How Incentives Can Lead to Unethical Behaviour in the Workplace

We are nearing that time of the year again! Employees around the world are looking forward to receive their year-end bonuses. Not to mention that every organisation is gearing up to set their goals for the next year. But employers may want to think twice about bonus payouts.

A recent study in the United States found out that even though incentive rewards can motivate employees and increase their performance, they can also cause unethical behaviour in the workplace.

Goals and dishonesty

Titled ‘The effects of goals and pay structure on managerial reporting dishonesty’, the study analysed the relationship between pay structures and motivation.

The researchers tested 160 business school students through four sessions of cost reporting environment simulation for 45 minutes. In every simulations, they manipulated the presence of a specific coast goal (specific goal vs. no specific goal) and type of wage contract (flat-wage contract vs. incentive contract).

What they found is that having cost goals decreases dishonesty when managers are paid a flat wage. On the other hand, dishonesty increases when managers are paid a bonus for hitting certain targets.

The study also witnessed the tendency of a “slippery step” effect, where dishonest behaviour becomes more erratic once managers have crossed a specific threshold of dishonesty.

The researchers said “In our study, relatively minor departures had very little effect on future dishonesty, but once people had cleared that first ‘slippery step’ they effectively opened the door to ever-increasing levels of dishonest behaviour. This could be due to competing tensions between reward seeking and ethical considerations.”

They also noted that while the competing tensions were relatively balanced in the beginning, it shifted toward reward-seeking behaviour once it reached a point during the simulation.

'Consider adding specific goals'

When it comes to practical implications of the study, the researchers wrote: “In an opaque environment where managers have private information, organisations using goals need to consider not only how adding an incentive pay structure may lead to the increased effort but also how it might lead to increased dishonesty.

“Conversely, organisations that use a flat-wage contract may want to consider adding specific goals as part of the organisation’s control system. Not only could this boost employee productivity, but it could also help attenuate the risks of managerial dishonesty.”

The research also noted that organisations should consider using goals and incentive schemes carefully to make that first step high enough to deter the type of morally disengaged reasoning that might lead to easier steps.

In a Virginia Tech Daily article, Bill Becker, co-author of the study said: “Goal fixation can have a profound impact on employee behaviour, and the damaging effects appear to be growing stronger in today’s competitive business landscape.”

Not sure how to go about calculating bonuses? Read: What You Need to Know About Employee Bonuses

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