105% Bonus Targets Win

A study on incentive structures reveals that setting bonus targets above 100% leads to better performance outcomes than lower targets.

Key Incentive Strategies

• Set bonus targets at 105% performance rather than 90%
• Research shows overattainment targets drive better results
• Use clawback mechanisms for stronger motivation

Clawback Strategy

• Give 50% of bonus upfront
• Require repayment if goals aren't met
• Loss aversion makes this more effective than traditional end-of-period bonuses
• Example applications:
  • Kids' allowance: Give $50 upfront, require payback if chores aren't done
  • Better results than promising $100 at end of month

Real World Examples

• Private Prisons
  • Current model: Incentivized by filled beds
  • Proposed better model:
    • Base payment for filled beds
    • Bonus tied to rehabilitation success
    • Clawback if inmates return within 4 years
    • Second payment if inmates stay out of prison

Key Principles

• Loss aversion is psychologically stronger than potential gains
• People work harder to avoid losing money they have than to earn new money
• Tracking results and measuring success is crucial but challenging
• Bold changes to incentive structures often needed for meaningful impact
• Second-order effects must be considered when designing incentive systems