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19 May 2010

Fear of Loss Versus Joy of Gain in Variable Compensation

Since intuition is rooted in emotions and thus subjective, intuitive approaches allow us to see a single, objective situation as many. We see this most clearly when we tap two distinct, opposing emotions such as the fear of loss versus the joy of gain. The first is generally stronger in people than the second. Research on a variable compensation plan shows this.

In the January 16, 2010 edition of The Economist an article titled “Designing Rewards – Carrots Dressed as Sticks” reported on a paper by Tanjim Hossain of the University of Toronto and John List of the University of Chicago outlining how they made a variable compensation plan more effective without changing one thing about the plan (i.e. more money, shorter time frame). Rather, they simply changed the wording of the letter outlining the details of a bonus.

To one group, they communicated it in the traditional way: hit this target by the end of the week and earn the bonus. However, to another group they said that employees had “provisionally” earned a bonus but would lose it if they did not hit their targets; thus, pitting the “joy of gain” against the “fear of loss.”

Cognitively, objectivity says no difference exists. However, Hossain and List found that the second approach (fear of losing the provisional bonus) was much more motivational than the traditional approach (joy of gaining the bonus). Moreover, the motivational difference persisted over time even after employees understood the bonus better.

In effect, by tapping into the way people intuit different emotions (fear and joy) a single bonus plan becomes two distinct ones. That is the multiplying effect of an intuitive approach.

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