Clawback – it’s a term that’s been
bantered about recently in response to the ongoing LIBOR money
laundering bank scandal when discussing the bonus money given to
executives. It’s a particularly descriptive term used
primarily within the finance industry to refer to bonuses tied to
provisions that allow those bonuses to be reclaimed by the organization
that gave them out, usually with an additional monetary penalty applied.
Although this monetary disincentive doesn’t seem to have
discouraged the types of behaviors it was meant to, the concept of
pulling back bonuses may have some applications in other jobs that can
yield positive results. Specifically, there was a recent report by the
National Bureau of Economic Research (NEBR) that showed a strong
positive effect on student test scores when teachers were rewarded with
bonuses that would have to be returned if certain goals were not met.
The psychological phenomenon being exploited by this compensation
method is loss aversion, and it has recently been gaining popularity as
a powerful but practical incentive method. In this instance, loss
aversion refers to the tendency of people to favor avoiding risk over
gaining rewards. Put simply, humans are more concerned with not loosing
than they are with winning.
This behavioral tendency has recently been explored for practical
application in the medical health field, and now the first experiments
in applying this concept to the business world are beginning to come
out. In July, the NEBR released the aforementioned “Enhancing
the Efficacy of Teacher Incentives through Loss Aversion: A Field
Experiment,” which showed that by giving teachers their bonus
at the beginning of the year, and then taking the money back if goals
were not met, students test scores increased significantly (one
standard deviation to be exact).
Obviously, this is different structurally from the clawback bonuses
used by the large banks – which, as noted previously, has
limited effectiveness – but it still raises some interesting
ideas on how this compensation system might be used for other
professions. As with anything new, more research needs to be done (and
is being done), but the idea is one well worth remembering
Until those results are in, please let us know what you think about
this type of incentive design. Have you ever explored anything like
this in your own organizations? Do you think it would be effective or
do you think it would incur too many unintended consequences?