The Negative Consequences of Loss-Framed Performance Incentives

Behavioral economists have proposed that incentive contracts result in higher productivity when bonuses are “loss framed”—prepaid then clawed back if targets are unmet. We test this claim by randomizing the pre- or post-payment of sales bonuses at 294 car dealerships. Although somewhat statistically imprecise, our analysis provides strong indications that the random assignment of loss framing had quantitatively important negative effects. We document that negative effects of loss framing can arise due to an increase in incentives for “gaming” behaviors. Based on these claims, we reassess the common wisdom regarding the desirability of loss framing.