COMP NEWS – A new study on the methodology for devising effective incentive pay found that such models of compensation work – even for unsupervised and untechnical tasks.

Executives have good reason to be uncertain about the value of financial incentives:

• “Rewards typically undermine the very processes they are intended to enhance,” the Harvard Business Review has advised. 

• McKinsey reached the opposite conclusion: “Generous and specific financial incentives are one of the most effective tools available for executives to motivate employees.”

The value of incentive ultimately comes down to whether it works — does it encourage employees to put in extra effort? And that, most agree, depends largely on how it is designed. A paper in Management Science proposes a methodology for devising an incentive contract that leads to greater productivity.

The authors examine the question of financial incentives in the growing area of on-demand jobs: ride-hailing companies such as Lyft and Uber, food-delivery services like DoorDash and freelance task work for such outfits as TaskRabbit and Amazon’s Mechanical Turk. Incentive payments here are relatively common. Lyft, for instance, pays a bonus to drivers who complete a certain number of rides within a set time period.

One characteristic of these jobs is supervisors have limited direct oversight, so it is difficult to tell whether incentives actually spur employees to greater effort. This lack of supervision presents a classic “moral hazard” problem, where the results of the workers actions can be seen but the amount of effort they put into doing a job well is invisible to managers.

The lack of visibility into worker effort presents a challenge for devising an effective incentive program. Incentives are designed to spur greater effort, which should lead to better results. But because effort is unknown, the relationship between a bonus and an increase in productivity is difficult to study in a mathematical model.

To test the effectiveness of incentive pay for menial tasks, researchers offered various pay incentives for workers finding typos in news articles. The study found that bonus payment increased quality, but that the effect diminished when base pay for the assignment was already high.

For the study, they recruited 500 Mechanical Turk workers to identify typographical errors in a one-page, 500-word excerpt from a newspaper article. The workers were promised a base amount if they found at least 25% of the typos, along with a bonus for finding at least 75% of the typos. Each worker was randomly assigned a unique pay scale, with combined base and bonus payments starting at 10 cents and rising at 1-cent intervals to $1.

Remarkably, many of the participants found none of the 10 typos in the excerpt. This, the authors say, is fairly common with Mechanical Turk tasks, in which workers often put in little or no effort in the hopes of getting paid anyway.

When the base payment was low, the experiment found, an increase in the incentive payment produces a moderate increase in the percentage of workers who qualify for the bonus (from 21% at a 10-cent bonus to 36% for a $1 bonus in the largest group studied). When the base payment was $1, however, raising the bonus payment resulted in only a small increase in the share of those who earn the incentive payment, from 34% to 37%.

“These results suggest that increasing the bonus payment can indeed increase quality,” the authors write, “but the effect is significantly diminished when the base payment is already high.”

To read more about the study on devising effective incentive pay for unsupervised tasks, click here.

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