“Non-linear Incentives and Worker Productivity and Earnings: Evidence from a Quasi-experiment,” Richard B. Freeman, Wei Huang, and Teng Li, NBER Working Paper # 25507, January 2019.

Abstract:

Firms often use non-linear incentive systems to motivate workers to achieve specified goals, such as paying bonuses to reach targets in sales, production, or cost reduction. Using administrative data from a major Chinese insurance firm that raised its sales targets and rewards for insurance agents greatly in 2015, we find that increased incentives induced agents to increase sales of the increasingly incentivized life insurance products, bunched around the new targets, albeit in part with some low quality sales that led to canceled contracts, while reducing sales of products outside the new incentive system. The greater non-linear incentives raised agent incomes and lowered turnover and substantially increased firm revenues net of the increase in payments to agents. The stock market reacted to the new system with a jump in the firms’ share price relative to its main competitor by 15-20% in the days surrounding introduction of the new system.