Rewarding Output Instead of Cost Cutting Leads Employees to Set Higher Targets

Companies pay for what they want. Some reward employees for producing more. Others reward them for using less. A paper forthcoming in The Accounting Review finds that the choice changes how employees behave when they help set their own budget targets. Employees paid for output set higher targets, hit them more often, and make fewer errors than employees paid for saving inputs, even when the two pay plans are worth the same amount of money.

The authors are Jake Andrassy, Assistant Professor of Accounting at McCoy College of Business, Texas State University; Jason Brown of Indiana University; Timothy Mallon, who was on the McCoy College accounting faculty when the paper was written and is now at Portland State University; and Ashley K. Sauciuc of Indiana University. The paper won the David A. Bush Best Paper Award at the 2025 Palmetto Symposium on Experimental Accounting Research.

Two ways to chase profit

Firms can raise profit by producing more with the same resources, which the authors call productivity, or by using fewer resources for the same output, which they call efficiency. Incentive plans usually lean one way or the other. Little research has asked whether the two framings feel different to the people being paid.

The paper studies that question in a participative budget. That is a budgeting process in which the employee helps set the target that pay will later be judged against. Employees in such systems have a known tendency to set targets a bit low, leaving a cushion known as budgetary slack.

What the researchers found

In an experiment, participants worked under one of two pay plans. One rewarded higher output. The other rewarded lower input. The two plans were designed to be economically equivalent, so a purely rational employee should have treated them the same.

Participants did not. They saw the efficiency plan as riskier than the productivity plan. That extra sense of risk led them to set lower targets, meaning more slack. The pattern held whether the production task had low or high uncertainty in its outcomes.

The follow-up results are the striking part. Employees on the productivity plan set harder targets, yet they reached those targets more often. They also made fewer errors in the work itself.

What it means for managers

The findings suggest that framing matters even when the dollars do not change. A plan that says “produce more” reads as an opportunity. A plan that says “waste less” reads as a threat, and people respond by protecting themselves with easier targets.

For managers who use participative budgets, the practical advice is to consider stating incentives in terms of output where the underlying economics allow it. Doing so may reduce slack, raise targets, and improve accuracy without spending more on pay. Firms that need employees to focus on cost control should at least be aware that such a plan may carry a hidden cost in lower ambition.

The paper has been accepted at The Accounting Review and had not yet appeared in an issue at the time of this summary. This summary is based on the paper’s abstract. The full article reports the experimental design, sample, and detailed results.

What it means for managers

• Framing changes behavior even when the money does not. An incentive stated as 'use less' feels riskier than one stated as 'produce more', and employees respond by padding their targets.
• Productivity incentives cut budgetary slack. Employees paid for output set harder targets, yet reached them more often and made fewer errors.
• If cost control must be the focus, expect a hidden price. Efficiency-framed pay may buy lower ambition in participative budgets.

Andrassy, J., Brown, J., Mallon, T., & Sauciuc, A. K. (forthcoming). Productivity versus efficiency: The effect of incentive focus on target setting in participative budgets. The Accounting Review. 10.2139/ssrn.5141519