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Why Pay Employees to Exercise When You Can Threaten Them?

More companies are choosing sticks over carrots to cut insurance costs. A study shows how it works.

When it comes to getting people to participate in workplace weight loss programs, financial rewards may not be much of an incentive. Penalties, on the other hand, work great.

For three months, 281 employees at the University of Pennsylvania participated in a step challenge. The goal was to walk at least 7,000 steps a day. Researchers used different incentives: One group got $1.40 for each day they met the goal, while another got $42 up front each month, and lost $1.40 for each day they didn't finish. Also participating in the study, published Monday in the Annals of Internal Medicine, was a group that got to enter a lottery to win $1.40 each time the goal was reached, and a control group that got no money at all.

Rewarding people with money, it turns out, didn't inspire more people to achieve their goal. About 30 percent of people who got no money performed their 7,000 steps, compared with about 35 percent of those with a potential reward, a statistically insignificant difference, according to lead researcher Dr. Mitesh S. Patel.

The people who faced a penalty for failure, however, reached their goal 55 percent of the time.

"It was surprising how dramatically effective loss aversion was," said Patel, an assistant professor of medicine. Although the payoff for participants (they tracked their steps with cell phones) wasn't very high, increasing the cash doesn't work, either. Another study last year by Patel found a $550 health insurance premium incentive didn't promote weight loss in participants. 

Financial incentives have been a popular way to get workers to participate in wellness programs. About 40 percent of companies offer rewards for completing certain health and wellness programs, according to the Society of Human Resource Management.

Employers tend to take one of two routes: the carrot or the stick. Some dangle financial benefits, which come in the form of discounts on health insurance premiums. The thinking is that giving employees a bonus will improve results or at least get them to participate. Increasingly, though, employers are using a tougher approach, taking away insurance coverage or otherwise taxing those who don't participate. Threatening employees with a loss, the thinking goes, is a better way to motivate.

"I see more and more companies switching over to penalizing as opposed to the incentives and rewards," said Jeff Luttrell, who works with SHRM. 

Not all incentives are created equal, Patel's new study suggests. "The design of the incentive is critical to its success," he says. "It has to do with how our brains are wired. We know from a lot of research that people are irrational, but they're predictably irrational. They tend to be more motivated by losses than gains," Patel said. So, the stick.

Wellness programs that penalize employees have been controversial and challenged as illegal. "Some people tend to think that the loss framing is a little bit harsh," said Patel. That tactic puts more of a financial burden on employees to cover health insurance. Others argue it's a way to discriminate against less healthy workers. The Equal Employment Opportunity Commission has filed several lawsuits against companies for designing what it believes are discriminatory wellness programs, though the agency has been largely unsuccessful so far.

Employers like penalties because they work. And so far, judges have ruled in their favor. "We're seeing the courts take a little bit different view of incentives," said Patricia Nemeth, a partner at Nemeth Law PC, which specializes in labor law. "And it sounds like the view that the courts are taking is the one that's working." 

While Patel's new study did prove the power of taking money away, it only framed the incentive as a loss—it was actually still a net gain: The researchers gave participants money, and then took it away for failure. "They never had anything to lose in the first place, at the end of the day you made the same amount," Dr. Patel explained. Some wellness programs are more aggressive, straight up making people pay for noncompliance. Broward County, a defendant in one wellness court case, required people who opted out of its program to pay $20 every other week. The plaintiff alleged that the threat violated the American With Disabilities Act and that the penalty made the program nonvoluntary. In that case, a federal appeals court in Atlanta ruled for the employer. 

With more evidence that penalties work, and few courts ruling in favor of employees, there's no reason for companies to choose carrots over sticks. "Employers will continue to do it until they can't," added Luttrell. 

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