Bonus or Penalty Contracts in Relative Performance Schemes: A Question of Regulatory Focus

In this study, we examine how contract framing in the form of bonus and penalty contracts influences employee performance in relative performance schemes (RPS). According to the regulatory focus and fit theory, people apply different motivational strategies while pursuing the same goals. Individuals with a high dispositional promotion focus concentrate on achieving ideal outcomes, while those with a high prevention focus concentrate on avoiding failure. In addition to these dispositional foci, a bonus (penalty) frame induces a situational promotion (prevention) focus, whereas RPS induce a situational prevention focus. The theory predicts that people will invest the greatest efforts to pursue a goal if there is a fit between dispositional and situational foci. Our experimental results support this prediction. The performance under a penalty contract is positively associated with an individual’s prevention focus in RPS, suggesting that giving this contract to individuals with a strong prevention focus leads to high performance because they experience regulatory fit. Bonus contracts lead to a non-fit and no performance effects associated with regulatory focus.