‘Money matters, but sometimes we find financial incentives to be insulting or grubby’
Here’s an age-old management conundrum: who should be rewarded for high performance, and how? As Diane Coyle, the economist and former adviser to the UK Treasury, recently observed in this newspaper, the answer to the question is usually self-serving. Simple and easily monitored jobs, such as flipping burgers, are natural candidates for performance incentives. Yet somehow it’s the inhabitants of the C-suite who tend to pick up bonuses, despite the fact that their complex, hard-to-measure jobs are poorly suited to the crude nature of performance-related pay.
But let’s assume that managers really want to answer the question. The answer is deliciously complex. Money matters, but sometimes we find financial incentives to be insulting or grubby. And we can respond keenly to non-financial rewards such as praise, status or the satisfaction in a job well done.
So managers might try running experiments to see what works in a particular situation. There is a long tradition of this, going back to Harvard professor Elton Mayo’s productivity trials at Western Electric’s Hawthorne works in the 1920s and early 1930s.
The Hawthorne experiments themselves, alas, were flawed and have been mythologised. But more modern experiments are revealing some intriguing results. I reported a few years ago on the curious alliance between “Farmer Smith”, owner of a large British fruit farm, and three economists, Oriana Bandiera, Iwan Barankay and Imran Rasul. Bandiera and her colleagues designed and tested different incentive schemes on Farmer Smith’s farms. (The deal: he got higher productivity; they got the data.)
The fruit farm experiments show that financial incentives do matter, at least for casual immigrant labour on fruit farms. First, a piece-rate scheme boosted productivity by 50 per cent; then, performance pay for the front-line managers ensured that work was no longer assigned as a favour to friends, and productivity increased another 20 per cent; then, a tournament encouraged workers to sort themselves into productive teams, and productivity increased by a further 20 per cent.
In another study by Bandiera (with Nava Ashraf and Kelsey Jack), hair stylists in Zambia’s capital Lusaka were recruited to sell condoms and give advice on HIV prevention. It turned out that celebrating the top performers at a public ceremony proved a far better approach than providing financial incentives to sell more condoms.
But sometimes neither a public ceremony nor a financial incentive is appropriate. Consider the case of long-haul airline captains. Unlike part-time condom agents or fruit pickers, these senior pilots have high-status, six-figure salaries and powerful unions to defend their pay and conditions. Nevertheless, a recent experiment conducted by Greer Gosnell, John List and Robert Metcalfe examines what can be done to influence the behaviour of these star players.
Gosnell, List and Metcalfe teamed up with a commercial airline that wanted to encourage captains to save fuel. Broadly, there are three ways to do this: before take-off, by carefully calculating fuel requirements; after landing, by switching off some engines while taxiing; and during the flight, by carefully adjusting the flap settings and negotiating the most efficient altitude, speed and course with air traffic control. The airline’s own data suggested that captains could potentially save 3 to 6 per cent on fuel — a substantial financial and environmental gain. But how to incentivise them?
Gosnell, List and Metcalfe designed an experiment that did not rely on paying bonuses. Instead, the captains were told that their company was running an experiment with the aim of saving fuel, and that the researchers would maintain anonymity for all the captains. There would be no financial incentives and no league tables.
Instead, the captains were split randomly into four groups. The “information” group received monthly feedback reports detailing how often they had saved fuel before, during and after each flight. The “target” group received the same reports but were also set targets to improve their performance. (The reward for hitting the target was a hearty “well done!”) The “incentives” group were told that for each target they hit, £10 would be donated to the charity of their choice — a total donation of £240 was possible if all three targets were hit across the eight months of the study. A control group was simply told that a study into fuel efficiency was taking place.
The most obvious outcome was that there was a large and lasting “observer effect”. Merely telling captains that the experiment was happening prodded them into being more careful and saving a lot of fuel. It is always possible that the sudden switch to fuel-saving behaviour had a cause that was nothing to do with the experiment but there are no apparent alternative explanations.
The second outcome was that all three treatments saved fuel compared with the control group but setting targets (with or without the charitable donation) had a particularly notable effect. And the third outcome was that captains who hit their targets were substantially more satisfied with their jobs.
“I just couldn’t believe the impact we had on job satisfaction,” says Metcalfe. Far from annoying the captains, the fact that the company was taking an interest in fuel saving, and acknowledging success, seemed to delight them.
No performance scheme will fit every occasion but the fuel-saving study does suggest an approach worth trying more broadly. If you want people to do a good job, tell them what success looks like to you — and that you’ve noticed when they’ve achieved it.
Written for and first published at ft.com.