Earnings-at-Risk Incentive Plans: A Performance,Satisfaction and Turn over Dilemma

Earnings-at-risk (EAR) incentive plans are designed to enhance performance, in part, by creating base wage dissatisfaction that, in turn, triggers greater effort directed toward performance behaviors rewarded with incentive pay. However, employee disatisfaction with EAR plans in general and base wages in particular may also produce unintended consequences that counteract any benefits these plans produce. This study examines the reactions of 167 sales and customer-service employees working under an EAR plan. It also compares employee reactions to an EAR format versus a traditional compensation plan. The study suggests that managers who decide to adopt an EAR plan should be aware of the negative reactions employees may have to these plans, the level of personal control employees actually have over targeted performance behaviors and the need for a level playing field that does not put newer employees at a disadvantage.