When rewarding top employees goes wrong

Turns out, having a recognition program doesn't mean it is working. A new study has revealed that award programs like "Employee of the Month" and "Top Sales Club" might be reducing firms' overall productivity.

The University of California research shows that seemingly innocuous non-financial award programs can be costly to firms, primarily because they can upset the status quo and influence perceptions of equity and fairness. This can lead to internally motivated employees becoming disenfranchised.

Lead author Timothy Gubler said that the common knowledge is that non-monetary awards can subtly motivate people in ways that are fundamentally different to financial reward programs, such as by increasing organizational loyalty, encouraging friendly competition, or increasing employees' self-esteem.

Gubler added, "In fact, past research has focused almost exclusively on the benefits of these programs, and the costs have been considered negligible."

To explore the potential downsides of award programs, the researchers used field data from an attendance award program implemented at one of five industrial laundry plants in the Midwest United States.

Using data from the company and a statistics technique called difference-in-differences (DiD), the researchers found that reward-motivated employees responded positively to the awards by reducing tardiness, but gamed the system to maintain eligibility using sick days and reverted back to poor attendance behavior when they lost eligibility in a given month.

It also showed that the awards crowded out intrinsic motivation in internally-motivated employees, who were already performing well by coming on time in the absence of rewards. These employees had increased tardiness after the program was implemented and they lost eligibility.

The awards decreased motivation and productivity for internally-motivated workers, suggesting these employees were unhappy because of fairness and equity concerns.

In total, the award program cost the plant 1.4 percent of daily productivity, mainly because of the lost productivity by internally-motivated employees.

Gubler said the research is among the first to show that motivational awards can be costly to firms, rather than beneficial.

Gubler noted, "To be effective, companies offering award programs need to consider not only the group they are targeting, such as those that are coming late to work, but also those that are already doing the right thing, as there is a possibility of demotivating some of their best employees."

The study is due to be published in the journal Organization Science.