The Dark Side of Monetary Bonuses: Theory and Experimental Evidence

CentER Discussion Paper No. 2020-001

51 Pages Posted: 29 Jan 2020

See all articles by Victor Gonzalez

Victor Gonzalez

Tilburg University - Tilburg University School of Economics and Management

Patricio S. Dalton

Tilburg University - Center for Economic Research (CentER)

Charles Noussair

University of Arizona

Date Written: January 6, 2020

Abstract

To incentivize workers and boost performance, firms often offer monetary bonuses for the achievement of production goals. Such bonuses appeal to two types of motivations of the worker. On the one hand, the existence of a goal, on its own, triggers an intrinsic motivation associated with the desire to not fall short of the goal. On the other hand, the money paid to achieve the goal constitutes an extrinsic motivation. This paper studies the possibility that these two effects are substitutes when workers set their own goals. We develop a theoretical model that predicts that if the worker is sufficiently loss averse and faces uncertainty about reaching a production goal, offering a monetary payment contingent on reaching such a goal is counterproductive. This is because under the presence of monetary bonuses, the loss averse worker prefers setting lower goals, which yield lower but more likely bonus payments. Lower goals, in turn, negatively affect subsequent performance. Results from a laboratory experiment corroborate this prediction. This paper highlights the limits of monetary bonuses as an effective incentive when workers are loss averse.

Keywords: Goal-setting, Contracts, Loss aversion, Bonuses, Experiment

JEL Classification: J41, D90, C91, D81

Suggested Citation

Gonzalez, Victor and Dalton, Patricio S. and Noussair, Charles, The Dark Side of Monetary Bonuses: Theory and Experimental Evidence (January 6, 2020). CentER Discussion Paper No. 2020-001, Available at SSRN: https://ssrn.com/abstract=3514493 or http://dx.doi.org/10.2139/ssrn.3514493

Victor Gonzalez (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Patricio S. Dalton

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Charles Noussair

University of Arizona ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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