So-called relative incentive packages—those that determine an individual's pay by comparing his or her performance with others—are among the most popular systems in the United States. But recent research coauthored by Imran Rasul of the University of Chicago Graduate School of Business suggests that workers may not be as productive under this scheme as they would be under another incentive plan.
This story in Chicago GSB's publication Capital Ideas looks at research conducted with fruit pickers and how they were incented to be more productive. An interesting subplot arose from studying how the production of workers increased or decreased when they were paired with friends. Under the piece rate plan, there was no loss in productivity among friends working side by side, but productivity decreased by an average of 21 percent when friends worked together in a relative incentive program. Why? In a relative program, one worker's gain is another worker's loss. "The things that the workers care about go beyond their own pay," Rasul is quoted as saying. "The workers also care about the pay of other people."
The best compensation plan might be one that rewards team results over individual performance. Also, organizations that use a team-based approach would be wise to sponsor social outings outside the office to establish and reinforce the bond between people on the team.