The Anti-Incentive Movement - It's About Application Not Theory

Every since the AIG debacle and the overall meltdown in the financial sector I've witnessed a rising tide of anti-incentive discussion.  From comments by the President of the United States to a variety of bloggers and pundits, incentives have been blamed all that is wrong with the business world - heck - all that is wrong with the world in general.   However, the discussions I've witnessed are unfocused, emotional and in some cases simply ill-informed.  Incentives are not the cause of our problems - nor are they the solution.

Incentives are simply one tool among many that business can use to provide direction for audience action.  But I get ahead of myself.

This post isn't designed to put an end to the discussion (I don't think there ever will be) but simply offer up my point of view on why the issue drives people crazy and give you my two cents on why I think they should be considered in your business.  At the end of the day - you alone can decide if you want to use the tool or not. 

The Main Discussion (or would that be disagreement) Points

As I see it the main points of discussion for the use - or non-use of incentives boils down to these issues:

First - there is evidence incentives work.  I've pointed to them in my post a few weeks back when I provided my input on the Dan Pink video.  Studies have shown incentives impact results.

Second - there is evidence that incentive don't work the way we want them to.  Notice the subtle inclusion of the words "the way we want them to."  Most detractors will admit that incentives do influence behavior - just not in the way they may have been designed to - they have unintended consequences.  That in my mind is a very different argument than "incentives are bad."  But in any event the point is that because of flaws in incentives they should not be considered a good tool for influencing behavior.

Third - there are studies that show incentives decrease intrinsic motivation (Kohn, Deci) and therefore over time incentives do more damage to the recipient than if they were simply allowed to follow their muse and do what they like and are good at.

Fourth - studies have shown that incentives (financial mostly) fall further down the list of what employees really want from their employers - behind respect, communication, trust, etc.  Incentives are not naturally what employees are looking for when considering their level of engagement with their employer.

and finally:

Fifth - there is a big difference between financial and non-financial incentives.  The response from the recipient is different when given a financial incentive for goal achievement versus a non-financial award for the same achievement.  This was highlighted in Dan Ariely's book "Predictably Irrational" when discussing the difference between social and transactional norms.  However, the discussions I've seen lump all incentives together whether they are financial or non-financial.  Again, different discussion but part of the outcome (unintended maybe?)

So the net-net of this discussion is we have two sides, each with evidence in their favor. 

 Would seem like a push no?  Not to me. And here's why...

Mechanics Can't Do Surgery

Just because something is poorly designed or poorly applied doesn't rule it out as an option.  I've used this analogy before - a scalpel is a good surgical instrument - but only when used by a trained surgeon.  Otherwise it is a weapon.  We wouldn't stop using scalpels because a bunch of untrained people went around performing surgery would we?  The tool is only as good as the practitioner.  To use poorly designed incentive programs as a test of their validity is the same as dismissing surgery as an option because surgery done by auto mechanics doesn't turn out well.  Hate the player not the game.

Context is Important

Experiments conducted within sterile environments of universities and within a specific group have no context.  In other words, the experiments showing incentives dampen intrinsic motivation may be correct, but if my competitor is using incentives to drive behavior (which everyone agrees work!) then I'm at a disadvantage.  If I want to keep my business afloat I don't have the option to wait and see if the theoretical works while the practical kicks my ass.  I need to use the tools that provide me with impact and help me compete.  I know this is short-term thinking but it is a fact.  I need to balance the impact of the short-term incentive with the long-term engagement strategies in order to build a business that will last.  I'm not ready to fall on my sword (and all my employees' swords) to advance a specific point of view while my competition figures out how to acquire me with their new-found wealth driven by a well-designed incentive program.

Not Just Where but How

Rewards, recognition, incentives provide directional cues for employees and other audiences.  To simply communicate a direction and then let everyone decide the best way to get there is chaos.  I need to reinforce behaviors that not only move my company in a specific direction but also communicate how I want to get to my destination.  When designed properly, rewards and incentives show the audience what I value - what behaviors are acceptable (and by lack of reinforcement what isn't.)  It is when the award gets out of whack with the outcome you have problems like the ones we faced with some financial institutions.  It's not that the incentive didn't work - it was that the award (millions and sometimes billions of dollars) was poorly aligned with the effort and the overall direction of the company.  No human can look at that many zero's and not think - "I have to get that no matter what!"  Again, poorly designed but not evil in it's intent.  Incentives should provide directional cues - they are not the end result.

Sometimes the Answer is No

Not all behavior should be reinforced with extrinsic rewards.  The idea that incentives should be used to drive all behavior in an organization is as bad and idea as providing billions in incentive money to brokers and bankers.  Some behaviors are punishable.  In other words - sometimes you need to use the opposite of reinforcement and actually punish.  Stealing, lying, harassment - are all behaviors that should be punished.  I would never run an incentive or reward program designed to reduce stealing - I'd just fire the SOB.  That sends as strong a signal (and one we don't do enough of) as any incentive program.  On the other hand, filling out paperwork, adopting a new computer process - these are behaviors that I can impact with incentives and I'm not too worried that they will decrease the person's intrinsic desire to complete their time sheet on time.  Some behaviors just don't connect with my inner being.  Innovation on the other hand - not something that traditional extrinsic awards may help with.  Again, back to PROPERLY designed programs and interventions.

The Ball Is In Your Court

You decide.  You can look at incentives like a dead mouse on the doorstep - or you can properly apply them in the context and with the appropriate strategy to reinforce, guide and impact behaviors that lead to business success, strong corporate culture and engaged audiences.

I know where I stand on this issue - and now you know where I stand. 

Firmly, proudly, unapologetically - in the middle.

Take a look at how you're using incentives in your organization and ask yourself if it is designed correctly - or will it be the next case history for Dan Pink?  Call me if you want to know.

 

Comments

[E. James (Jim) Brennan]

Hear, Hear! I'd merely quibble that punishment is a reinforcement, but a negative reinforcement rather than a positive reinforcer... although I have witnessed some masochistic scenarious acted out in real life. Punishment may not by itself extinguish the negative behavior but it does occasionally supply an appropriate counterbalance to the positive rewards otherwise incumbent to the actor. And it sends a message along with its negative consequence. People NEVER do anything they don't believe is in their own best interest when they act. Incentives are merely one of our many communication tools.

[Paul Hebert]

Thanks - appreciate the thoughts. I will say this - based on the last comment from "Anonymous" I won't be coming back to the discussion on W@W - anonymous should not be an option if you want to post comments.

[E. James (Jim) Brennan]

de gustibus.... gotta ignore the trolls.... they're everywhere and you can't allow your behaviors to be controlled by the ignorant.

[Paul Weatherhead]

Paul,

I love the analogy of the scalpel! Have you got a patent on that analogy?

Paul Weatherhead

[Paul Hebert]

Well said Jim. It is a fine line between being controlled by, and deciding on a behavior. Wait a minute - isn't that what incentives allow? Geez... it just keeps going doesn't it!

[Paul Hebert]

Not yet... in the works :)

[George A Guajardo]

Paul, that was a great post! I can almost hear the passion in your words. That's quite a feat, my friend!

I agree with you on all these points. I think it is particularly important for people to understand that it wasn't incentive programs that led people astray, it was poorly designed incentive programs that did that. These are two different types of creatures. More to the point, I suspect the incentive packages created for the C-Suite were not crafted by people with knowledge of human behavior, but by lawyers.

Finally, I like that you touched upon the intrinsic/extrinsic motivation debate. i know of few psychologists that would suggest eliminating extrinsic-based incentives in favor of intrinsic-based programs. The science is still developing and we have yet to figure out the magnitude of the trade-offs, or the generalizability of results. The consensus, so far as I understand it, is to try to incorporate both components.

[Paul Hebert]

I am sure that science will show that intrinsic is better than extrinsic - but that is an argument for philosophy not sales. I can impact business without damaging too much the relationship with my employees instituting well-crafted extrinsic reward programs.

[Scott Crandall]

Paul --- Chicken or the egg here: my guess on much of the influence pushing the financial meltdown was not incentives, other than incidently. I believe it was: basic, old fashioned (Old Testament?) corruption.
Human nature is a given, which is why I liked your comment about "firing the SOB". You're right: in our T-ball-business culture, where "everyone's a winner", it's refreshing when we recognize that good leadership validates people and influences good behaviors and positive outcomes, while poor leadership leads to corruption, obfuscation and negative results.
Regardless of the incentive program.