Coaching and Development

7 Problems With Employee Incentives

Employee incentives and rewards don't lead to improved performance, they can actually have the opposite effect. Don't fall for this management myth.

For over a century the prevailing management wisdom in many companies has been that, in order to get improved performance from employees, you have to reward the behavior you want and punish the behavior you don’t. This philosophy has been built into compensation models, employee incentive plans, performance management programs, ingrained in the very fabric of many companies.

The problem is that it doesn’t work. In fact, following the practice of offering carrots and sticks can actually have the opposite effect, and decrease performance.

In his book Drive, Daniel Pink presents the research of a number of psychologists and behavioral economists, dating back as far as the 1940s, who argue that the long-trusted theory that rewards and punishment are our most effective motivational tools is, in fact wrong.

Why don’t carrots and sticks work?

Pink provides seven key reasons why rewards and punishment don’t work to effectively motivate today’s workforce. Here’s what Pink identified as some problems with incentive programs:

They can extinguish intrinsic motivation

Intrinsic motivation is that internal drive, often described as passion, that focuses us on a task and keeps us engaged regardless of the challenges we face. Pink cites several studies that showed how rewards actually snuffed out this passion. One such experiment on school children offered a portion of a group of children a reward in the form of a certificate if they chose to draw during a free play period. Drawing was an activity they already chose to do because they enjoyed it. The experiment showed that those children who were rewarded with a certificate for drawing actually began to draw less than their peers who continued to do it for no reward.  For these children drawing was no longer about the drawing, but about the reward and that was not enough to sustain them.

They can diminish performance

In 2009, the London School of Economics looked at over 50 studies of corporate pay for performance programs and concluded that these plans can result in worse performance. Behavioral studies conducted in India showed that the higher the reward, the worse participants performed in a series of skill-testing games. Creating a focus on the reward causes a reduction in results.

They can crush creativity

By focusing people on a reward we actually make them less creative according to Pink. The reward tends to narrow a person’s focus, which is fine when there is a clear path to a solution, but makes them less effective when the task requires a level of creativity – something most jobs in today’s economy require.

They can crowd out good behavior

By adding a reward, Pink argues, we remove a person’s ability to make a decision based on morals, interests and values and force them to make it based on the reward. This has a tendency to devalue the activity itself. As an example, studies of blood donations – a typically altruistic venture – show that in jurisdictions where people are paid to donate blood, donations are consistently lower than jurisdictions where they are not paid.

Read More: Motivate your employees without giving everyone a raise

They can encourage cheating, shortcuts & unethical behavior

Rewards tied to sales quotas, revenue targets and other short-term, extrinsic targets can encourage bad behavior and cheating. Examples in the book include Sears imposing a sales quota on its auto repair staff that lead to customers being over charged for unnecessary repairs; Enron’s setting of large revenue goals potentially leading to the behavior that brought the company down; and Ford’s push to have the Pinto meet certain weight targets and deadlines resulting in skipped safety checks.

They can become addictive

One of the more interesting problems of incentives is that, just like a drug addiction, the introduction of rewards for completing a task creates the need for the same or greater rewards for future tasks of the same nature. These rewards quickly become less about a bonus and more about what is due, meaning a greater reward is needed to encourage improved performance each time.

Pro Tip: Check out these 6 hacks to boost employee engagement 

They can foster short-term thinking

Rewards also have a tendency to limit long-term thinking. They encourage people to focus on immediate tasks – what’s required to get the reward – at the expense of longer-term consequences or opportunities. Pink references studies showing that public companies that spend more time focusing on quarterly earnings typically have poorer long-term growth rates.

So, if carrots and sticks (extrinsic motivation) no longer deliver results in the modern workforce, what is the right kind of employee incentive?

Pink argues it’s a focus on fostering the intrinsic motivation within each of us by focusing on autonomy, mastery and purpose. To make this focus on intrinsic motivation work, companies, managers and HR need to better understand their team, and determine what will create that drive for each person.

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