Do social incentives matter? Evidence from an online real effort experiment

Mirco Tonin, Michael Vlassopoulos 26 July 2012

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Corporate Social Responsibility (CSR) activities, ranging from corporate philanthropy to the adherence of firms' operations to code of conducts involving, for instance, environmental protection or labour standards, are important and growing in their importance. As the Economist (2008) puts it, "it is almost unthinkable today for a big global corporation to be without [a corporate CSR policy]". Given their heterogeneous nature, it is not easy to quantify CSR activities in a comprehensive manner. However, the available figures suggest that CSR is more than a declaration of intents. For instance, the 139 US companies surveyed by the Conference Board gave $8.45 billion in charitable donations in 2010 (Tonello and Torok 2011).

One rationale for CSR is that various stakeholders have some demand for corporations to engage in philanthropy on their behalf (Benabou and Tirole 2010). Usually it is underlined how CSR may be valued by customers (Casadesus-Masanell et al. 2009, Elfenbein and McManus 2010) or employees and investors. Additionally, CSR activities may be rewarded by regulators or by social activists and NGOs (Baron 2001). There is, however, not much evidence on the impact of CSR on employees, despite the fact that, as The Economist (2008) emphasises, "[a]sk almost any large company about the business rationale for its CSR efforts and you will be told that they help to motivate, attract and retain staff".

In recent research (Tonin and Vlassopoulos 2012), we set up a ‘real effort’ experiment to assess the impact of social incentives brought about by CSR activities on productivity.

An online experiment

In our experiment subjects perform remotely an online data entry task, while being exposed to different combinations of incentives. We provide two different types of monetary incentives. One type, which we term ‘private incentive’, involves paying subjects a piece rate, while the other type, which we term ‘social incentive’, involves a donation received by a charity of the subject's choice. The donation can be either lump sum or related to the subject's performance.

We find that social incentives have a significant effect on people’s performance. Specifically, they are associated with a 20% rise in productivity and this effect is present whether the donation to the charity is lump sum or related to subject’s performance. This suggests that what motivates workers is the presence of social incentives rather than their specific form. Consistent with this, in the real world firms introduce CSR policies in a variety of ways. For example, in the US, large retailers and grocery chains, such as Target Corporation and Whole Foods Market donate 5% of their pre-tax profits to charitable groups, while in the UK there exists the so-called Percent Club for companies that pledge to donate at least 1% of their pre-tax profits to charitable causes, with members like GlaxoSmithKline, Deloitte, and the John Lewis Partnership. On the other hand, other firms opt not to explicitly link their CSR budget to profits.

When we compare the effectiveness of private and social incentives in boosting productivity, we find that social incentives are at least half as effective in motivating subjects as compared to private incentives. What this means is that an employer that spends $1 on a charitable cause will generate at least the same increase in productivity as $0.50 spent on paying workers directly.

If we consider the additional gains arising from tax benefits, and additional advantages coming from the appeal of CSR to customers, regulators, or investors, we may well conclude that social incentives are cost-effective. Also, one could expect social incentives to become increasingly more effective in motivating employees relative to private incentives as earnings increase and the marginal utility of money decreases. This may be one of the factors behind the increasing importance of CSR policies. For instance, in a survey by the Economist Intelligence Unit (2007), 34% of corporate executives indicated that CSR was a high or very high priority for their firms three years earlier, compared to 55% saying so with regard to the present and almost 70% expressing their expectations on how high a priority it will be three years hence.

Choosing your compensation

Motivated by the fact that in real labour markets workers face a trade-off between sectors that offer high financial rewards and others that pay less but have social impact, in one of our treatments, we offer subjects a certain amount and ask them to decide whether and how they want to split this into a personal and a social piece rate. This allows us to investigate selection effects that social incentives may induce. We examine the characteristics of subjects who self-select into a compensation scheme that embeds social incentives while sacrificing personal monetary rewards.

We find that around 50% of our subjects choose compensation with a social element, with women being more likely than men. Notably, we find no differences in terms of productivity between the group that shares the piece rate with the charity and the group that does not, suggesting that social incentives do not attract more (or less) productive workers. We also do not find differences between these two groups in terms of their responsiveness to social incentives when social incentives are imposed upon them. This suggests that there may not be a ‘first mover advantage’ in terms of productivity for firms introducing social incentives. For instance, a firm that applies voluntarily strict environmental standards might attract an environmentally conscious workforce, but employees may respond as well in firms that adopt the standards later on, when for instance they become mandatory by government regulation.

Beyond Corporate Social Responsibility

Our results provide empirical support for the growing recognition that workers have an interest in advancing social causes through their labour effort. Besides CSR, social incentives are also pervasive in organisations in the public and non-profit sector where the link between a worker's job and a social cause arises naturally. Our finding that social incentives are effective in boosting productivity indicates that in occupations and sectors with characteristics that engender pro-social behaviour, such as, health, education, and social care, a given level of productivity can be achieved with fewer financial incentives.

References

Baron, D (2001), “Private Politics, Corporate Social Responsibility, and Integrated Strategy”, Journal of Economics and Management Strategy, 10:7-45.

Benabou, R and J Tirole (2010), “Individual and Corporate Social Responsibility”, Economica, 77(305):1-19.

Casadesus-Masanell, R, M Crooke, F Reinhardt, and V Vasishth (2009), “Households' Willingness to Pay for Green Goods: Evidence from Patagonia's Introduction of Organic Cotton Sportswear”, Journal of Economics and Management Strategy, 18(1):203-233.

The Economist (2008), “Special report: Corporate social responsibility”, 17 January.

Economist Intelligence Unit (2007), Global Business Barometer.

Elfenbein, DW and B McManus (2010), “A Greater Price for a Greater Good? Evidence That Consumers Pay More for Charity-Linked Products”, American Economic Journal: Economic Policy, 2(2):28-60.

Tonello, M and J Torok (2011), “The 2011 Corporate Contributions Report”, The Conference Board.

Tonin, M and M Vlassopoulos (2012), “Social Incentives Matter: Evidence from an Online Real Effort Experiment”, IZA Discussion Paper 6716.

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Topics:  Frontiers of economic research Labour markets Productivity and Innovation

Tags:  social incentive, online experiment, corporate social responsibility