Increased Rewards May Lead to Adverse Consequences
In the ever-evolving world of employment, employers are constantly seeking ways to improve their workforce selection. One approach that has gained traction is the use of incentive-based pay structures. However, a recent study by George Georgiadis and Henrique Castro-Pires suggests that steeper incentives may not automatically guarantee better hires.
The study sheds light on the complex interplay between incentives and the quality of job applicants. Steeper incentives can attract more applicants, but they may disproportionately attract low-ability workers if these incentives increase their expected utility more significantly than for high-ability workers. This can lead to a decrease in the quality of the hiring pool if not managed carefully.
The second part of the test involves making a second adjustment to the incentives and tracking how employee productivity responds to this change after hiring employees. While incentives can increase effort, they may not always lead to higher productivity or better outcomes. For instance, in a retail setting, workers might respond to increased commission thresholds by misallocating customers to certain products, leading to higher return rates, which can harm the firm.
Understanding these impacts and considering key factors is crucial for employers designing effective incentive structures. Factors such as worker outside options, job discretion, fairness and equity, performance metrics, and organizational culture all play a role in shaping the response of potential applicants and hired employees to incentives.
For example, if incentives disproportionately benefit lower-ability workers, it may lead to an influx of less qualified applicants. On the other hand, focusing solely on easily measurable outcomes might overlook other important contributions. To optimize incentive pay structures, employers should design incentives that specifically appeal to high-skilled employees more than low-skilled employees.
A higher commission rate in sales jobs can attract both high-skilled and low-skilled associates. If the pool of potential low-skilled applicants expands more rapidly than that of high-skilled applicants, raising commissions might lead to hiring proportionally more low-skilled associates.
The study's findings are supported by real-world examples, such as Safelite, a windshield repair company, which implemented performance-based pay in the mid-1990s. Within a year, Safelite's productivity surged by approximately 44 percent. Today, many companies, including tech giants like Google and Netflix, have adopted performance-based incentive structures to attract and retain top talent.
In conclusion, employers should track the total number of applicants and the number of applicants rejected during screening to gauge whether changes to their incentives are improving their workforce selection. By carefully considering the factors outlined in this article, employers can design incentive structures that attract and retain high-quality workers while aligning with the organization's strategic objectives.
- In the realm of personal-finance and career-development, employers might reconsider their approach to incentive-based pay structures, especially when aiming to attract high-quality workers.
- To optimize incentive pay structures, employers could focus on designing incentives that specifically appeal more to high-skilled employees, as highlighted in the study by George Georgiadis and Henrique Castro-Pires.
- Education and self-development in finance and wealth-management can help job applicants better understand the complex interplay between incentives and the quality of job applicants, thereby enhancing their chances of securing better job opportunities in business.
