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2 Basic Research on Incentives A broad interpretation of “incentive” could encompass all determi- nants of behavior and require a literature review that includes all fields in the social and behavioral sciences. As explained in Chap - ter 1, the committee focused on research related to incentives in which an explicit consequence—either positive or negative—is attached to a mea - sure of performance and on two areas that together provide a complemen- tary picture of what we know about their effects: theoretical research from economics about using performance-based incentives and experimental research from psychology on motivation and external rewards.1 The work from economics provides a framework for understanding how the effect of incentives can vary from context to context and from person to person. The work from psychology provides empirical results showing how the behavior caused by incentives can vary from context to context and from person to person. Together, these two literatures provide a picture of the complexity of the structure of incentives and an under- standing of the subtle differences in their design that can be crucial in determining their effects. Although we use these two research literatures to structure our analysis, we also discuss some empirical results from eco- nomics, sociology, and personnel psychology where they are applicable. 1 Although the committee focused in particular on theoretical work from economics and empirical work from psychology, we recognize that this division is artificial since the re - search in both fields includes complementary theoretical and empirical work. Where ap - propriate, the chapter notes related empirical work in economics and theoretical work in psychology. 13

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14 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION ECONOMIC THEORY AND ISSUES Economics has a well-developed body of theoretical research that looks at how organizational incentives should be designed and uses the results of that work to understand why different organizations use dif- ferent incentives. This body of research applies the general economic approach of explaining human behavior as resulting from individuals’ trying to get the best outcomes for themselves within the constraints of their environments. This general framework for understanding human behavior has proven to be quite powerful, although there are critiques that it misses important aspects of human psychology that limit the abil- ity to determine the best outcome in the idealized way that economists assume (see, e.g., Ariely, 2008; Rabin, 1998). The research on the use of incentives in organizations extends the general economic framework by analyzing differences in the objectives of the individuals who make up an organization. In particular, the work contrasts the objective of an organization as a whole—as defined by the owner or “principal” of that organization—with the objective of an indi - vidual worker or “agent.” As a very basic example, an owner probably cares about the organization’s overall profit while the workers care about their own pay, hours of work, and levels of effort. Because of the differ- ence in these objectives, a worker in an organization may not behave in ways that will best achieve the owner’s goals for the organization—which can make the organization less productive and thereby make things worse for the workers indirectly by reducing employment or pay in the long run. To help correct such a situation, incentives can be used to encourage the workers to work toward the owner’s goals for the organization. The classic example of the effect of incentive structures is to contrast the effect of paying workers by the hour with the effect of paying them by the amount of work they perform measured by some quantity of output. The latter is often known as a “piece rate,” derived from a manufacturing context in which a worker is paid for each piece produced. The owner of the company will want the workers to produce more per hour in order to increase profits: switching to a piece rate gives the worker an incentive to do so; paying by the hour may not do so. Sales commissions are one of the well-known ways in which piece rates are currently used in many indus- tries. Empirical research has shown many situations in which simple piece rate incentives operate as the economic theory predicts (Prendergast, 1999), although the efficiency of incentives depends on the precise social relations that tend to grow up around piece work (see Burawoy, 1979; Sallaz, 2009). Beyond the basic difference between paying by the hour and by the piece, there are important and subtle complexities that affect the way incentives operate. A number of contrasts in incentive structures provide

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15 BASIC RESEARCH ON INCENTIVES some understanding about the ways that incentives work in different settings or for different people. In the rest of this section, we discuss five different types of complexity that have been analyzed and the important considerations they raise for the design of incentives in education: 1. finding performance measures, 2. the different effects of incentives on different people, 3. the effects of uncertainty and control, 4. the effects of working in groups, and 5. weighing the benefits of incentives against their costs. Finding Performance Measures to Use with Incentives In most jobs, the value of the work performed by each worker is dif- ficult to assess. For example, for many jobs, it is hard to measure what workers produce because their output cannot be counted in any meaning- ful way. The qualitative aspects of that work—the relationship with the client, the clarity of the report, the accuracy of the numbers—are more important in determining its value than such countable outcomes as the number of meetings held, pages written, or spreadsheets produced. The difficulty in measuring the true results of what workers do is an important constraint in providing incentives—and the difference between the available measures of workers’ output and the true value of that out- put has consequences for the way incentives operate. In an attempt to provide appropriate incentives, organizations often look for performance measures to use in objectively quantifying what each worker is produc- ing. The problem is that these performance measures necessarily focus on the aspects of the job that can be easily quantified and neglect the qualita - tive aspects of the job that cannot be easily quantified. When incentives are attached to these performance measures, the predictable result is that workers often focus on the readily quantifiable aspects of the job that affect the performance measures and neglect the quantitative and qualita- tive aspects of the job that do not factor into the performance measures. There are numerous examples of the distortion that results from the use of incentives with performance measures that do not adequately reflect the true value of the work that is being done. These examples con- firm the findings in the theoretical analyses about the problems that can result when incentives are attached to performance measures that are not closely aligned with the true value of the work. For example, computer programmers rewarded by the length of their programs write longer pro- grams, surgeons penalized for high mortality rates take less risky cases, and chief executive officers (CEOs) rewarded for their company’s earn -

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16 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION ing performance manipulate those earnings reports (Prendergast, 1999; Rothstein, 2008). A good example of this kind of result in education occurs when incen- tives are attached to the number of “proficient” students: the result is that extra attention is given to the students who are just below the threshold of proficiency, while teachers and schools may compete for the proficient students who do not bring the threat of negative consequences. Another example can be seen when college rankings reward a more selective admissions policy: the result is that college recruiters encourage appli - cants from unqualified students because they will effectively get credit for rejecting them (Stevens, 2007). In these examples, the incentives placed on the performance mea - sures lead workers to perform actions that increase the performance measures but not the underlying value of their work. It is typical for performance measures to become distorted when they are used for incentive purposes. This is a version of the phenomenon sometimes referred to as Campbell’s law (Campbell, 1975, p. 49): The more any quantitative social indicator is used for social decision making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor. In organizations seeking to find an appropriate incentives scheme, the performance measures used may evolve over time in the search for mea - sures that are well aligned with the true value that the workers produce. For example, the Job Training Partnership Act of 1982 initially provided incentives for local employment and training centers that were based on job placement rates and the wages at the time of placement. These incen - tives led the centers to focus on people with stronger work histories who were more likely to find work and to be paid more. The program then added performance measures focused on people with weaker work his- tories and on changes in earnings. The successor to this act, the Workforce Investment Act, currently uses a combination of 17 performance measures to provide incentives to local employment and training centers (Heinrich and Marschke, 2010). Similar evolution in performance measures has occurred in other areas in which performance incentives have been used, such as in health care (see Rothstein, 2008). In education, many incentives are currently focused on a narrow set of measures derived from annual test results in grades 3-8 in read - ing and mathematics. This focus falls far short of a complete measure of desired educational outcomes. Most notably, it omits entirely such things as advanced levels of performance in the two tested subjects; areas of per- formance in those subjects that are hard to assess with standardized tests;

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17 BASIC RESEARCH ON INCENTIVES performance in other subjects and other grades; growth in such important characteristics as creativity, curiosity, persistence, values, collaboration, and socialization; and the eventual success of students in graduating, obtaining postsecondary education, finding productive and satisfying work, and contributing as members of their communities. The challenge of finding appropriate performance measures to use with incentives is often made more difficult by the challenge of defining the underlying goals that one wants the performance measures to reflect. For many organizations, it can be difficult or impossible to specify the organization’s goals in a way that would satisfy all stakeholders. This can be true not only for such institutions as not-for-profit organizations, government agencies, and schools, but also for groups and individuals in for-profit firms. For example, different stakeholders in a for-profit energy corporation may disagree about whether to focus on fossil fuels or on the development of renewable energy sources. In education, schools are responsible for educating students in many ways: fostering cognitive skills, emotional and physical development, readiness for work and civic participation, as well as students’ health and safety. In addition, schools are charged with ensuring that all students meet some minimal standards and that some of them are able to meet very high standards. Although these goals are not inconsistent, they all compete for the limited education resources that are available and, ulti - mately, require schools to make difficult tradeoffs among them (Dixit, 2002). These trade-offs affect the design of the accountability system. Ide - ally, one would like to have at least one performance measure linked to each goal, but this ideal is often not practical to carry out. Consequently, further trade-offs in the selection of performance measures are generally called for. Finally, within the set of performance measures that will be used, it is necessary to decide how heavily to weight each measure in the overall incentives system. This added challenge of reaching a consensus about an organization’s objective that can be captured in a set of feasible performance measures compounds the difficulty of finding appropriate measures that are aligned with that objective. A theoretical analysis shows that an optimal incentives scheme will place less weight on performance measures that are less aligned with the true value of what the workers produce (Baker, 2002). What is critical is not whether there is an overall correlation between the performance measures and the workers’ true productivity, but whether they are corre- lated “at the margin”—that is, correlated for additional changes from the status quo—so that the actions that improve the measures also improve the workers’ underlying productivity. The distinction between an overall correlation and a correlation at the margin is especially important because of the distortion in perfor-

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18 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION mance measures that occurs when incentives are attached to them. A performance measure may be generally correlated with the full range of outcomes without incentives—so that high levels of the measure are asso- ciated with overall good performance—but when incentives are attached to the performance measure, the actions taken to increase the performance measure on the margin may not increase overall performance at all. This common outcome is referred to as “gaming” the system or the test. Test preparation classes are an example of this phenomenon: knowing when to guess at the answer and when to skip the question will improve a score without increasing learning in the domain of the test (Koretz, 2008b). In education, it is not clear how strong the current incentives are. Objectively they may seem small, because they rarely involve serious consequences, like substantial bonuses or decertification in the case of teachers. However, studies of cheating by teachers suggest that some of them react very strongly to the seemingly small incentives in the current system (see Chapter 4). It is also important to keep in mind, as noted below, that any given set of incentives will have different effects in differ- ent settings and for different people, causing some people to work harder or more effectively and others to give up or to work in ways that thwart an organization’s goals. Distortion is virtually unavoidable in an incentives system that uses performance measures that do not reflect the full value of workers’ pro - ductivity. And as noted above, few jobs lend themselves to comprehensive measurement, so one should usually expect some distortion and take steps to minimize it. In education, one example of distortion occurs when teachers and students focus narrowly on tested material and ignore topics that are not covered on the tests. In evaluating an incentives system, it is important to evaluate, not whether distortion exists, but whether the incentives result in a sufficient increase in the output desired to justify the costs of running the incentives system, including the costs of monitoring the performance measures, providing the incentives, and addressing the unintended, negative effects. Because of the distortion in performance measures that results from plac- ing incentives on those measures, the true change in the output that results from the incentives system cannot be determined by looking at changes in the performance measures being used in the system, but must be determined by looking at other indicators of performance. In an educa- tional setting using test-based incentives, this means that it is necessary to look at other tests besides the tests attached to the consequences—other tests that are not themselves designed to mimic the high-stakes test—in order to determine how the incentives are affecting achievement. As a result of the difficulty in measuring results, most organizations base their incentives on subjective rather than objective measures or on

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19 BASIC RESEARCH ON INCENTIVES some combination of the two (Prendergast, 1999; Rothstein, 2008). Sub- jective measures have the potential to provide a more complete assess- ment of the contribution of each worker, with the ability to appropriately take into account special circumstances and to discount the value of quantitative measures that may be influenced by gaming behavior. Of course, there are problems with subjective measures, including that their reliability and validity are affected by such things as the reluctance of supervisors to differentiate workers in their performance assessments, the information that is privately held by workers about their own effort and performance, and the attempts of workers to game the measures by spending time to influence their supervisors’ assessments. These difficul - ties will be compounded in settings, such as schools, that do not face strong pressure to produce good results and may have personnel policies that discourage differentiation of workers on the basis of their perfor- mance. Systems that rely on subjective performance measures must have or must create incentives for the relevant authorities (e.g., principals) to act on their subjective assessments, while protecting the workers from arbitrary—or even capricious—evaluations. The Different Effects of Incentives on Different People One of the important results in the economic theory about incentives is that the effect of a particular incentives structure is likely to be differ- ent for different people. Although incentives are often structured so that everyone is given the same target, the target will often be easy for some people to meet but hard for others (Lazear, 2000). As a result, the effect of the incentive is likely to differ, encouraging greater performance for those people who are able to reach the target with some extra effort but discouraging performance for those people who believe they are unlikely to reach the target at all.2 This differential effect can lead in turn to differential turnover across a group of people receiving incentives: over time, an organization that uses performance incentives is likely to attract and retain workers who can achieve the targets that are rewarded by the incentives, while workers who are unlikely to be successful will become discouraged and leave. Research shows this differential effect of incentives on people. For example, Lazear (2000) studied a change from hourly to piece-rate pay for workers who install windshields in cars: he found that productivity improved by 35 percent, one-third of which was produced by lower productivity work- ers leaving the firm and being replaced by higher productivity workers. 2 See the discussion in the section “Psychological Results and Issues” below about the ef - fects of low and high targets.

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20 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION The knowledge that incentives will have different effects on different people depending on their ability to achieve the targets can be readily applied to examples within education. Lazear (2006) applies the theory to the case of incentives given to teachers—in a model in which teachers dif- fer in their effectiveness in raising student test scores—and produces the result that incentives will cause some teachers to increase their effort and others to change occupations. In Lazear’s model, this differential reaction would lead to increasing effectiveness in the pool of teachers over time— as measured by the ability of the teachers to raise test scores—because the ones who leave are those who are less able to respond effectively to the incentives.3 Similarly, economic theory suggests that incentives given to students—such as high school exit exams—will cause the students who have greater ability to pass the test, but can only pass it with increased effort, to increase their effort while causing the students who have less ability to pass the test to drop out (Betts and Costrell, 2001). If exit exams are introduced without making other adjustments to provide remedia- tion and support to students who will have difficulty passing the test, the differential reaction could lead to increasing achievement in students who graduate and increasing numbers of students who do not graduate. (Chapter 4 looks at the literature related to these responses by students and teachers in more detail.) In the teacher and student examples just mentioned, the economic models assume that the actions available to the teachers and students are either to increase effort or quit. A similar model of the different reac- tions to test-based incentives might consider instead that the two actions available are different versions of “increasing effort”—one involving greater focus on the full curriculum and the other involving extra time in test preparation. A model of teacher and student reactions to test- based incentives—in which different teachers and students have different abilities to be successful on the tests by focusing on the full curriculum or different beliefs about what instructional strategy would be successful— would show that the same incentives structure could lead to an increased attention to the full curriculum for some teachers and students while also leading to increased attention to test preparation by others. Teachers and students who believed they could be successful on tests by focusing on the full curriculum might choose to do so in such a model, while others might choose instead to focus on test preparation. 3 Research related to teacher turnover has shown that the teachers who leave teaching before their second year tend to be worse than the average teacher, as measured by changes in student test scores (Boyd et al., 2009). This research was conducted under the general approach to school-based accountability under the No Child Left Behind Act; we are not aware of any research comparing types of teacher turnover occurring with stronger and weaker teacher incentives.

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21 BASIC RESEARCH ON INCENTIVES As noted in the previous section (and discussed in more detail in Chapter 3), a focus on test preparation is likely to distort the test scores, resulting in an increase in the scores that is inflated as a measure of the true learning in the domain. So in this alternative model the same incen - tive might lead to test score increases for both groups of teachers and students, but the actions producing those score increases and the true learning involved would be dramatically different for the two groups. Importantly, these differences would be invisible without gathering addi - tional information beyond the test score data. Effects of Uncertainty and Control in Providing Incentives In most jobs, both the value of what workers produce and the mea- sures of that value can be strongly affected by many factors that the work- ers themselves do not control. For example, a client might be very moti- vated or not, or budget constraints may limit options for improvements that are needed. As a result, if an employer uses incentives, it is likely that the payoffs will vary according to those other factors, in addition to varying because of the workers’ own efforts. However, people generally dislike uncertainty, and if their pay is going to be influenced by factors they cannot control, they will want a higher level of pay on average to compensate for that uncertainty. A theoretical analysis shows that an optimal incentives scheme will place less weight on performance measures that are subject to greater uncertainty because they are subject to factors that the workers do not control (Baker, 2002). The use of such performance measures will require firms to pay their workers a higher average level of pay because the work- ers will need to be compensated for the greater uncertainty in their pay in comparison with what they would receive at another job. Although the firm may benefit on average from the response of the workers to the incentives, the higher level of average pay that workers need to compen - sate them for the uncertainty will reduce the extent to which the firm uses incentives. If the workers are adverse to the uncertainty associated with such performance measures, it may not be worthwhile for the firm to use incentives because the benefit from the increased productivity of the workers due to the incentives may be less than the cost of the higher average pay needed to compensate them for the uncertainty. In education, many factors affect student learning that teachers and schools do not directly control, including, in particular, many aspects of students’ home environments. As a result, the learning that occurs in the classroom of an individual teacher can vary widely from student to stu- dent and from year to year. As a result of this uncertainty and variability in student outcomes, many teachers dislike incentives based on student

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22 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION outcomes and will need to be compensated at a higher average level to make up for this uncertainty. Although there are things schools can do to affect or work around aspects of students’ home environments—such as working with parents or providing breakfast or study time at school— such interventions are not likely to be sufficient to counteract the variabil- ity in home environments across students. There is also strong evidence of random year-to-year fluctuations in student performance even at the school level, perhaps because one year the test happens to ask more ques- tions that were covered in the school’s curriculum or because of common environmental factors, such as whether there was an important school basketball game the night before the exam (Kane and Staiger, 2002). In many jobs, workers are compared with each other as a way of reducing the effect of factors that the workers themselves do not control. The argument is that workers in similar jobs will be subject to similar uncertainties that are beyond their control. So, for example, CEOs may be judged by the performance of their company’s stock price compared with other companies in the same industry as a way of controlling for changes in the industry that are outside the control of each CEO. The technique of comparing workers with each other rather than to an objective standard is often used in promotions, which is one of the most common ways of pro- viding incentives in firms (Prendergast, 1999). In education, the approach of comparing teachers or schools with each other could address common year-to-year changes, like fluctuations in test difficulty, but it would not account for the most important year-to-year changes, which occur at the student level and so do not affect every teacher in the same way. Many researchers are currently working on “value-added” techniques, which statistically adjust for differences at the student level to make it possible to compare the results of different teachers. However, as noted in Chapter 3, it is not yet clear how fully these models can account for student differ- ences to provide accurate measures of teacher effectiveness. Effects of Groups in Providing Incentives Economic theory has also looked at some of the issues in designing incentives for groups of people rather than for individuals. In many jobs, workers need to work together in a team (or group), and the results of their work depend on the contributions of all the members. There are inev- itable tradeoffs in the available measures of the workers’ contributions. On the one hand, any measures of the work done by individual workers will miss their contributions to the work of the other team members and so will give an inaccurate assessment of that worker’s total productivity. On the other hand, performance measures based on the productivity for the entire team will be very uncertain indicators of the performance of

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23 BASIC RESEARCH ON INCENTIVES any single worker because they will depend on the performance of all members of the team. In this situation, there is a tension between using inaccurate individual performance measures that ignore each worker’s contributions to the team and using team performance measures that vary because of the performance of all the team members and therefore pro - vide only weak incentives to each worker. Whether it is better to provide incentives at the individual or team level in this situation depends on the relative importance of cooperation by the team members and the degree of uncertainty added by using a team performance measure (Baker, 2002). In education, student learning is affected by many other people besides the designated teacher for a class, including other teachers, students’ par- ents, and students’ peers. In addition, there are important opportunities for teachers to contribute to the teaching skills of their colleagues, thereby affecting the learning of their colleagues’ students indirectly. (Chapter 4 discusses results of studies providing incentives to teachers, including experiments that compared the effects of incentives provided to individual teachers and to all teachers as a group in a school.) Research outside economics raises issues about the functioning of organizations that go beyond the issues addressed by economic theory. For example, sociological research deals with the structure of organiza- tions and the formation of occupational norms. Even in schools in which teachers do not appear to be working together or working with each other’s students, there are still important group processes that influence how any external incentives are interpreted and communicated among all the teachers. Organizational theory describes schools as “loosely coupled” organizations that buffer classroom practice from change and outside scrutiny and therefore respond to outside pressures by making largely symbolic changes (Firestone, 1985; Meyer and Rowan, 1977, 1978; Weick, 1976). The standards-based accountability movement recognized these ten- dencies and sought to counter them. A call for systemic reform by Smith and O’Day (1990) argued that a “fundamental barrier to developing and sustaining successful schools in the USA is the fragmented, complex multi-layered educational policy system in which they are embedded” (p. 237). The systemic reform strategy aimed to overcome loosely coupled organizational structures through state-led education reform that empha - sized unified goals, a coherent system of instructional guidance, and restructured educational governance. Some of the concrete manifestations of this approach have included school-level efforts to coordinate, support, and monitor instruction by changes to emphasize principals’ roles as instructional leaders, promote mentoring relationships among teachers, and institute coaching models for teacher improvement. Organizational theories predicted that the shift toward systemic

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26 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION PSYCHOLOGICAL RESULTS AND ISSUES As in economics, psychology has a long-standing appreciation of the importance of incentives in motivating behavior—going back to the begin- ning of the discipline—with research over the past few decades showing the complexity of the relationship between incentives and behavior. This research has led to the counterintuitive finding that under some circum - stances incentives actually reduce the behavior that is being rewarded rather than increase it. The counterintuitive result has shown up in experiments that provide an explicit incentive that takes the place of preexisting internal motivation by rewarding people for behavior they would have engaged in anyway without the incentives. For instance, Deci (1971) found that when college students were paid to perform interesting cube puzzles, they were less likely to perform the puzzle on their own during a free-choice period. Similarly, when nursery school children were offered a “good player award” for drawing a picture, they were less likely to draw when they were back in their regular classrooms (Lepper, Greene, and Nisbett, 1973). Once explicitly rewarded for a particular behavior, people tend to stop that behavior when the reward is discontinued. A number of other early studies showed that use of an external reward to motivate people to do something they would have done anyway can have detrimental effects on the quality and creativity of performance, as well as on subsequent motivation to perform the activity (Lepper and Greene, 1978). The finding that external rewards can undermine internal motiva- tion was initially very controversial, seeming to contradict both conven- tional wisdom and a wide body of experimental research in psychology. Over a decade, a succession of meta-analyses both supported (Rummel and Feinberg, 1988; Tang and Hall, 1995; Wiersma, 1992) and contested (Cameron and Pierce, 1994) that finding. These were followed by a new meta-analysis that provided a more complete and nuanced review of the contrasting conditions in the literature (Deci, Koestner, and Ryan, 1999). The new meta-analysis considered 128 studies published from 1971 to 1999, including each of the studies addressed by Cameron and Pierce (1994); this study showed clearly that tangible rewards do significantly and substantially undermine internal motivation. Other research at the intersection of psychology and economics has shown that the way people perceive consequences and the way they decide between options with different consequences can be strongly affected by the way the different options are framed (see, e.g., Ariely, 2008; Rabin, 1998). For example, options framed as losses are perceived differently than the same options framed as gains. Similarly, people may reject options that are objectively better if the options are framed in a way that makes them seem unfair. A number of researchers have attempted to

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27 BASIC RESEARCH ON INCENTIVES reconcile these psychological findings with the more standard view from economics that people choose according to the objective benefits of the different options, without reference to how those benefits are described (e.g., Fehr and Falk, 2002; Frey and Jegen, 2001). In the rest of this section, we look in more detail at the specific circum- stances that produce the negative effect of rewards on internal motivation, and on the research that has focused on learning and educational settings. We do so in three areas: 1. internal and external motivation, 2. the motivation to learn, and 3. incentives and public service work. Internal and External Motivation Deci and Ryan (1985) synthesized the large body of experimental work on human motivation in a theory that provides a framework for understanding the varying effects of external rewards. In this theory, inter- nal motivation derives from a basic human need for self-determination that involves being able to make choices and manage the interaction between oneself and one’s environment. When self-determined, a person will “engage in an activity with a full sense of wanting, choosing, and per- sonal endorsement” (Deci, 1992, p. 44). The need for self-determination involves needs for autonomy, competence, and relatedness, each of which can be affected by external rewards. Autonomy refers to the extent that people do something of their own choosing, both in and out of the context of external pressures. For exam- ple, one student may do homework simply to avoid punishment from his parents. Another student may do homework because she believes, despite a lack of interest in the topic, that it may be useful to her career. Both students are doing things that they would not do out of interest, so both are externally motivated. Yet the behavior of the second student entails more of an element of choice rather than simple compliance, and therefore she is exercising a certain degree of autonomy. The student has identified and understood the importance of the behavior and has internalized and assimilated it. In this respect, the student’s behavior shares many charac - teristics with behavior that is internally motivated. It is creating this type of “buy-in” that is such a challenge for edu- cators and employers. It can be fostered by giving a student a sense of relatedness, which is a sense of belonging with the school (or other institution, person, or family) and sharing and accepting its mission or goal. Competence is another key factor—that is, the feeling on the part of a student that she understands the goal and has the skills to succeed.

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28 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION This contrasts with the first student, who is simply complying with his parents but likely feels controlled, with little autonomy, which has a nega - tive effect on internal motivation. The needs for autonomy, competence, and relatedness help to make sense of the effects of external rewards in different contexts. One particularly interesting finding on the effects of external rewards relates to rewards for doing well or meeting a specified standard. The effects of such rewards have been shown to be mixed (Deci, Koestner, and Ryan, 1999): sometimes receiving a reward that signifies compe- tence appears to enhance subsequent motivation, sometimes it seems to decrease subsequent motivation, and sometimes it seems to have no effect. The key seems to be that when rewards signifying competence are used in a way that seems very controlling to the person—so that it limits autonomy—the result tends to be negative. However, if a reward does not seem to be pressuring but instead simply signifies competence, it can have the intended positive effect. When people are told their performance is being evaluated, it is often experienced as controlling, and internal motivation may decrease even when positive evaluative information is subsequently provided (Harackiewicz, Abrahams, and Wageman, 1987). The information provided by the reward can also be important. In situations in which higher performers receive higher rewards while lower performers receive lower rewards, the less-rewarded performers tend to interpret the shortfall as a signal not only that they did poorly this time, but also that they are unlikely to do well in the future. People who feel incompetent stop trying and become “demotivated.” This effect has been found to be quite large (Deci, Koestner, and Ryan, 1999). Rewards need not be tangible. The effects of verbal praise are also complex (Henderlong and Lepper, 2002). Verbal rewards are generally predicted to enhance internal motivation because they are informational, and they also feed a person’s feelings of competence. However, not all praise has a positive effect. Several studies have shown that controlling positive feedback that seems to pressure the recipient (“good, you did just as you should”) leads to less internal motivation than positive feedback that is purely informational (“you did well on that task”) (Pittman et al., 1980; Ryan, 1982). One study found that verbal feedback that empha - sizes performance relative to others tends to reduce internal motiva- tion, whereas feedback centered on whether one has reached a certain level of performance on the task tends to increase interest in the task (Harackiewicz Abrahams, and Wageman, 1987). The kinds of goals that are set also affect motivation. The highest level of effort occurs when the task is moderately difficult, and the lowest levels occur when the task is either very easy or very hard (Abramson et al., 1978; Atkinson, 1964; Csikszentmihalyi, 1990; Deci and Ryan, 1985).

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29 BASIC RESEARCH ON INCENTIVES When goals are set so high that people do not believe they can achieve them, the goals are demotivating and set the stage for feelings of helpless- ness, reduced effort, withdrawal, and lower self-esteem. Another factor is the specificity of the goals that are set: identifying specific, difficult goals leads to higher performance than does simply urging people to do their best (Locke and Latham, 2002). This occurs because do-your-best goals have no external referent and allow for a wide range of acceptable perfor- mance levels. The ideal goals provide optimal challenge: they encourage people to stretch themselves and are attainable with effort. Incentives can in turn affect the goals that people set for themselves: when people are given a choice of tasks that differ in terms of difficulty, they tend to choose relatively easy tasks if there is an external reward for successful completion, but they choose more challenging tasks in the absence of an external reward (Shapira, 1976). The Motivation to Learn Rewards-based incentive systems are commonly used in educational settings. For example, many teachers try to improve student performance by systematically rewarding students who follow classroom rules with praise, gold and silver stars, or tokens exchangeable for prizes. 4 Grades and honor rolls are intended to recognize excellence in achievement, but they may come to serve as external rewards to motivate students to work hard. Incentives can backfire if they reduce the motivation that students have to learn. Young children have a natural propensity to learn that prompts exploration, curiosity, and a readiness to engage new material that frequently results in learning without the application of any external incentives. Given this propensity, why is the use of grades a standard part of the educational system? Part of the answer is that grades provide information to others (such as parents and college admissions officers) about how students have done, as well as information to the students themselves that they are learning the right things. Another part of the answer, of course, is that students are not always motivated to learn the things that may be useful or important for them to learn, so that the external signaling and motivation provided by grades can encourage stu - dents to learn skills and topics they might otherwise ignore. Sometimes the initial learning produced by external motivation will lead students to discover an interest in a new area that can lead to internal motivation for later learning. 4 See, for example, the National Education Association’s resources on classroom manage - ment at http://www.nea.org/classmanagement/archive.html [December 2010].

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30 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION The key to using rewards in the classroom is to do so in a way that fosters autonomous motivation. As discussed above, autonomous moti - vation involves engaging students in a learning activity by helping them identify with and fully accept its importance for their own personal goals and values, even though the activity is not inherently interesting to them (at least initially) and therefore not internally motivating. An example would be a student who studies biology very hard in order to get excel- lent grades so she can go to medical school, because that is her personal goal. Autonomous motivation has been found to be a strong predictor of both conceptual learning and psychological well-being (Benware and Deci, 1984; Deci, Ryan and Williams, 1996; Grolnick and Ryan, 1987; Grolnick, Ryan, and Deci, 1991). Autonomous motivation has also been found to be associated with greater creativity on art activities at the elementary level (Koestner et al., 1984), less likelihood of dropping out for high school students (Vallerand et al., 1997), and a preference for chal - lenges (Shapira, 1976). Contemporary theories of motivation predict that tests and other forms of evaluation will best foster learning when they have informa - tional significance. Evaluations would be expected to be most motivating when they provide relevant feedback in a noncontrolling way—that is, by providing individuals with specific feedback that points the way to becoming more effective or more competent, but without pressure or control. Motivation research suggests that when evaluations are experi- enced as controlling, they may produce temporary compliance, but they ultimately undermine internal motivation and commitment to the activity. And when evaluations convey incompetence to the individual, or when they are based on overly challenging standards that are perceived to be beyond the reach of the individuals, they are likely to reduce motivation and lead to a withdrawal of effort. Both experimental and field studies have supported these predictions concerning the effects of evaluations on motivation (Ryan and Brown, 2005). For example, in one experiment at an elementary school (Grolnick and Ryan, 1987), students were given a reading comprehension task under three conditions: (1) they were told they would not be tested at all; (2) they were told they would be tested, but only to determine what kinds of ideas were learned, with no consequences for failure or success; and (3) they were told they would be tested and graded, and the grade would be delivered to their classroom teacher. The results showed that under the third condition—which represented a controlling use of evaluations—the students demonstrated short-term, rote memory but produced a signifi - cantly lower level of conceptual learning than the two noncontrolling conditions. Classroom studies have shown that when teachers are oriented toward

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31 BASIC RESEARCH ON INCENTIVES being controlling (for example, using evaluations and rewards), students are less internally motivated, less desirous of challenges in schools, and less confident in their skills (Deci et al., 1981; Ryan and Grolnick, 1986). What leads teachers to be controlling? They may become controlling when they themselves are pressured to get students to perform. In one study (Deci et al., 1982), participants were given the task of helping stu - dents learn a cognitive-perceptual task. The teachers all had the same set of problems to work with and were given the same preparation. However, one group of teachers was explicitly told that it was their job to make sure their students performed “up to high standards,” while the other group received no such instruction. The participants who were pressured to pro- duce high student achievement were more controlling and less support- ive of students’ autonomy. Specifically, they engaged in more lecturing, criticizing, praising, and directing—all techniques that have been shown to have a negative impact on students’ interest in learning and their will- ingness to undertake difficult academic challenges. A subsequent study (Flink, Boggiano, and Barrett, 1990) examined this effect in the context of a newly introduced school-based curriculum for elementary students across several schools. As would be predicted by the prior work, the results showed that teachers pressed toward higher standards were more likely to engage in controlling instructional behaviors, and the more they did so, the more poorly the students actually performed on the objective tests. Finally, there is evidence to suggest that focusing parents’ concerns on performance outcomes will lead them, like teachers, to use pressuring motivational strategies that may backfire, leading to lower achievement over the long term (Grolnick, 2003; Grolnick et al., 2002). In contrast, par- ents who are supportive of their children’s autonomy can help them to be more internally motivated (Grolnick, 2009). Incentives and Public Service Work Although most jobs include an external financial reward, many peo- ple enjoy work and do not do it only because they are paid. Organiza- tional psychologists have found that people are most motivated in jobs that involve a wide variety of tasks, give them autonomy, provide good feedback, and encourage identification with the organization’s mission (Griffin, 1991). The organization’s mission may be particularly important to teachers and other people in public service who are motivated by the opportunity to contribute to society by such goals as educating children, caring for the elderly, or helping the unemployed (Burgess and Ratto, 2003; Heinrich and Marschke, 2010; Prendergast, 1999). One example of the commitment of teachers to the mission of educating children is the finding, from two surveys (Ingersoll, 2003, p. 179), that most teachers

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32 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION spend a substantial amount of their own money on curriculum materials and classroom supplies. People in public service professions often view themselves as organi - zational stewards and may be motivated primarily by internal rewards, such as trust, autonomy, and job satisfaction, and the goals of their organi- zation. The feeling of contributing to the public good may satisfy their per- sonal needs and goals. In the field of public administration, research has found support for the importance of public service motivation (Heinrich and Marschke, 2010). This motivation potentially has implications for the effectiveness of external incentives in public service occupations. Because of their under- lying motivation, giving public service workers a financial incentive may be counterproductive, in that it signals that the relationship between the organization and the employee more closely resembles a market one, thus diluting effort and motivation (Burgess and Rato, 2003). Although there have been successful public-sector incentive programs—such as a Brazil - ian program that tied the pay of tax collectors to the number of tax evad- ers they apprehended (Kahn et al., 2001)—it is important that the incen- tives structure be aligned with the mission of the organization. Chapter 4 discusses the evidence related to providing performance pay for teachers. CONCLUSIONS The overarching message about incentives from research in econom- ics, psychology, and related fields is that the details of incentive systems are critical to their success. Although there are many situations in which incentives work in a straightforward way, increasing the targeted behav- ior as intended, there are also many situations in which incentives fail to produce their desired effect because important details have not been taken into account. Although the research in economics and psychology shares a high- level conclusion about the complexity of the link between incentives and behavior, the two fields point toward different considerations when one considers the research on the use of incentives in education. Work in eco - nomic theory analyzes the likely effect of incentives that are structured in different ways. These differences tend to be defined in concrete terms— who receives what consequence under what conditions. In contrast, much of the recent work in psychology about incentives analyzes subtleties in the different ways that incentives are framed and communicated. When the committee looked at the ways that incentives have been used in education, this difference in the types of features considered by economics and psychology affected our ability to identify the relevant contrasts in existing educational research. In the large-scale applications

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33 BASIC RESEARCH ON INCENTIVES of incentives that we review, we are able to note interesting and poten - tially important contrasts in the types of features suggested by economic theory—who gets what, when—but we are not able to note interesting contrasts in how the incentives are framed and communicated to the people they seek to influence. As a result, our synthesis of the basic research provides more detail about the findings from economic theory because we are able to use that detail to guide our review of the research on applications of incentives in education (see Chapter 4). As the research in economic theory discussed in this chapter shows, at least four key elements need to be carefully considered in designing incentive systems: who is targeted by the incentives, what performance measures are used, what consequences are used, and what support is provided. Target In complex organizations, incentives can be designed for peo- ple in different positions who can affect outcomes in different ways. Although the effects of incentives will be transmitted informally through the organization, that transmission will likely be imperfect. It may be important to target direct incentives to the people who can make the changes needed to improve outcomes. Performance Measures The performance measures used with incen- tives have to be aligned with the desired outcomes for the incentives to have their desired effect. In particular, the measures need to be chosen so that behavior that increases the measures also increases the desired outcomes. Consequences The size and structure of the consequences provided by the incentives will affect how the incentives operate and should be designed to be appropriate to the situation. Support Incentives will typically have different effects for different people who have different abilities to successfully reach the target that will provide a reward or avoid a sanction. Without resources in support of an organization’s objectives, incentives can be discouraging to the very people they are often intended to help, particularly if those people do not have the capacity to be successful. The literature in psychology is not inconsistent with the four ele- ments above—and much early psychological research focused precisely on such structural features of incentives—but much recent work in psy- chology about incentives has focused on a different element that has

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34 INCENTIVES AND TEST-BASED ACCOUNTABILITY IN EDUCATION proven to be important in many settings: how incentives are framed and communicated. Framing and Communication In most organizations, the commit- ment people have to the organization’s mission is a critical part of their motivation. Incentives need to be framed and communicated in ways that reinforce that commitment—rather than erode it—by emphasizing the information they provide on progress toward shared goals. In the chapters that follow we look at the use of test-based incentives in education through the lens of these key elements, with the caveat that we are able to say nothing about interesting contrasts in how incentives have been framed and communicated. The research in economic theory discussed in this chapter also raises two important points related to evaluating the success of incentive sys - tems, nonincentivized performance measures for evaluation and weigh - ing costs and benefits. • Nonincentivized performance measures for evaluation: Incentives will often lead people to find ways to increase measured performance that do not also improve the desired outcomes. Because of the resulting distortion in the performance measures used with the incentives, it is usually necessary to find different performance measures—that are not being used in the incentives system—to use when evaluating how the incentive system is working. • Weighing costs and benefits: Incentive systems will typically gener- ate a mix of costs and benefits that must be weighed against each other to determine the net value of the system. The costs will include monetary costs associated with running the system itself, as well as nonmonetary costs, such as the negative reactions of people who are left out of rewards or sanctioned under the incen- tive rules. Again, the literature in psychology is not inconsistent with these two points from economics about how incentive systems should be evaluated, but the focus of recent work on psychology related to incentives speaks more directly to another point, changes in disposition. • Changes in dispositions: In addition to evaluating the changes in a set of defined objective outcomes, it is important to consider the way incentive systems affect people’s dispositions. No mat- ter how broadly an incentives system is designed, in most situ-

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35 BASIC RESEARCH ON INCENTIVES ations we are likely to care about a broader range of outcomes than could be measured by available performance measures and rewarded by feasible incentive systems. With respect to these broader outcomes, it is important to know how incentives change the way people are disposed to act when they are not being directly affected by the incentives. We consider these points further in Chapter 4 in the context of our discus- sion about the use of test-based incentives in education, with the caveat that we are able to say little about how these incentives have changed people’s dispositions to act when they are not being directly affected by the incentives.

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