Law of Unintended Consequences

Organizations and people within them respond to incentives.  They just don't always respond the way that we would like them to do so.   We might have a policy designed with the best of intentions, but it may have serious uintended consequences.   Take, for example, this article from yesterday's Wall Street Journal.  It reports on a new study published in the JAMA: Cardiology.  Melanie Evans reports: 

The Affordable Care Act required Medicare to penalize hospitals with high numbers of heart failure patients who returned for treatment shortly after discharge. New research shows that penalty was associated with fewer readmissions, but also higher rates of death among that patient group.

The researchers said the study results, being published in JAMA Cardiology, can’t show cause and effect, but “support the possibility that the [penalty] has had the unintended consequence of increased mortality in patients hospitalized with heart failure.”

The article goes on to report some disagreement among researchers about the impact of this policy.  Nevertheless, it notes concerns by some physicians about the possibility of unintended consequences and the desire by many to see further research on this matter.

More broadly, this article reminded me that managers need to consider the law of unintended consequences as they establish policies, metrics, and procedures.  For instance, managers may have great intentions when they create a new incentive compensation scheme.  However, the reward system may cause behaviors that they did not foresee or intend to stimulate.  In fact, they may see some adverse effects because of the ways in which their scheme distorted behavior.   One can blame individuals for unethical behavior that emerges as people try to achieve ambitious targets and garner bonuses, for example.  Or, one could ask:  Did we create policies that unintentionally encouraged people to act in unethical ways?  I'm not excusing bad behavior, but I am encouraging to think carefully about the systemic reasons for unethical action within firms.  

Rewarding Employees? Think Experiences Rather Than Material Gifts

Wharton's Cassie Mogilner has conducted some interesting research on gifting behavior.   Her work has implications for managers thinking about how to reward their employees with small tokens of appreciation for the work they have done.   Mogilner finds that experiential gifts foster stronger emotional connections between the giver and the receiver than material gifts do.  Here's her description of one experiment that she conducted:

We conducted a study in which undergrads, as our participants, come in with a friend. We assigned one person to be the gift recipient and one person to be the gift giver. Among the gift givers, we gave them $10 and told them, ‘Go out and buy a gift with this money for your friend here.’ We told them either to buy an experiential gift or a material gift. The gift recipient wasn’t aware of our instructions, they just 10 days later received this gift that their friend had given them. You can’t buy a ton with $10, but you saw some examples of the experiential gifts that people gave. They bought them a ticket to the local movie theater or a Chipotle gift certificate versus material gifts like a pint glass, a teddy bear, socks. And we found that the gift recipients who received the experiential gift felt more connected to the gift giver. Again, I will point out that they didn’t like the gifts any more, but they did feel more connected. Our argument is that a big goal of gift giving is not just to give a liked gift, but to foster relationships.

With this research in mind, think about offering a gift certificate to dinner or tickets to a ballgame to one of your hard-working employees for a job well done.  Perhaps that small token of appreciation may be a more effective way of expressing your gratitude than offering them a material gift.  

Would You Like That Bonus in Cash or Some Other Form?

How should you reward people?  What concerns should you have about offering rewards to your employees?   One important factor to consider: Will the employees compare rewards with one another?  Will those who receive smaller rewards be highly dissatisfied?   Extensive research shows that people engage in social comparisons.  They care not just about how much they receive, but how much they receive as compared to their peers.  Kellogg Professor Neal Roese and doctoral student Jingjing Ma have conducted some fascinating research with regard to reward comparisons.   They have shown that making rewards less "countable" can reduce the "likelihood that recipients will compare rewards, which in turn increases their satisfaction." 

The original experiment went as follows.  They created two groups of students: an "overbenefit" group and an"underbenefit" group.   The groups split a fixed reward 60/40.   One half of each group received a "countable" reward - i.e. cash.  The other half received an "uncountable" reward - i.e. a slice of cake.   Naturally, people who received higher rewards were more satisfied in both cases (cash and cake).  However, between the two "underbenefit" groups, the recipients of cake were much less dissatisfied than the recipients of cash rewards.  

Kellogg Insights provides the scholars' explanations of this result: "According to Ma, offering cake encouraged the recipients to focus on the experiential aspect of their reward—'oh, this cake is delicious,' she says—instead of 'thinking about how they received less than the other guy.'"

The Dark Side of Employee Awards?

Timothy Gubler, Ian Larkin, Lamar Pierce have conducted a provocative new study regarding employee awards.  They collected data about an attendance award program at a private commercial laundry services company in the Midwestern United States.  One of the company's five plants chose to implement an award for good attendance.   Managers wanted to reduce absences and tardiness.   The other four plants did not institute this program.   The program was rather simple.   All employees without an unexcused absence or tardy in the prior month received recognition before their peers, and they became eligible for a drawing for a $75 gift card.  The program lasted for a bit less than a year.  Senior executives at the company eliminated the program because they felt it rewarded behavior that should be expected of everyone.

The scholars studied this program, and they found that the award produced two important unintended consequences.  Here is an excerpt from the paper's abstract:

First, employees game the program, improving timeliness only when eligible for the award, and strategically calling in sick to retain eligibility. Second, employees with perfect pre-program attendance or high productivity suffered a 6% to 8% productivity decrease after program introduction, suggesting they were demotivated by awards for good behavior they already exhibited. Overall, our results suggest the award program decreased plant productivity by 1.4%, and that positive effects from awards are accompanied by more complex employee responses that limit program effectiveness.

I don't think we should be surprised by these results.  When creating any type of incentive or recognition program, we should remember the law of unintended consequences.   Still the paper documents the phenomenon in a powerful way.   I find it particularly interesting that this award program clearly created a perception of injustice.  People felt that people did not merit recognition for simply showing up when they should anyway.  Perceptions of inequity should be top of mind when creating reward programs. These feelings are likely to trigger discontent and unintended consequences.