Paying employees to perform better can enhance their productivity, but can also entice them to cheat, finds a new study by Ryerson University and University of Guelph researchers.
"The dark side of behavior can be affected by pay-for-performance schemes," says Fei Song, co-author of the study and a business professor at Ryerson's Ted Rogers School of Management. "Faced with certain types of incentives, some people are tempted to make up or misrepresent their performance numbers, which can cause companies to lose revenue."
This is the first study of its kind that compares employee cheating under different pay-for-performance compensation schemes. Bram Cadsby and Francis Tapon of the University of Guelph are the other co-authors of the study.
The researchers asked over 200 students at the University of Guelph to create as many words as they can from anagrams in one minute. Three groups of students completed this task using different pay-for-performance schemes as a financial incentive: a linear piece-rate system (employees receive a bonus for each unit they produce or sell); a tournament-based bonus system (payment is tied to an employee's performance in relation to that of other workers); and a target-based scheme (employees only receive compensation if they achieve the company's pre-set goal for sales or performance).
Afterwards, the students were asked to check each other's work and were given a chance to correct any errors made by their rater before submitting their assignment to the researchers.
The researchers found that students cheated significantly more when the target-based compensation system was used compared to the other two incentive programs. In addition, the closer the participant's actual performance was to their target goal, the more often they cheated.
"We speculate that people feel much worse if they miss a target by only a small margin rather than a large one," says Song. "The employee knows how close they are to the target. It acts like a big apple, tempting them to cheat in order to get the bonus.
"Companies should be very cautious about the use of target-based bonuses," she adds.
How can companies improve pay-for-performance systems to reduce deception in the workplace?
"To combat cheating, companies must have effective internal auditing/monitoring systems in place,"Song says. "This will help to control and weed out any misrepresentation, which can occur under any payment scheme."
The study, "Are You Paying Your Employees to Cheat? An Experimental Investigation," was published in the 2010 issue of the B.E. Journal of Economic Analysis & Policy. The study was supported by a grant from the Social Sciences and Humanities Research Council of Canada.
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