For platforms using gig workers, bonuses can be a double-edged sword

ITHACA, N.Y. –  In the growing gig economy, where a company’s success depends on contractors whose schedules they can’t control, businesses often turn to bonuses to lure and retain these workers. But according to new Cornell-led research, bonuses can be a losing strategy for the stakeholders involved in platform operations.

“Bonus Competition in the Gig Economy,” published in the journal Production and Operations Management, shows that not all bonuses are created equal, and the availability of labor dictates which type of bonus is more effective for firms.

Fixed bonuses, also known as subsidies – given as part of the contract – are better for firms when gig workers are plentiful, since there’s no need for platforms to compete for workers. But in a tight labor market, contingent bonuses – awarded after a worker provides consistent service over a period of time as a way to obtain and retain workers – are the better choice.

“A few years ago, we started to see ride-sharing platforms like Uber, Lyft and others very intensively offer bonuses to their service providers,” said Yao Cui, associate professor of operations, technology and information management. “And at the same time, we also saw Uber reporting huge profit losses, so it looked like they were actually burning through too much money to overcompensate these drivers. So we were trying to understand the economic driving factors behind these bonuses.”

The downside for firms such as TaskRabbit, freelancer.com, and Uber and Lyft is the uncertainty regarding workers’ availability. For instance, a worker can register with both Uber and Lyft, and accept work from whichever offers a more desirable route on a given day. For that reason, bonuses are a way to entice and retain contractors. Whether fixed or contingent, bonuses have often overlooked downsides for the gig economy, they found.

The researchers developed a game-theory model to study platform competition with the two bonus strategies. When workers are plentiful, they found, fixed bonuses improve platform profit by eliminating a “prisoner’s dilemma” – the need for firms to overpay to outbid a rival for contractors’ services. Each platform has a relatively fixed set of workers from which to choose.

However, workers are worse off, as they ultimately receive lower pay.

“With fixed bonuses, the platform has an alternative way of paying the workers,” Cui said, “and the platforms essentially have more flexibility now, because they can decide when to pay using commission and when to pay using bonuses. Overall, it’s good for the platforms, because they can always choose the better way – meaning the cheaper way – to pay the workers.”

On the other hand, when labor is scarce, a contingent bonus works better because it lures workers and then retains them, as the bonus can only be attained over time. Contingent bonuses also cause operational inefficiency, they found: The attractiveness of a contingent bonus can lead workers to take jobs they might otherwise not take – say, a ride-sharing job with a 10-minute pickup time, as opposed to another with just a five-minute drive – thus reducing the demand-matching efficiency.

For additional information, see this Cornell Chronicle story.