Simplifying Incentives: Evidence from a randomized workplace experiment

by Iwan Barankay

Discussion byCamelia M. Kuhnen

Northwestern & UNC

Disclaimer

• I have not yet received the paper or seen the actual empirical analysis, so I will not be able to comment much on the details of the execution.

• I will discuss the broad research question and its importance.

Main findings

• Replacing a more detailed incentive scheme with a simpler one (1% of sales) for a furniture product line leads to an increase in sales of 17.6% and to a decrease of 23.8% in commission payouts.

• Sales for other furniture lines did not change.

Broad research implications

• When people face easier to understand incentive schemes, they work harder.

• Simplicity in incentives can save on labor costs.

Comments: Empirical result

• Needs more evidence:– Does the treatment work for all sales people?– Who responds more?– Does the treatment effect vary over time?

Comments: Broad research idea

• Complexity leads to inaction in other settings also, from purchases in supermarkets to retirement plan participation

• “The Paradox of Choice” (Schwartz (2003))

• “Nudge” (Thaler and Sunstein (2009))

• “Scarcity” (Mullainathan and Shafir (2013)): bandwidth shortage leads to mistakes, excess attention on focal issue, ignoring everything else.

Comments: Mechanism

• How can this empirical pattern be modeled?

• Is this just an instance of multitasking? – Hard-to-understand piece rates may be interpreted as weak incentives

(say, people assume their pay rate will be the minimum in the possible range). People will naturally do the task that offers the simpler incentive.

• Is this just an effort story? – Mathematical calculations are hard to do on the fly, so, all else equal

people prefer not to do them. So, a setting with complex incentives may just be one where more effort is needed to accomplish the same payoff.

Comments: Mechanism

• What if the difference between complicated pay scheme and simple scheme is large (say, simple scheme offers only 0.1% commission)?

• At which point do people start preferring the simpler pay scheme?

Comments: Mechanism

• Why may complicated pay schemes not work?– Memory problem: can be fixed by tagging items to sell with SPIFs info– Computational problem: harder to fix.

• What if instead of reducing complexity of reward scheme we reduce complexity of punishment scheme?

Conclusion

• This is a great research idea

• More evidence that the effect documented is indeed there

• Discussion of when and why simple incentives may work better than complex ones.