Salespeople are often painted as being only interested in making money. A study of US salespeople looked at the impact on employee performance of three organizational reward types frequently used by companies to motivate and engage employees, namely financial incentives, recognition, and feedback. Examining sales employees in the retail sector, the results indicated that all three reward types increased employee performance, and that financial incentives and recognition were substitutes, with feedback being independent of the other incentive types.
Key Topics: Monetary incentives; Feedback; Recognition; Sales performance
Title of Reviewed Article: Monetary Incentives, Feedback, and Recognition—Complements or Substitutes? Evidence from a Field Experiment in a Retail Services Company.
Researchers: Sofia M. Lourenco (Lisbon University)
Publication: The Accounting Review, 2016, Vol. 91 No. 1, pp. 279-297.
Setting the Scene
Research suggests that financial incentives, recognition, and feedback can appeal to varying motivational processes, such as tangible payoffs, social esteem, and self-regulation (e.g., Bowles & Polania-Reyes, 2012). These incentives have also been shown to have varying impacts on such things as social distinction (Frey, 2007), respect (Ellingsen & Johannesson, 2007), and status (Besley & Ghatak, 2008).
Given these diverse motivators, using a combination of various incentives may lead to a substitution or complementarity effect. Research on these effects is relatively limited (e.g. Bonner & Sprinkle, 2002) despite financial incentives, recognition, and feedback being used in combination in many companies (Chiang & Birtch, 2006; Dewhurst et al., 2009).
This study looks to address this gap in research by directly examining the interaction effects amongst financial incentives, recognition, and feedback. Three primary research questions are put forward:
Hypothesis 1 – “There is no interaction between monetary incentives and performance feedback in terms of their impact on performance; that is, monetary incentives and feedback are independent.”
Hypothesis 2 – “There is no interaction between recognition and performance feedback in terms of their impact on performance; that is, recognition and feedback are independent.”
Hypothesis 3 – “The interaction between monetary incentives and recognition is negative in terms of their impact on performance; that is, monetary incentives and recognition are substitutes.”
How the research was conducted
This study was conducted using employees from the Assisted Sales division of a U.S. retail services company. In total, 352 sales representatives took part in the study. The role of these employees was primarily to conduct product demonstrations throughout the U.S. in retail establishments. Data for this study was collected over a 4-month period.
The researcher implemented reward interventions which involved the presence or absence of financial incentives, recognition, and performance feedback. In total 8 interventions were established and reps were randomly assigned to one of 8 groups on that basis. In some interventions multiple incentives were present.
The presence of financial incentives meant that reps could earn a weekly sales performance related bonus. While the presence of performance feedback meant that reps received periodic information on sales targets and sales achieved. Finally, the presence of recognition meant reps were part of a non-financial acknowledgment program that publicly awarded CEO signed certificates to well performing reps.
Key Research Findings
Before the experiment started, average performance was approximately 41%, as measured by sales relative to sales goals. This overall average performance rose to 57% during the experiment.
Performance in all 8 conditions rose during the experiment, although the size of the performance effect differs.
A 32.5% performance increase was observed in the financial incentives and recognition groups.
The effect of feedback on performance was not found to be any greater than the control group, which had no incentives, indicating that under these experimental conditions knowledge feedback has no impact on performance.
Support was found for Hypotheses 1 and 2 as the interaction between financial incentives and feedback, and between recognition and feedback were not found to be significant. This indicates that feedback is independent from recognition and financial incentives.
Support is also found for Hypothesis 3 as the interaction between financial incentives and recognition was found to be negative, which is consistent with these incentives acting as substitutes.
The results of this study show an increase in performance when financial incentives and recognition are introduced, but no change in performance following feedback being provided. The results are consistent with previous research which demonstrated the positive effects of financial incentives (e.g. Shearer, 2004; Presslee et al., 2013) and recognition (e.g. Kosfeld & Neckermann, 2011) on performance.
The performance effects of financial incentives and recognition are interesting, with both producing similar 30%+ performance gains, suggesting that these two motivation mechanisms may have the same effect, and can be substituted for each other. This is inconsistent with prior research which found financial incentives to be better at improving performance than recognition (Stajkovic & Luthans, 2001), although research in prosocial settings indicate that recognition can be a better motivator (Ashraf et al., 2014), suggesting the power of these motivators varies depending on the labor context. The economic implications of this finding are significant, given that the recognition treatment has almost zero related direct cost, whereas the financial incentives did incur costs for the company. All incentive conditions did have indirect costs such as the manager’s time and reporting costs.
The lack of impact of feedback is somewhat surprising, although prior research has suggested it is less powerful a motivator than financial incentives and recognition (Stajkovic & Luthans, 1997). The researcher of this study suggests that the limited impact of feedback could be due to the type of feedback provided.
Organizational and Reward Implications
The primary implication of this research is to further reinforce the idea that providing additional money to employees is not always the best motivator. What this research demonstrates is that the costliest intervention is not necessarily the best or most effective one. Companies should be open the testing a range of reward and recognition programs in order to determine the most cost effective and performance enhancing motivator or combination of motivators. Practitioners should also take note that it is not enough to simply give feedback for it to have a performance effect, the right type of feedback needs careful consideration.
This research provides interesting findings on the role of various incentives on performance, and points to the importance of context on the impact of these incentives. As the research was carried out with a single company over a relatively short period, the generalization of the results should be considered with caution. Further research in this area would be welcomed, particularly in relation to the substitutability of financial incentive and recognition, and also on the independence of feedback from these incentives.
Source Article: Lourenço, S. M. (2016). Monetary Incentives, Feedback, and Recognition—Complements or Substitutes? Evidence from a Field Experiment in a Retail Services Company. The Accounting Review, 91(1), 279-297.
Published by: American Accounting Association
For further details and access to the full journal article Click Here (subscription or payment may be required).
Ashraf, N., Bandiera, O. & Jack, K. (2014). No margin, no mission? A field experiment on incentives for public service delivery. Journal of Public Economics, 120, 1–17.
Besley, T., & Ghatak, M. (2008). Status incentives. American Economic Review, 98(2), 206–211.
Bonner, S. E., & Sprinkle, G. B. (2002). The effects of monetary incentives on effort and task performance: Theories, evidence, and a framework for research. Accounting, Organizations and Society, 27(4/5), 303–345.
Bowles, S., & Polania-Reyes, S. (2012). Economic incentives and social preferences: Substitutes or complements? Journal of Economic Literature, 50(2), 368–425.
Chiang, F. F., & Birtch, T. A. (2006). An empirical examination of reward preferences within and across national settings. Management International Review, 46(5), 573–596.
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Shearer, B. (2004). Piece rates, fixed wages and incentives: Evidence from a field experiment. Review of Economic Studies, 71(2), 513–534.
Stajkovic, A. D., & Luthans, F. (1997). A meta-analysis of the effects of organizational behavior modification on task performance, 1975–1995. Academy of Management Journal, 40(5), 1122–1149.
Stajkovic, A. D., & Luthans, F. (2001). Differential effects of incentive motivators on work performance. Academy of Management Journal 44(3), 580–590.
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