Sticks and carrots: the effectiveness of penalties versus bonuses

Should organisations penalise employees who underperform or should they limit themselves to rewarding good performance? This is not a trivial question since financial incentives are an important part of employers’ toolkit. Wim van der Stede and colleagues have uncovered evidence that when an employee is penalised their performance improves the following month. However, he also finds diminishing sensitivity for both penalties and bonuses as the amounts increase. This occurs faster for penalties, creating a tipping point when bonuses become more effective.