related issues below, and address each of Lawler and
Rhodes recommendations in turn.
That incomplete measures lead to significant problems has been well-documented in the
popular literature. Incomplete measures occur partly because of what Kerr (1975) describes as
a fascination with the objective criterion. For many jobs, objective measures are simply not
available for all critical aspects of the job, and organisations end up focusing on the partial set
for which objective measures are available. Employees then attend only to the measured
aspects, ignoring the remaining significant job duties. For example, in the Atlanta Public
School Cheating Scandal (Winerip, 2013; Wikipedia, 2015a), the incentive system focused
exclusively on standardised test scores teachers and administrators in the school district took
legitimate and illegitimate steps to increase standardised test scores. In another example, the
Pacific Gas and Electric Company offered bonuses to supervisors whose crews found fewer
leaks and kept repair costs down (Van Derbeken, 2011). An investigation concluded that
bonuses for finding fewer leaks encouraged crews to ignore safety threats. In 2010, a blast killed
8 people and destroyed 38 homes. Unfortunately, the incentive system worked the crews
found fewer leaks! Had the performance measurements been more complete and more
accurate, the disaster could have been averted. But our favorite example comes from bus
drivers in an Asian city (Govindarajan and Srinivas, 2013). Drivers were paid bonuses based
on whether they reached their destination on time. One of the authors waited at the bus stop
during peak traffic time. Several buses drove by without stopping, even though there were
clearly empty seats. In other words, the incomplete incentive system encouraged drivers not to
pick up passengers during rush hour, when the most fares (revenue for the organisation) would
be paid. These are but a few examples of incentive systems working too well, promoting exactly
the behaviours that are rewarded. Again, the problem is in design, not in the use of money.
As noted, Lawler and Rhode (1976) encouraged the use of objective (i.e. not based on
subjective judgements) measures, but objective measures are typically not available for all
aspects of performance (i.e. objective measures tend to be incomplete and suffer from criterion
deficiency). Often, because complete objective measures are difficult to obtain easily, we settle
for proxies that are easily at hand. But careful thought could produce an almost complete list
of objective measures. For example, Arthur and Aiman-Smith (2001) reported that a joint
unionmanagement team developed a customised gainsharing formula (or family of measures)
covering essential aspects of performance. This formula consisted of 10 different dimensions
that could be benchmarked historically. The lesson is that objective measures need not
necessarily suffer from criterion deficiency, but that more effort is needed to develop a network
of objective measures that encompass performance fully.
Still, the fact remains that complete objective measures may not always be available. As an
alternative, organisations often use subjective performance appraisals by supervisors. Such merit
systems, based on supervisory performance ratings, are arguably the most common basis for
financial incentives (Heneman and Werner, 2005). But supervisory ratings of performance suffer
from criterion contamination, and represent many other influences beyond employee performance (Murphy, 2008). Indeed Hoffman et al. (2010) demonstrated that idiosyncratic rater source
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effects accounted for 55 per cent of variance in multisource performance appraisals, whereas
performance dimensions accounted for 10 per cent of the variance. These estimates are consistent
with the results obtained by Scullen et al. (2000) and Mount et al. (1998). Performance ratings may
overcome the problem of incomplete measures, but they introduce a variety of other problems.
Unless the performance appraisal system is thoroughly examined for validity, tying financial
incentives to them is likely to lead to undesired behaviors such as impression-management and
politics.
A good example of the problems inherent in the use of incentive systems with uninfluenceable
measures can be seen in recent scandal involving the Veterans Health Administration Scandal
of 2014 (Wikipedia, 2015b). Rewards in this case were tied to wait times for patient
appointments, but no additional resources were provided to make shortening wait times
feasible. Furthermore, because of the Iraq and Afghanistan wars, the caseload increased
dramatically. Because already overworked workers had no legitimate way to influence the
measure (wait times), they resorted to fudged data. Again, the incentive system worked, but
bad design (uninfluenceable performance outcomes) led to substantial problems.
Beyond these criterion issues, at least two other problems with the design of incentive
systems can be highlighted. One concerns the size of incentives, and the other the simultaneous
use of multiple incentives.
In terms of incentive size, research shows that performance-based pay raises must be large
enough (about 7 per cent) to have meaningful effects (Mitra et al., 1997, 2015). Often, pay raises
do not meet this threshold and are thus unlikely to have the desired effects. At the high end,
we need more research on the sensitivity of performance to financial incentives levels. For
many years, we have been proponents of research designed to understand when the positive
performance effects of larger incentives begin to diminish (e.g. Shaw, 2011). The evidence that
does exist, however, is not particularly applicable to real-world incentive contexts. For example,
in Ariely and colleagues (e.g. Ariely et al., 2009) research, individuals in a rural village in India
were invited to play some games in return for cash prizes, the largest amounting to half of the
typical annual wage in the village. A second study was conducted among only 24 undergraduate
students and also included an exorbitant reward condition. These authors found that extremely
large incentives were associated with some detrimental outcomes a finding the authors
attributed to choking. These findings are not surprising; surely, it is possible to induce anxiety,
choking, cognitive inference and the like with such large prizes. What is needed are more
reasonably designed studies that give us some indication of when positive returns to incentives
begin to attenuate. In research terms, more evidence on the non-linearity of performance effects
within reasonable incentive ranges is needed. In practical terms, prudence should be used and
care taken in designing reasonable reward systems.
Sometimes organisations use more than one incentive system, and these incentives work at
cross purposes. Beer and Cannon (2004), for example, reported on the problems encountered in
the implantation of pay-for-performance plans in multiple sites at Hewlett-Packard in the 1990s.
Each site developed its own plan, and their case reports demonstrate many design problems, but
we focus on the use of multiple systems here. At the San Diego site, the system was designed to
have a team pay-for-performance component and an individual skill-based pay component that
encouraged learning new skills. The incentives systems were dropped after 1 year in one division,
and in the rest thereafter. The training necessitated by skill-based pay plans implies that, for at
least a modicum of time, employees will have sub-par performance. Implementing a teamperformance-based pay plan concurrently militates against employees in training mode. Indeed,
many employees were resentful of the need for training, and ultimately the team pay-forperformance plan overwhelmed the skill-based pay plan. In other words, the plan failed not due
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to the use of team incentives (they work, in general; see, Garbers and Konradt, 2014) or because
of the use of skill-based pay plans (they are shown to work in other settings; see, Shaw et al., 2005),
but because the two were used simultaneously, and the two promoted conflicting behaviours.
Problems with incentive system implementation
Even when an incentive system is well-designed, problems can occur in implementation. Two
issues are particularly salient in this regard. We addressed the first issue above that
supervisors and managers take arbitrary, unjust, and unexplained actions that underlie the
negative effects observed in free-time or post-reward studies. Many years ago, Lawler (1978)
noted that the implementation of innovative financial incentives requires the full commitment
of middle as well as top management. This is in part because no change can be implemented
perfectly, and that kinks are likely to develop during implementation. How managers
address these kinks is vital to the success or failure of the incentive system. Arbitrary choices
inconsistent with the inherent philosophy of the incentive system are likely to cause problems.
Shaw et al. (2005) found, for example, that employee involvement in the design of the system
and supervisor support for the system were consistent predictors of system success
(productivity and workforce flexibility) and plan survival 8 years later.
A related issue that is often observed is that system designers underestimate the power of the
incentive system (perhaps because they listened to Kohn and Pink!). They set low performance
standards that employees meet easily, resulting in higher employee earnings than anticipated. An
example of this phenomenon was observed in the Beer and Cannon (2004) report on HewlettPackard. In the first 6 months, the employees were excited by the team pay-for-performance plan
and outperformed expectations, and the payout was higher than expected. Instead of building on
this success, managers punished employees for their productivity by adjusting standards.
Needless to say, this action triggered significant resistance among employees, and was partly
responsible for the eventual termination of the plan. These kinds of managerial reactions also
explain the development of rate restriction norms in teams and promotes distrust of management.
Other examples can be observed. But our point is that, quite often, incentives work as they are
designed to do. Standardised test scores were improved, the buses ran on time, there were fewer
leak reports, etc. Individuals performed the behaviors that were rewarded. But these successes
are used to demonstrate the failure of incentives. Boxall (2014) considered contingent compensation or performance-based pay to be one of the most obviously dangerous ideas (p. 587),
citing the 20082009 global financial crisis as an example of the pernicious power of ill-conceived
approaches to HRM to do more harm than good (p. 587). These statements illustrate vividly the
common misattribution the blame for bad design and implementation is laid at the door of
financial incentives per se. Defective design and implementation are the true culprits, not the use
of money. This is not to say that financial incentives work in all situations. Rather, this is to say
that reflexively laying the blame on financial incentives precludes a systematic examination of the
actual causes of failure. It prevents us from learning from our mistakes.
CONCLUSION
As with debates about whether the sun goes around the earth and whether there is climate
change, the scientific evidence has spoken about financial incentives in work settings they are
effective, they improve performance quantity, they improve performance quality and they do
not erode, but rather enhance the potency of, intrinsic motivation. It is time to put the issue of
whether they work to rest; it is time to attend to issues of how and why they work. It is time to
consider the conditions under which, and the people for whom, they work best. Gupta and
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Shaw (2014) highlighted many fruitful areas for compensation research. We urge the academy
of scholars to move away from settled debates towards these promising areas.
Some additional thoughts are in order. First, by arguing that financial incentives are effective,
we are not arguing that only financial incentives are effective or that people are motivated by
money alone. Clearly, we are motivated by challenge, engagement, autonomy, mastery and
other factors. Instead, we are arguing that, if we accept that financial incentives work, we can
move more easily to questions such as the best combinations of intrinsic and extrinsic rewards,
the best combinations of social and extrinsic rewards, the best combinations of intrinsic, social
and extrinsic rewards, and so forth. Second, our analysis makes a general assumption that
pay-for-performance is normatively accepted within the context. Much has been made about
whether individuals in different cultural contexts, across different occupations, and across
different levels of the societal strata, are interested in and will be motivated by the proper use
of performance-based pay (Shaw, 2014). For example, we highlighted poor incentive design as
one reason why bus drivers in an Asian city passed up the opportunity to pick up riders during
rush hour. It is possible that other factors were also in play, such as the cultural appropriateness
of the system as well as tendencies toward solidarity or cohesion among workers which may
have contributed to these reactions (Marsden and Belfield, 2010). These are important issues to
address. We need to make space to begin addressing them.
Kohn is fond of saying things such as no controlled scientific study has ever found a
long-term enhancement of the quality of work as a result of any reward system (1998: 34;
see also, Kohn, 2009). We agree with him that we need longitudinal studies of incentives. This
is a legitimate issue; such studies are scarce, and investigations assessing the immediate and
lasting effects of financial incentives are desirable (feasibility is another matter). One such study
has recently appeared in the literature. Nyberg et al. (2015) studied the relationship between
incentives and concurrent and future performance among nearly 12,000 employees over a 5-year
period. Not surprisingly, given the meta-analytic evidence outlined above, they found that
merit and bonus pay, as well as their multiyear trends, as positively associated with future
employee performance (p. 1). But, we would point out here that existing theory does not
suggest that financial incentives can be used as a behaviour modification or a psychological
panacea, inducing permanent changes in employee behaviors long after the incentives are in
effect. Withdrawal of incentives may result in reversion to the status quo ante, i.e. financial
incentives are effective only as long as they are in effect. Many of the studies highlighted by
Kohn (2009) and by others involve assessments of the outcome in time periods where the
incentives are no longer offered. It is not reasonable to expect that receipt of a financial incentive
at one time period should relate to behaviours long in the future when incentives are no longer
offered. Financial incentive decisions (and all other managerial decisions for that matter) are
relevant only within their prescribed time windows. An illustrative example here would be
Yahoo CEO Marissa Mayers decision to end the long-standing work-from-home arrangement
in the company (MacMillan, 2013). From media reports, we can reasonably conclude that
employees had realised some benefits from flexible working hours in the past. But, it would be
absurd to criticise flex-time as being unable to affect long-term enhancement of the quality
of work after the program had been eliminated. Going forward employees attitudes and
performance would be best predicted by the working arrangements currently in place.
In conclusion, we encourage more research on critical compensation matters. We also
pointed out many flaws in the design and implementation of incentive systems. Attention to
these and similar issues is likely to result in better-designed incentive systems. Ultimately, we
need to accept that financial incentives are effective, they are more effective than previously
thought, and that therefore it is all the more important that they be used prudently.
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