When incentive-based compensation programs and bonuses backfire

October 6th, 2004 by Julie Ferguson

George’s Employment Blawg (which, incidentally, is always a good read) treats the legal downside of incentive-based compensation, pointing us to an article by Chiree McCain of the Birmingham Business Journal entitled Compensation systems also have legal negatives
The article uses examples of bonuses that may inadvertently encourage drivers to short-shrift safety or drive beyond legal limits and bonuses for accident-free days that may impede accident reporting. While the article doesn’t discuss piecework, we’d put that in the category of a compensation system that often leads to safety problems. It certainly wreaked ergonomic havoc in the textile industry, although today, with much of that industry being outsourced offshore, injuries are probably less in evidence here in the U.S.
In most instances, incentives are intended to be a positive force, motivating employees to excellence but they can be a fertile playing ground for the law of unintended consequences, bringing to mind the age-old saw about the road to hell being paved with good intentions. We’ve certainly seen bonuses for accident-free days backfire, particularly because they are often awarded to a group of workers or a manufacturing division so you have the carrot of financial gain AND the stick of peer pressure at play.
The article suggests possible initeneded consequences of incentive-based compensation:
“They’re [the employer] not saying, ‘I’ll give you extra money if you go break the law’ … but the company can face liability for the conduct that is illegal,” he says.
Gittes says employers could face liability for on-duty actions by an employee or an independent contractor because, either way, that person is acting as an agent for the company.
And if a plaintiff can identify a pattern of accidents or illegal behavior, a compensation system that encourages that behavior might raise the stakes from negligence to deliberate disregard and therefore introduce punitive damages into the mix.
“If they were put on notice that their policy was being interpreted by employees in ways that threatened the safety of others and they continued to do it anyway, there could be an issue about punitive damages,” Gittes says.

The downside can be costly. In January, we reported on a $12 million lawsuit based on bad faith for a claims handling practice allegedly involving incentives to claims staff for lowering the cost of claims

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