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(Paiwei Wei/©Paiwei Wei)
(Paiwei Wei/©Paiwei Wei)

Do bonuses create cheaters? Add to ...

The common practice of granting bonuses to people who hit a certain target is supposed to boost their productivity.

Turns out, it may be encouraging them to cheat, according to a new paper by University of Guelph and Ryerson University researchers.

The paper - with the provocative title, "Are You Paying Your Employees to Cheat?" - found people who are given a specific target they have to meet to garner a bonus are more apt to lie about their productivity.

"Paying people bonuses is the most common compensation scheme in the corporate world because organizations think that offering a lump sum will push employees to excel," said professor Francis Tapon, who worked on the study with Guelph professors Bram Cadsby and Ryerson's Fei Song. "However, we have found this strategy is actually pushing people to cheat."

The paper was published in a recent B.E. Journal of Economic Analysis and Policy and will be issued as a press release Tuesday.

This feeling of entitlement acts as a justification for cheating. They may have also felt less guilt about cheating because they were so close to the target and viewed their cheating as only a small lie.

The study, based on results from 208 participants, compared cheating under three compensation systems: bonus (where people get rewarded if they hit a target), piece rate (where people are rewarded for each completed task) and tournament (where only employees with the highest productivity get rewarded).

Participants were given seven letters and asked to make as many words as possible in one minute. They underwent seven rounds of the word-scramble task, and different groups were rewarded based on one of the three compensation systems.

Another participant marked their work, though individuals were responsible for reporting their final score to the researchers. "They could choose to report their true score or lie about their score to receive more money," Mr. Tapon said.

Most cheating happened in groups which got a bonus for hitting a target of nine words. The closer these participants were to reaching the target, the more likely they were to exaggerate their scores.

"Under the bonus scheme, participants often came close to the target and may have felt they worked hard and deserved to be paid for their efforts. This feeling of entitlement acts as a justification for cheating," Mr. Cadsby said. "They may have also felt less guilt about cheating because they were so close to the target and viewed their cheating as only a small lie."

The opposite was true for participants compensated under a piece-rate system, which resulted in "significantly" less cheating.

Earlier research has compared cheating under target-based compensation with cheating under non-performance-based compensation (which offers no financial incentive to cheat). But this is the first study that compares cheating under target-based schemes to cheating under other performance-based schemes, the authors said.

The findings suggest companies may want to reconsider how they financially motivate their employees. "Knowing that the choice of compensation scheme can have an important effect on cheating is clearly an important factor in the design of [compensation]systems," it concluded.

"Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers" the paper quotes investment guru Warren Buffett as saying in 2003.

"Our experiment provides strong support for this insight," the authors of the study add.

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