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The Negative Consequences of Loss-Framed Performance Incentives

Author

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  • Lamar Pierce
  • Alex Rees-Jones
  • Charlotte Blank
Abstract
Behavioral economists have proposed that incentive contracts result in higher productivity when bonuses are “loss framed”—prepaid then clawed back if targets are unmet. We test this claim by randomizing the pre- or post-payment of sales bonuses at 294 car dealerships. Although somewhat statistically imprecise, our analysis provides strong indications that the random assignment of loss framing had quantitatively important negative effects. We document that negative effects of loss framing can arise due to an increase in incentives for “gaming” behaviors. Based on these claims, we reassess the common wisdom regarding the desirability of loss framing.

Suggested Citation

  • Lamar Pierce & Alex Rees-Jones & Charlotte Blank, 2020. "The Negative Consequences of Loss-Framed Performance Incentives," NBER Working Papers 26619, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26619
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    Cited by:

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    2. Bauhoff,Sebastian Peter Alexander & Kandpal,Eeshani, 2021. "Information, Loss Framing, and Spillovers in Pay-for-Performance Contracts," Policy Research Working Paper Series 9687, The World Bank.
    3. Dreyfuss, Bnaya & Heffetz, Ori & Hoffman, Guy & Ishai, Guy & Kshirsagar, Alap, 2024. "Additive vs. subtractive earning in shared human-robot work environments," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 692-704.
    4. Cadsby, C. Bram & Song, Fei & Zubanov, Nick, 2024. "Working more for more and working more for less: Labor supply in the gain and loss domains," Labour Economics, Elsevier, vol. 88(C).
    5. Reyes, Germán, 2024. "Coarse Wage-Setting and Behavioral Firms," IZA Discussion Papers 17039, Institute of Labor Economics (IZA).
    6. Paul J. Ferraro & J. Dustin Tracy, 2022. "A reassessment of the potential for loss-framed incentive contracts to increase productivity: a meta-analysis and a real-effort experiment," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1441-1466, November.
    7. Germ'an Reyes, 2022. "Coarse Wage-Setting and Behavioral Firms," Papers 2206.01114, arXiv.org, revised Mar 2024.
    8. De Paola, Maria & Gioia, Francesca & Pupo, Valeria, 2020. "Selection and Incentives under Time Pressure: The Importance of Framing," IZA Discussion Papers 13474, Institute of Labor Economics (IZA).
    9. Kuhn, Peter J. & Yu, Lizi, 2021. "Kinks as Goals: Accelerating Commissions and the Performance of Sales Teams," IZA Discussion Papers 14115, Institute of Labor Economics (IZA).

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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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