The Negative Consequences of Loss-Framed Performance Incentives

61 Pages Posted: 6 Jan 2020

See all articles by Lamar Pierce

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business

Alex Rees-Jones

Cornell University - Department of Economics; National Bureau of Economic Research (NBER)

Charlotte Blank

Maritz Holdings Inc.

Date Written: January 2020

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 in a large-scale field experiment. Holding financial incentives fixed, we randomized the pre- or post-payment of sales bonuses at 294 car dealerships. Prepayment was estimated to reduce sales by 5%, generating a revenue loss of $45 million over 4 months. We document, both empirically and theoretically, 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.

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Suggested Citation

Pierce, Lamar and Rees-Jones, Alex and Blank, Charlotte, The Negative Consequences of Loss-Framed Performance Incentives (January 2020). NBER Working Paper No. w26619, Available at SSRN: https://ssrn.com/abstract=3514359

Lamar Pierce (Contact Author)

Washington University, Saint Louis - John M. Olin School of Business ( email )

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Campus Box 1133
St. Louis, MO 63130-4899
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314-935-5205 (Phone)

Alex Rees-Jones

Cornell University - Department of Economics ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.alexreesjones.com

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Charlotte Blank

Maritz Holdings Inc. ( email )

1375 North Highway Drive
Fenton, MO 63099
United States

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