Strong incentives may lead to even more employee burnout, research finds

LAWRENCE — Everybody in business management understands that incentive compensation — like a commission rate or a bonus for achieving a goal — helps retain employees. Yet … what if that isn’t exactly true?

“We find that even when it seems to be against their interest, firms might choose to burn people out,” said Rob Waiser, assistant professor of marketing at the University of Kansas.

“Firms may knowingly incentivize employees strongly enough they’re going to work themselves to that burnout point. Even though hiring somebody new and retraining them is costly, there are situations where the firm might still make that choice with intent.”

His article titled “Incentives, burnout, and turnover: Dynamic compensation design with effort cost spillover” examines how firms should account for effects like fatigue and burnout when designing incentive compensation for their employees. The article appears in Quantitative Marketing and Economics.

“In sales organizations, for example, the amount of work that somebody puts into their job is to some extent a function of what they’re incentivized to do,” said Waiser, who co-wrote the piece with Juan Dubra of the Universidad de Montevideo and Jean-Pierre Benoît of the London Business School.

“Some jobs, you do the work that’s in front of you or somebody is monitoring your efforts. But in jobs like sales, the reason we have incentives such as commissions and quotas and bonuses is this belief that if we give you stronger incentives, you’ll work harder.”

But if those incentives get too strong, employees could work so hard that they suffer from burnout, resulting in either reduced effort, a need for even larger incentives or feeling compelled to leave the firm.

While the results confirm this, a key question remains: Why do firms knowingly let this happen?

Some firms may legitimately not care (or not fully understand) how incentives affect their employees, Waiser said. But others may face a binary choice.

“Let’s say I have a sales force of 1,000 people where everybody’s got a commission rate of 3%. But I observe our turnover is too high. So I might say, ‘Let’s scale it back to 2%.’ We expect our salespeople to sell a little bit less, but we won’t turn over as many employees. Yet what could happen is the employees might then say, ‘Oh, 2% is not driving me to go out and put in that extra 10 or 15 hours a week,’” he said.

What Waiser’s research found is when employees are susceptible enough to burnout, there is often no in-between point from the firm’s perspective.

“You’re either overincentivizing people and they’re working themselves to burnout, or you’re underincentivizing people and they back off and save themselves for future effort,” said Waiser, a Toronto native who’s been at KU for three years.

Firms may then respond in a manner that is not geared toward the benefit of an employee.

“If it’s a choice between giving a bigger bonus and working you to the point that you quit or giving a smaller bonus and watching you hold back too much, I might choose to just burn you out and replace you next period,” he said.

Waiser’s article is unusual in that it’s based in game theory rather than experiments or empirical analysis of firm data. His team incorporated “effort cost spillover” (the idea that effort now continues to affect us later) into a dynamic, two-period principal-agent model.

His model suggests two potential solutions to appease both firm and employee. 

“One is what we would call a commitment solution, which is to commit to future incentives in advance. If the firm is willing to commit to not just this period’s quota or commission rate but next period’s as well, I can regulate my work over those two periods in a way that’s effective but also sustainable,” Waiser said.

The other solution is for the firm to offer other perks beyond incentives to try to reduce the longer-term effects of effort. 

“Is that flexible scheduling? Employee wellness benefits? Better performance recognition?” Waiser asked.

“Whatever it is, there’s this threshold where if you can reduce spillover effects enough, then you start to have that middle ground available to you again where you can motivate people strongly without burning them out.”