In many organizations, incentive systems are designed with the simple assumption that offering bonuses or threatening penalties will automatically improve employee performance. However, businesses often overlook how differently people respond to these incentives based on their individual motivations. As a result, some incentive schemes fail to deliver the expected boost in performance, or even lead to stress and disengagement. There is still limited understanding in practice about when a particular type of contract—such as a bonus or a penalty—works best, and for whom. Our study addresses this issue by examining how contract framing interacts with individual motivational styles in competitive work settings.
Specifically, we investigate how presenting contracts that emphasize either bonuses or penalties affects employee performance in relative performance schemes—settings where outcomes depend on how well one performs compared to others. These schemes are common in workplaces such as sales teams or customer service departments, where employees compete for commissions, performance ratings, or career advancement. By exploring both the framing of the incentive and the employee’s personal motivation, our study seeks to understand when and for whom a particular contract type is most effective.
Our research is based on a psychological concept called regulatory focus theory, which explains that people are motivated in different ways. Some individuals have a promotion focus, meaning they are driven by hopes, aspirations, and the desire to achieve ideal outcomes. Others have a prevention focus, meaning they are motivated by duties, responsibilities, and the desire to avoid failure.
The situation itself can also shape these mindsets, such as through the way contracts are framed. A bonus contract, which highlights potential rewards, encourages a promotion-oriented mindset, while a penalty contract, which emphasizes avoiding failure, promotes a prevention-oriented mindset. Relative performance schemes, because they involve social comparison and create high psychological pressure, also tend to trigger a prevention focus.
We expected that when a person’s natural motivation matches the mindset encouraged by the situation—a concept known as regulatory fit—they would perform better. To test this, we conducted an experiment examining how different combinations of regulatory focus (promotion vs. prevention) and contract framing (bonus vs. penalty) affected performance.
Our findings confirmed our expectations. Individuals with a strong prevention focus performed better under a penalty contract, showing a positive association between prevention orientation and performance. Under a bonus contract, an individual’s regulatory focus did not significantly influence performance, because the bonus framing created a mismatch with the situational prevention focus induced by relative performance schemes.
The study highlights the limitations of “one-size-fits-all” incentive designs, showing that they can be ineffective. By understanding how personality and contract framing interact, organizations can design better motivational systems that align with employees’ natural tendencies, leading to improved performance and more sustainable motivation.
The reference for the paper is found below:
Altenburger, M., & Mauser, S. (2025). Bonus or penalty contracts in relative performance schemes: a question of regulatory focus. European Accounting Review, 1–21. https://doi.org/10.1080/09638180.2025.2567384
