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Bonus programs may encourage employees to cheat, journal paper concludes

Bucking conventional human resources wisdom, a recent academic paper has concluded that bonus programs may encourage employees to cheat more than other types of performance pay systems.

The paper - titled "Are You Paying Your Employees to Cheat? An Experimental Investigation" - was published in the B.E. Journal of Economic Analysis & Policy in April 2010 ("B.E." stand for Berkeley Electronic).

The paper's abstract explains the experiment that was employed as follows:

We compare, through a laboratory experiment using salient financial incentives, misrepresentations of performance under target-based compensation with those under both a linear piece-rate and a tournament-based bonus system. An anagram game was employed as the experimental task. Results show that productivity was similar and statistically indistinguishable under the three schemes.

The abstract then goes on to state the following about the researchers' findings:

In contrast, whether one considers the number of overclaimed words, the number of work/pay periods in which overclaims occur, or the number of participants making an overclaim at least once, target-based compensation produced significantly more cheating than either of the other two systems. While earlier research has compared cheating under target-based compensation with cheating under non-performance-based compensation, which offers no financial incentive to cheat, this is the first study that compares cheating under target-based schemes to cheating under other performance-based schemes. The results suggest that cheating as a response to incentives can be mitigated without giving up performance pay altogether (underline added).

The Globe and Mail ran an article today about the findings ("Do bonuses create cheaters?"), and quoted one of the journal paper's authors as follows:

"Paying people bonuses is the most common compensation scheme in the corporate world because organizations think that offering a lump sum will push employees to excel," said professor Francis Tapon, who worked on the study with Guelph professors Bram Cadsby and Ryerson's Fei Song. "However, we have found this strategy is actually pushing people to
cheat."

The Globe article can be found here.