IDEAS home Printed from https://ideas.repec.org/a/iza/izawol/journly2016n234.html
   My bibliography  Save this article

Employee incentives: Bonuses or penalties?

Author

Listed:
  • Daniele Nosenzo

    (University of Nottingham, UK)

Abstract

Firms regularly use incentives to motivate their employees to be more productive. However, often little attention is paid to the language used in employment contracts to describe these incentives. It may be more effective to present incentives as entitlements that can be lost by failing to reach a performance target, rather than as additional rewards that can be gained by reaching that target. However, emphasizing the potential losses incurred as a result of failure may entail hidden costs for the employer, as it may damage the trust relationship between a firm and its employees.

Suggested Citation

  • Daniele Nosenzo, 2016. "Employee incentives: Bonuses or penalties?," IZA World of Labor, Institute of Labor Economics (IZA), pages 234-234, January.
  • Handle: RePEc:iza:izawol:journl:y:2016:n:234
    as

    Download full text from publisher

    File URL: http://wol.iza.org/articles/employee-incentives-bonuses-or-penalties-1.pdf
    Download Restriction: no

    File URL: http://wol.iza.org/articles/employee-incentives-bonuses-or-penalties
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Olivier Armantier & Amadou Boly, 2015. "Framing Of Incentives And Effort Provision," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 917-938, August.
    2. Tanjim Hossain & John A. List, 2012. "The Behavioralist Visits the Factory: Increasing Productivity Using Simple Framing Manipulations," Management Science, INFORMS, vol. 58(12), pages 2151-2167, December.
    3. Roland Fryer & Steven Levitt & John List & Sally Sadoff, 2012. "Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment," Framed Field Experiments 00591, The Field Experiments Website.
    4. Grolleau, Gilles & Kocher, Martin G. & Sutan, Angela, 2014. "Cheating and loss aversion: do people lie more to avoid a loss?," Discussion Papers in Economics 21387, University of Munich, Department of Economics.
    5. Steven D. Levitt & John A. List & Susanne Neckermann & Sally Sadoff, 2016. "The Behavioralist Goes to School: Leveraging Behavioral Economics to Improve Educational Performance," American Economic Journal: Economic Policy, American Economic Association, vol. 8(4), pages 183-219, November.
    6. Jonathan de Quidt, 2018. "Your Loss Is My Gain: A Recruitment Experiment with Framed Incentives," Journal of the European Economic Association, European Economic Association, vol. 16(2), pages 522-559.
    7. Olivier Armantier & Amadou Boly, 2014. "On the effects of incentive framing on bribery: evidence from an experiment in Burkina Faso," Economics of Governance, Springer, vol. 15(1), pages 1-15, February.
    8. Hong, Fuhai & Hossain, Tanjim & List, John A., 2015. "Framing manipulations in contests: A natural field experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 118(C), pages 372-382.
    9. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    10. Luft, Joan, 1994. "Bonus and penalty incentives contract choice by employees," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 181-206, September.
    11. de Quidt, Jonathan, 2014. "Your loss is my gain: a recruitment experiment with framed incentives," LSE Research Online Documents on Economics 58208, London School of Economics and Political Science, LSE Library.
    12. R. Lynn Hannan & Vicky B. Hoffman & Donald V. Moser, 2005. "Bonus versus Penalty: Does Contract Frame Affect Employee Effort?," Springer Books, in: Amnon Rapoport & Rami Zwick (ed.), Experimental Business Research, chapter 0, pages 151-169, Springer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Felix Koelle & Tom Lane & Daniele Nosenzo & Chris Starmer, 2017. "Nudging the electorate: what works and why?," Discussion Papers 2017-16, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    2. Boosey, Luke & Goerg, Sebastian, 2020. "The timing of discretionary bonuses – effort, signals, and reciprocity," Games and Economic Behavior, Elsevier, vol. 124(C), pages 254-280.
    3. Ken Yahagi, 2023. "Sanctions and rewards with a motivated agent," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2057-2067, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jonathan Quidt & Francesco Fallucchi & Felix Kölle & Daniele Nosenzo & Simone Quercia, 2017. "Bonus versus penalty: How robust are the effects of contract framing?," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(2), pages 174-182, December.
    2. Brice Corgnet & Roberto Hernán-González, 2019. "Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks?," Management Science, INFORMS, vol. 65(3), pages 1096-1114, March.
    3. Paul J. Ferraro & J. Dustin Tracy, 2022. "A reassessment of the potential for loss-framed incentive contracts to increase productivity: a meta-analysis and a real-effort experiment," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1441-1466, November.
    4. De Paola, Maria & Gioia, Francesca & Pupo, Valeria, 2020. "Selection and Incentives under Time Pressure: The Importance of Framing," IZA Discussion Papers 13474, Institute of Labor Economics (IZA).
    5. Alex Imas & Sally Sadoff & Anya Samek, 2017. "Do People Anticipate Loss Aversion?," Management Science, INFORMS, vol. 63(5), pages 1271-1284, May.
    6. Ahrens, Steffen & Bitter, Lea & Bosch-Rosa, Ciril, 2023. "Coordination under loss contracts," Games and Economic Behavior, Elsevier, vol. 137(C), pages 270-293.
    7. Mylène Lagarde & Duane Blaauw, 2021. "Effects of incentive framing on performance and effort: evidence from a medically framed experiment," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 7(1), pages 33-48, September.
    8. Brice Corgnet & Simon Gaechter & Roberto Hernán González, 2020. "Working too much for too little: stochastic rewards cause work addiction," Working Papers 2007, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    9. Cui, Xuegang & Feltovich, Nick & Zhang, Kun, 2022. "Incentive schemes, framing, and market behaviour: Evidence from an asset-market experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 301-324.
    10. Olivier Armantier & Amadou Boly, 2014. "On the effects of incentive framing on bribery: evidence from an experiment in Burkina Faso," Economics of Governance, Springer, vol. 15(1), pages 1-15, February.
    11. Olivier Armantier & Amadou Boly, 2015. "Framing Of Incentives And Effort Provision," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(3), pages 917-938, August.
    12. Jonathan de Quidt, 2018. "Your Loss Is My Gain: A Recruitment Experiment with Framed Incentives," Journal of the European Economic Association, European Economic Association, vol. 16(2), pages 522-559.
    13. John List, 2020. "Experimental tests of the endowment effect and the Coase theorem," Natural Field Experiments 00687, The Field Experiments Website.
    14. Astrid Gamba & Luca Stanca, 2023. "Mis-judging merit: the effects of adjudication errors in contests," Experimental Economics, Springer;Economic Science Association, vol. 26(3), pages 550-587, July.
    15. Saskia Opitz & Dirk Sliwka & Timo Vogelsang & Tom Zimmermann, 2022. "The Targeted Assignment of Incentive Schemes," ECONtribute Discussion Papers Series 187, University of Bonn and University of Cologne, Germany.
    16. Mahmoodi, Jasmin & Prasanna, Ashreeta & Hille, Stefanie & Patel, Martin K. & Brosch, Tobias, 2018. "Combining “carrot and stick” to incentivize sustainability in households," Energy Policy, Elsevier, vol. 123(C), pages 31-40.
    17. Stephan Tontrup & Christopher Jon Sprigman, 2022. "Self‐nudging contracts and the positive effects of autonomy—Analyzing the prospect of behavioral self‐management," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 19(3), pages 594-676, September.
    18. Erwin Bulte & John A. List & Daan Van Soest, 2019. "Toward an Understanding of the Welfare Effects of Nudges: Evidence from a Field Experiment in Uganda," NBER Working Papers 26286, National Bureau of Economic Research, Inc.
    19. Sung, Hao-Chang & Ho, Shirley J., 2023. "Disclosure strategies for management earnings forecasts: The role of managerial compensation structures, overoptimism, and effort," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).
    20. Essl, Andrea & Jaussi, Stefanie, 2017. "Choking under time pressure: The influence of deadline-dependent bonus and malus incentive schemes on performance," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 127-137.

    More about this item

    Keywords

    employee motivation; bonuses; penalties; loss aversion; contract framing;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izawol:journl:y:2016:n:234. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Institute of Labor Economics (IZA) (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.