Do cash incentives motivate people to work harder?
Performance pay increases effort on individual tasks with observable outputs.
Paying extra for extra effort seems pretty straightforward.
In experimental settings, people complete more tasks when they're paid a piece rate on top of a flat wage. That's true for extremely simple tasks (like positioning a slider on a computer screen) and more creative tasks (like brainstorming alternative uses for common objects). Even tiny incentives make a difference, but as the piece rate increases so does work output. And cash incentives don't seem to undercut other motivators, like task meaningfulness or symbolic awards.
But hold up: real workplaces aren't the same as experimental settings. Before implementing cash incentives employers need to think about the types of effort they want to maximize and whether the system can be gamed.
When employers want to motivate individual effort and individuals' output is clearly observable, performance pay should work. For instance, windshield installers installed more windshields and tree-planters planted more trees when they were given a piece rate, rather than a fixed wage.
But at workplaces that depend on collaboration, individual performance pay probably won't work as well as team incentives like revenue sharing. And when employees can strategically game incentives—say, by clustering sales when commissions are high—it can be costly to firms.