Promoting Team Spirit with Bonus Payments

How do incentive systems for teams work? Guido Friebel about a field experiment in a German bakery retail chain

Professor Friebel, in a recent publication in the renowned American Economic Review* you demonstrated the success of a team bonus system. Are team bonuses a new trend?

In fact, there is currently much debate in the industry about possible alternatives to individual performance measures and payment systems. While, on the one hand, academic research assesses individual bonus payments favorably in general – except from some sectors such as the financial industry where bonuses can induce misbehavior –, the importance of team work is constantly increasing. Companies become more and more convinced that team members who cooperate well with one another produce more and with better results compared to a situation where each of them works on his or her own. As a result, companies are looking for ways to promote cooperation in teams. Nevertheless, team bonus systems are not very common yet – although they are anything but new. In manufacturing, they were first introduced in the 1930s. But they have received little attention in research so far.

You implemented a field experiment together with a bakery retail chain. What were the results?

We introduced a team bonus in a part of the chain’s shops and analyzed the impact on the employees’ performance. The (mainly female) employees could earn up to 300 euros more per month and team when they met or overfulfilled certain sales targets. The bonus system was very successful: In the treated shops sales increased by around 3 percent on average. Profits rose accordingly and more than compensated for the higher salary costs. This result came as a surprise for the chain’s management. Particularly people in the middle management had serious concerns about submitting the company to a scientific experiment over months. Fortunately, we had the full support of the executive board and the workers’ council.

In your study, teams consist of seven employees on average. Is this an ideal size for a team bonus?

In fact, this seems to be a good size. Of course, a profit sharing scheme among all employees of a firm could also be called a “team bonus”. However, it is questionable if such a scheme, that promotes hundreds, thousands or ten thousands of employees as a “team”, can have sustainable effects on the individual motivation of a firm’s workers. The individual contribution to the overall profit is too small, and the incentive to freeride – to profit from the bonus without any extra effort – is too high. But other factors are also important. In our experiment, the bonus led to more efficiency gains in larger teams with more than ten or twelve employees. However, this was not owing to the size of the team but to the fact that the larger shops are located in more attractive city areas where the employees can influence sales – for example by cooperating more efficiently in peak times so that more clients could be served. In smaller shops, e.g. in the country-side, the bonus had less of an impact because it was simply impossible for the employees to affect sales given the low demand. A team bonus thus works best in teams of a manageable size, with clear job definition and transparent results, and where cooperation leads to efficiency gains.

Have you learned about how the team members prevented freeriding behavior?

It is quite difficult to examine this from outside. There are some studies that suggest group pressure as the important factor that leads to a change in behavior: The fact that someone is watching you who is more productive gets you to work harder. An interesting result of our study in this context was that the bonus had no effect in shops where more than 20 percent of the work was done by so-called “mini-jobbers”, who could not be incentivized because they would have become fully taxable if they earned more than 450 euros. Of course, this result can be explained by the lack of a monetary incentive. However, one could have imagined that the other employees make an arrangement with the „mini-jobbers“; e.g. sharing a part of their bonus in order to get them to work harder. Nothing like that happened though. Hence, a team bonus seems to have no effect when you do not incentivize all team members. And, apparently, even a very small team does not succeed in overcoming such a problem.

In your study, teams mainly consisted of low-skilled workers. Is that an important aspect for the success of a team bonus system?

There is some evidence for that. One reason is that in the low-wage sector, in retail companies or in restaurants, you can measure the output of teams very well – a big advantage for the implementation of a team bonus. Another aspect is that, in this sector, career incentives do not play a major role. In general, higher-skilled workers are, even without a bonus, interested in doing a good job because they want to advance their careers. Low-skilled workers usually do not have serious career perspectives, and their wages are so low that bonus payments can have an impact even if they are relatively small.

Did the bakery chain maintain your bonus system?

Based on the positive results of our experiment the company expanded the bonus system to all of their shops. Also, it took appropriate measures as a result of the revealed differences between the shops: They sold or closed those shops where the bonus had no impact because employees were not able to change the fact that the shops were located in unattractive areas, even by working more efficiently. This is certainly an unfortunate result, but one needs to take into account that this long established company has to survive in an extremely competitive market. Against this background, the efficiency gains due to the implementation of a performance-focused payment system have to be understood as a contribution to safeguarding all of the other jobs. Where structures and market conditions are unfavorable, a team bonus offers only limited help.

Questions by Muriel Büsser

*Friebel, G., Heinz, M., Krueger, M., Zubanov, N. (2017), Team Incentives and Performance: Evidence from a Retail Chain, American Economic Review, 107(8)