Do Incentive Plans for Exemplary Employees Lead to Productive or Counterproductive Outcomes?

by Carolyn Deller and Tatiana Sandino

Overview — This study of a mobile phone retail company shows that incentive contracts that selectively incentivize exemplary employees (that is, preferential incentive plans) may be helpful when companies want to motivate employees to pursue objectively measured goals in addition to relevant tasks not explicitly written into their contracts. However, preferential incentive plans may lead to unintended consequences if they trigger perceptions of inequity.

Author Abstract

Using data from a retail chain, this paper studies the effects of a preferential plan providing incentives only to exemplary employees. Such plans incorporate elements of tournaments (through the selection of employees chosen largely on the basis of past performance but incorporating some managerial discretion) and linear incentives, to align employees with company goals and values. We find that, on average, the implementation of the preferential incentive plan was associated with improvements in sales. Also, we find that this plan was associated with greater improvements in sales and gross profits as well as reductions in the incidence of bad audits in stores where employees were initially less likely to be aligned with company goals. However, the plan was associated with lower sales and gross profits and higher incidence of bad audits, absenteeism, and turnover in some situations where employees could have perceived the plan to be unattainable or unfair. Our study sheds light on the impact of preferential incentive plans and the conditions under which these plans are more or less effective.