Does a Short-Term Increase in Incentives Boost Performance?

By Vera Angelova, Thomas Giebe, and Radosveta Ivanova-Stenzel

Short-term changes in employee incentives are a common way of responding to temporary changes in the business environment. For instance, sales managers are recommended to use short-term sales contests on top of regular employee compensation to increase sales in periods of slow business.

These additional short-term incentives are expected to boost business for a short period of time. However, they may also affect performance after they have been removed, or even before they are introduced (given that employees anticipate the introduction).

In this project, we study the effect of short-term changes in incentives on long-term performance. Does a short-term increase in incentives boost performance, if we also look at the time before and after incentives have been increased?

In a real-effort laboratory experiment, we compare two incentive schemes where agents either participate in a sequence of identically incentivized contests, or the pattern of `low' and uniform incentives is interrupted by a contest with `high' incentives. We find that introducing a contest with a large prize spread boosts performance in that contest, but does not result in an increase in total performance.

Our results thus confirm the conventional belief that higher incentives lead to higher effort in the short run. But they also reveal the existence of countervailing behavioral effects (before and) after times of high incentives in dynamic competitive environments. Therefore, the simple static formula ``high(er) incentives induce high(er) performance'' cannot be applied unconditionally in dynamic real-life working environments. This should be considered by practitioners when designing incentive schemes.

The full paper “Does a short-term increase in incentives boost performance?” published in Economics Letters is available as Open Access publication.