Goals, Bonuses and Loss Aversion

To enhance workers' motivation, organizations often offer monetary bonuses that are linked to meeting production goals. We argue that when workers set these production goals and are sufficiently loss averse, offering a monetary bonus for goal achievement may backfire. The rationale is as follows: while self-chosen goals can act as reference points that motivate loss-averse workers to increase effort and earnings, a monetary bonus for goal achievement may crowd-out the motivation to set an ambitious goal because workers will not want to miss the bonus offered. Hence, monetary bonuses will induce workers set more conservative goals, attenuating the motivational effects of goal setting. We show experimental evidence consistent with this mechanism.