Companies often have a hard time determining how motivated or committed their employees are, because employees know it goes against their own interests to declare themselves unmotivated or uncommitted. The solution to this problem is for companies to put incentives in place that encourage employees to reveal how they actually feel. In this article, the author, a behavioral economist, describes an incentive plan that has been deployed successfully to this end — the so-called Pay-to-Quit program, in which companies offer employees a significant sum of money to leave their jobs.
Companies often need to reduce the size of their workforce. But how do managers decide which employees to let go and which to keep?
One often-overlooked parameter in the decision-making process is motivation. The math is simple: All else being equal, the more motivated employees are, the higher their value — which means managers should prioritize keeping highly motivated employees on board. The problem is, employees know that companies value motivation, so they have a strong incentive to appear motivated, even if they’re not. To work against that tendency, managers need to create incentives that will encourage employees to reveal their true levels of motivation.
The Pay-to-Quit Program
One such strategy is to offer employees money to resign voluntarily — the so-called Pay-to-Quit strategy. Zappos, the online shoe and clothing retailer, was the first to employ the strategy, making what has become known as “the offer”: a bonus for new hires to quit following a four-week training period if they didn’t feel that their job was a good fit for them. Zappos started the bonus at $100. When almost no trainee took the offer during training, they raised it all the way up to $4,000, and still almost no one took it — a sign that the company’s workforce was highly motivated.
Amazon, which bought Zappos in 2009, adopted a variation of this strategy. Here’s how Jeff Bezos explained it in his letter to shareholders in 2014, the first year Amazon put the program into effect:
Pay to Quit is pretty simple. Once a year, we offer to pay our associates to quit. The first year the offer is made, it’s for $2,000. Then it goes up $1,000 a year until it reaches $5,000. The headline on the offer is “Please Don’t Take This Offer.” We hope they don’t take the offer; we want them to stay. Why do we make this offer? The goal is to encourage folks to take a moment and think about what they really want. In the long-run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company.
Amazon made its program available to warehouse workers for years, but at the beginning of 2022, because of a tightening in the labor market, the company suspended the program for warehouse workers and now only offers it to graduates of its Career Choice upskilling program.
In the work I do as a behavioral economist who advises organizations, I’ve found that the Pay-to-Quit strategy can be remarkably effective. In many organizations, dissatisfied employees have no reason to disclose their true sentiments, but you can incentivize them to do so by offering them money to resign, making it costly for them to be dishonest. One outcome of this strategy is that those who stay are more motivated, of course. But an additional benefit is that those who stay feel the need to justify that decision to themselves — which they typically do by working harder toward longer-term objectives. If they turn the Pay to Quit money down, in effect they invest it in their future with the company. This boosts their productivity and commitment.
Everybody wins with this strategy. It allows managers to identify which employees are genuinely motivated and which are not; it allows unmotivated employees to make an amicable departure with money in hand; and it allows motivated employees to genuinely demonstrate their commitment. And if nobody takes the offer, as recently happened at Trainual, a company that provides automated training and onboarding processes, that’s also a positive outcome: The company ends up learning something important about its new hires and providing them with a motivational boost — at no cost.
Testing the Program
It’s hard to judge the success of such incentive-based programs without running a controlled study. How can you really know if the right people are quitting, or if those who stay get a moral boost from doing so? To find out, you need to run an experiment that includes a control group that is not offered the incentives, which you can compare to a group that is offered them.
I’ve recently been working with a large consulting company that is conducting such a test. The model is instructive. The company decided to implement a significant technological change in the way it operated — a change that would require senior employees to invest time in learning new technology and drastically alter their working methods. Some of these employees were enthusiastic about the opportunity, and others were not, but management couldn’t distinguish between them.
Company leaders recognized that they needed to figure that out in one particularly important context — when they were considering which employees to name as partners. Why? Because when the company chooses who to promote, it is declaring them highly competent and valuable, which immediately makes them interesting to other companies, who often begin efforts to lure them away. The company wants to avoid a situation in which it trains employees and promote them to partner at the expense of others, only to see those partners take their knowledge and training and go elsewhere. In addition, it’s hard to fire partners even if they don’t do a good job or embrace necessary changes in how work gets done. That’s why the company wanted to figure out which employees were the most motivated before it decided which of them to name as partners. If the company could do that, it could then make its investments in training much more strategically and cost-effectively.
The Pay-to-Quit strategy seemed perfectly suited to this situation. So the company launched an experiment. In some of its many offices around the world, it offered employees an exit bonus if they chose to leave prior to the partnership decision, and it then compared those offices to somewhat similar ones (the control group) where no bonus was offered. To be considered a success, the program would have to lead to retention rates in the offices where the program was offered that were better than that of the control group.
So far, the program has been a success. In the offices that offered the bonus, close to 12% of the employees chose to take it. Revealingly, those employees were not the worst performers on the team, which suggests the program was doing the job it needed to: identifying capable employees who don’t necessarily feel a strong commitment to the company and might leave after being named partners. The retention rates of new partners in the offices where the bonus was offered has also been higher than the rate in the control group. The program was temporarily put on hold because of Covid-19, but the company now plans to relaunch the program on a larger scale.
How to Launch a Pay-to-Quit Program
If you’re considering adopting a Pay-to-Quit program, make sure you follow these five rules:
1. Be transparent.
When you launch the program, make sure to explain exactly how the program works and why you’ve decided to launch it. Employees will respond better to the program if they understand its purpose.
2. Offer the right amount.
The amount you offer should be sufficient to motivate some employees to take it but not so high that lots of them do. That amount will be different at every company, so run a pilot to figure out what works best for you.
3. Be selective.
Not all employees should be eligible for the offer. Determine which groups or positions are most likely to benefit from it (as the consulting company above did, when it targeted potential partners), and limit the offer to those employees.
4. Set a deadline.
The program should not be open-ended. Give employees a relatively short period during which to decide whether to accept the offer, and make it clear that the offer will not be available after that date.
5. Monitor and evaluate.
The program will only succeed if you regularly measure its effectiveness and make adjustments as needed. This will only be possible if you first clearly define your long-term goals and then monitor and evaluate success relative to them.
Ultimately, the Pay-to-Quit program is an instructive example of how companies can use the power of incentives to find out more about their employees. Remember, talk is cheap. Simply asking employees about their preferences may not reveal what you need to know — but with a smart inventive plan in place, you can learn a lot.