Why Incentives So Often Fail
There is an old saying that “when you change incentives you change behavior,” and there is some evidence to support that it can work. For example, the Mexican government program Prospera has been proven to be extremely effective using cash payments to boost school attendance and preventative health care.
So it’s not surprising that when leaders want to change behavior, they often start by designing programs with carrots and sticks to encourage behaviors they want to see and penalize those they don’t. Sometimes consultants are brought in to do complex econometric analysis to optimize the incentives for maximum effect.
Yet research shows that incentives often fail and can even backfire horrendously. Human behavior can’t be boiled down to simple triggers. There are norms that underlie behaviors that are rarely obvious and unintended consequences that can warp behavior. The truth is that if you want to motivate people, incentives are not the place you want to start.
What Lies Beneath Behaviors
On the surface, incentives should be simple. People like rewards and want to avoid punishments, so it stands to reason that giving them stuff they like to do things that you want and threatening them with things that they don’t like to prevent things that you don’t want, should be an effective way to shape behavior.
Yet consider the ultimatum game, a popular social science experiment in which one player is given a dollar and needs to propose how to split it with another player. If the offer is accepted, both players get the agreed upon shares. If it is not accepted, neither player gets anything. If people responded perfectly to incentives, the second player would accept even a single penny. After all, a penny is better than nothing.
But they don’t. In fact, the ultimatum game and its variants, such as the dictator game, the public goods game and the third party punishment game reveal that human behavior is incredibly complex. Given the circumstances, people will often act directly against their own interests to express what they think is fair and right.
What is often missed is that there are norms and rituals that underlie behaviors, which is why people from different cultures behave very differently in the ultimatum game and its variants and that’s what most incentive efforts miss. You can’t separate punishments and rewards from the cultural context. Often, there are underlying motivations that extrinsic rewards and punishments fail to account for.
How Incentives Can Crowd Out Other Motivations
As Roland Bénabou and Jean Tirole explained in a landmark paper, there are forms of motivation beyond extrinsic benefits including, most notably, intrinsic motivation and reputational factors. For example, artists often toil for years with little material benefit, but enjoy significant intrinsic satisfaction and reputational rewards.
There is also significant evidence that extrinsic incentives crowd out intrinsic and reputational motivations. For example, in an experiment in which subjects were asked to solve a puzzle, those who were paid a flat fee were much more likely to continue to work during free time than those who were paid for each puzzle solved.
In another famous experiment, pioneered by Karl Duncker in the 1930s, subjects were given a candle, a box of thumbtacks and a pack of matches. They were then asked to figure out how to attach the candle to the wall and light it so that the wax doesn’t drip on the table below. The key to solving the task is to realize that you can empty the thumbtacks from the box, then use the tacks to fix it to the wall and put the candle inside.
Conventional wisdom predicts that by offering incentives, you could motivate people to work more efficiently and improve their performance. However, researchers have consistently found exactly the opposite. Once monetary rewards were introduced, performance actually decreased, most probably due to the “crowding out” effect.
The crowding out effect is not uniform, however. For example, in a study of elementary school students, it was found that financial incentives improved scores in math, but not other subjects. Sometimes the lure of direct benefits can overcome the crowding out effect, other times it can’t
How Incentives Can Backfire
People often act in unpredictable ways that aren’t immediately obvious. Consider what happened in an experiment where daycare centers imposed fines for parents who were late picking up their children. Instead of cutting down on late pickups, they increased. As it turned out, parents saw the fine as a fee for convenience which they were happy to pay.
Yet consider another study in which subjects were asked to perform a simple task. One group was given monetary incentives while the other was told that their efforts would benefit a good cause. The group that was working for charity put forth significantly more effort. So it seems that the daycare centers would have been much more effective if they had merely explained how picking up children late affects the staff.
As organizational psychologist David Burkus highlighted in his TED Talk, that humans are prosocial. We are more likely to perform when we understand and identify with who our work benefits than when they are given financial incentives or fed some grandiose vision. Evolutionary psychologists have long established that altruism is deeply embedded in our sense of tribe.
Burkus references a study by study by Adam Grant where the performance of call center employees more than doubled when they had regular conversations with people who benefited from their work. Lisa Earle McLeod and Elizabeth Lotardo report in an article in Harvard Business Review that similar results have been found in studies of lifeguards, hospital workers, and sales teams.
Designing Effective Motivational Strategies
Many managers spend a lot of time and energy designing compensation schemes to incentivize performance. Yet as Daniel Pink explained in Drive, decades of studies show incentive pay often decreases productivity, especially for tasks that require creative thinking. He argues that the best way to motivate people is to give them opportunities for autonomy, mastery and purpose.
The 19th century philosopher Immanuel Kant believed strongly in the notion of dignity, which he defined as treating people as ends in themselves, rather than as means to an end. I’ve found that Kant’s ideas about dignity are essential to managing employees, customers and partners. Nobody wants to be a cog in somebody else’s machine.
When you treat people as ends in themselves you make their goals your own. You want employees to do more than perform tasks, but to attain their potential. You see customers as more than a way to pay the bills, but as central to the mission of the enterprise. You want communities to be invested in your success, rather than just tolerate your existence.
So rather than working to construct some Rube Goldberg-like incentive structure and then adjusting it every time you want a change in behavior, try treating people with dignity. Think about what they want to achieve in terms of autonomy, mastery and purpose and make it clear how their actions can advance your collective mission.
Sound leadership is not about prodding to get people to do what you want, but attracting those who want what you want and leading them with shared values in pursuit of a shared purpose.
Greg Satell is Co-Founder of ChangeOS, a transformation & change advisory, an international keynote speaker, host of the Changemaker Mindset podcast, bestselling author of Cascades: How to Create a Movement that Drives Transformational Change and Mapping Innovation, as well as over 50 articles in Harvard Business Review. You can learn more about Greg on his website, GregSatell.com, follow him on Twitter @DigitalTonto, his YouTube Channel and connect on LinkedIn.
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