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

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 the platform operations.

The researchers' key findings: 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 in the Cornell SC Johnson College of Business. "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."

Cui and Li Chen, the Emerson Professor of Manufacturing Management (SC Johnson College), are co-authors of "Bonus Competition in the Gig Economy," published Oct. 9 in the journal Production and Operations Management. Other co-authors are Jingchen Liu, assistant professor of operations management at Renmin University, Beijing; and Amber Xiaoyan Liu, Ph.D. 21, assistant professor of information analytics and operations at Santa Clara University.

Gig workers constitute an increasingly large percentage of the U.S. workforce. In 2022, they represented around 42% of the workforce; by 2028, that figure is expected to be more than 50%.

The gig economy works for both businesses and workers. Firms save costs by not having to compensate independent contractors with benefits such as health insurance. And gigs offer independent contractors the flexibility they likely wouldn't have in a more traditional 9-to-5 job.

But the downside for firms such as TaskRabbit (home repairs), freelancer.com (professional services), and Uber and Lyft (ride-hailing) is the uncertainty regarding workers' availability. Contractors can register with more than one company, and accept work from either. 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. Unfortunately, the platforms cannot avoid the prisoner's dilemma when offering the contingent bonus.

"The uniqueness of this competition is that the workers are independent contractors - they're not your employees," Chen said. "So you have to give them incentive, and you also have to fight off your competitors and fight for customers."

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.

"There's this kind of incentive-led friction with these two-sided markets," Chen said, "and we know that whenever you have friction, it's not good for social efficiency."