According to a new study done in the United States, while these incentive rewards can motivate and increase employee performance, they can also lead to unethical behaviour in the workplace.
The study, titled 'The effects of goals and pay structure on managerial reporting dishonesty', analysed the relationship between pay structures and motivation.
Researchers placed 160 business school students from a large Midwestern university in the United States, through four different cost reporting environment simulation sessions of approximately 45 minutes. In each simulation researchers manipulated the presence of a specific cost goal (specific goal vs. no specific goal) and type of wage contract (flat-wage contract vs. incentive contract).
Findings suggested that having cost goals decreases dishonesty when managers are paid a flat wage and increases dishonesty when managers are paid a bonus for hitting certain targets.
The research also witnessed the tendency of a “slippery step” effect, where dishonest behavior becomes increasingly worse once managers have crossed a certain threshold of dishonesty.
The researchers wrote: "In our study, relatively minor departures had very little effect on future dishonesty, but once people had cleared that first 'slippery step' they effectively opened the door to ever-increasing levels of dishonest behaviour. This could be due to competing tensions between reward seeking and ethical considerations."
They further noted that while the competing tensions were relatively balanced in the beginning, at some point during the simulation, it shifted toward reward seeking behaviour.
In terms of the practical implications of the study, the researchers pointed out: "In an opaque environment where managers have private information, organisations using goals need to consider not only how adding an incentive pay structure may lead to increased effort but also how it might lead to increased dishonesty.
"Conversely, organisations that use a flat-wage contract may want to consider adding specific goals as part of the organisation’s control system. Not only could this boost employee productivity, but it could also help attenuate the risks of managerial dishonesty."
The study also suggested that organisations should consider using goals and incentive schemes wisely to make that first step high enough to deter the type of morally disengaged reasoning that might lead to the next - seemingly easier - steps.
In an article published by Virginia Tech Daily, Bill Becker, co-author of the study and associate professor at Virginia Tech, said: "Goal fixation can have a profound impact on employee behavior, and the damaging effects appear to be growing stronger in today’s competitive business landscape."
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