The impact of Financial and Non-financial Incentives
Two researchers studied the impact of financial and non financial incentives on business performance in 21 stores of a fast food franchise in the Midwest. In this study the researchers carefully compared performance over time in stores that did and did not use financial and non financial employee incentives. Each store had about 25 subordinates and two managers. The managers were trained to identify critical, observable measurable employee behavior that were currently deficient but that could impact store performance. Example behaviors included keeping both hands moving at the drive through window working during idle time and repeating the customer’s order back to him or her. The researchers measured store performance in terms of three things, gross profitability (revenue minus expenses) drive through time and employee turnover.
Financial incentives: Some employees in some of the stores received financial incentives for exhibiting the desired behaviors. The financial incentives consisted of lumpsum bonuses in the worker’s paychecks. For example if the managers observed a work team exhibiting up to 50 behaviors during the observation period, he or she added $25 to the paychecks of all store employees that period ; 50 to 100 behaviors added $50 per paycheck Andover 100 behaviors added $75 per paycheck. Payouts rose over time as the employees learned more about the behaviors they were to exhibit. Specifically payouts rose from about $33 average per employee per month during the three months just after training. To about $54 per employee per month during the next three months, to about $70 per employee per month during the final three months of the study
Non financial Incentives: The researchers also trained the managers to deliver non financial incentives in the form of performance feedback and social recognition For example for performance feedback managers maintained charts showing the drive through times at the end of each day. They placed the charts by the time clocks, so all the store employees could keep track of their store’s performance on things like drive trough times. The researchers also trained managers to administer recognition to employees such as the drive through times were really good. That is great since that is what we’re really focusing on these days.
Results: The results of this study indicated that both financial and non financial incentives improved employee and store performance and that these improvements were sustained over time. For example store profits rose 30% for those units where managers used financial rewards. Store profits rose 36% for those units where managers used non financial rewards. During the same nine month period, drive through times decreased 19% for the financial incentives group and 25% for the non financial incentives groups turnover improved 13% for the financial incentives group, and 10% for the non financial incentives group. Initially financial incentives had a greater impact than non financial incentives on profits and customer service, but their effects became equally effective over time. (Financial incentives had a more significant impact on employee turnover than did non financial incentives over time however).
Incentive plans in practice: Nucor
Nucor Corp is the largest steel producer in the United States and also has the highest productivity, highest wages and lowest labor cost per ton in the American steel industry. Employees earn bonuses of 100% or more of base salary and all Nucor employees participate in one of four performance based incentive plans. With the production incentive plan, operating and maintenance employees and supervisors get weekly bonuses based on their work group’s productivity. The department manager incentive plan pays department managers annual bonuses based mostly on the ratio of net income to dollars of assets employed for their division. With the professional and clerical bonus plan, employees who are not in one of the two previous plans get bonuses based on their divisions net income return on assets. Finally, under the senior officer incentive plan Nucor senior managers (whose base salaries are lower than those of executives in comparable firms) get bonuses based on Nucor’s annual overall percentage of net income to stockholders equity.