Why The Financial Incentives Bullet Misses The Mark To Motivate Employees

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Leaderonomics

05-02-2016

5 min read

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Another fatal attraction. Reaching for financial incentives to solve most problems is the corporate equivalent of the gun duel in western movies – the go-to option for everything.

There is an unhealthy tendency amongst leaders to look for a silver bullet, to oversimplify business problems and to establish linear cause-and-effect relationships.

In many large companies, financial incentives are the default option adopted by chief executive officers (CEOs) and boards to solve most issues. It is much overused and the bullet often misses its mark. Why?

The answers lie in the field of psychology not economics, from where most business leaders derive their inspiration.

Understanding the issue

To solve a problem, you need to define and understand it properly. The use of financial incentives as the cornerstone for motivation comes out of neo classical economics where individuals are deemed to be self-serving and to act rationally.

Behavioural economists have shown convincingly that this assumption is full of holes. Frankly, if one wants to understand how people think, act and how the brain functions, it’s best to look to psychology.

For psychologists, rewards and punishments can be counterproductive because they can undermine intrinsic motivation.

The prevailing narrative in favour of financial incentives to drive motivation and performance is based on three pillars:

  • The relationship between the company and the employee is a transaction. The contract is that you work, follow rules and for that, you get paid.
  • People work to make money which is necessary to make a living and they are always interested in making more money.
  • The only question management needs to address is the design of the incentives and measurement of performance. The faith in the magical qualities of financial is quite pervasive.

The Yin and Yang of generating motivation

The psychologist Herzberg, as far back as 50 years ago, offered two key insights.

First, dissatisfaction and satisfaction are not one continuum. Eliminating dissatisfaction is merely the absence of it and not the same as generating motivation.

Dissatisfaction and low engagement are dependent upon hygiene or extrinsic factors such as work conditions, compensation, job security and relationship with supervisors and peers. Lack or absence of hygiene can make you sick, i.e. dissatisfaction and low morale.

However, good hygiene simply leads to absence of sickness but does prepare you to run a marathon or climb a mountain. For that, you need different routines.

Second, generating motivation depends upon separate intrinsic factors such as achievement, recognition, autonomy, purpose, and job design but interestingly not compensation. In other words, once compensation reaches a hygienic level, more money does not equate to more motivation.

It is better to attract people for the intrinsic drivers of the job such as the company’s purpose, recognition, and achievement rather than for the financial rewards alone.

The most effective financial incentives are those who serve to provide recognition, strengthen and further the purpose of the company, create some excitement but are not so large that they distort behaviour, cause divisiveness or become centre of plate.

High engagement = High productivity + High performance?

Do high levels of satisfaction and engagement lead to higher productivity and performance? The relationship is not so simple and direct as it is often assumed. Performance is rarely an individual effort.

The underlying system of the organisation, teamwork and collaboration all matter when it comes to improving performance. These interlocking factors are harder to change and take time.

Financial incentives provide the false attraction of an easy fix. To the limited extent that they do work, incentives aimed at rewarding groups work better than individual incentives.

Financial incentives have limited impact and that too in limited circumstances. Also the size of the incentive does not have a linear relationship with the desired impact.

Where work is not interdependent, where performance does not depend upon teamwork and where individual input directly determines output, financial incentives can work. However, very few jobs and roles satisfy all these conditions.

It is ironic that Frederick Taylor’s outdated prescription of financial incentives which was aimed at piece rate workers continues to be applied out of context to knowledge workers where teamwork and collaboration are critical for success.

The flipside of financial incentives

Financial incentives can be downright toxic when supplied in big doses. When they are aimed at influencing behaviour and it’s all about the money, individuals will often do anything as the ends justify the means.

Spectacular examples such as Enron, the global financial crisis, the Libor rigging scandal provide cautionary proof of the perils of excessive financial incentives.

Skewed financial incentives increase the risk of mis-selling and irresponsible lending at banks and insurance companies. Apart from harming the end customer, it exposes the financial institutions to future liability from litigation.

Less than one-third (31.5%) of the United States workers were engaged in their jobs in 2014 according to Gallup. However, a majority of employees, 51%, were still “not engaged” and 17.5% were “actively disengaged” in 2014.

Gallup defines engaged employees as those who are involved in, enthusiastic about and committed to their work and workplace. The fact that simplistic, archaic and ineffective tools continue to be applied simply because they are easy and solid research on motivation continues to be ignored is a terrible indictment.

Motivation can be enhanced by restructuring work with increased opportunities for advancement, personal development, recognition and responsibility.

No easy task

Motivating employees and improving engagement is hard work. It gets harder if you focus on the wrong things.

Why do leaders reach for the financial incentives gun? The simplicity of financial incentives is a fatal attraction for CEOs and boards. It is expedient and safe to be doing what everyone else is doing even if it is ineffective.

However, the much needed improvement in morale and engagement remain a mirage. Companies such as Google seem to have found a way to leverage these intrinsic factors such as job design where people are allowed time in their jobs to be creative and to do things differently.

One needs to look deeper than the bean bags and pool tables. Since it is hard to replicate and companies are under pressure to adopt best practice, they copy the superficial and less relevant factors.

Concluding thoughts

A motivated and engaged workforce is the holy grail for CEOs and boards. Complex medical conditions often require a cocktail of medication. Individuals are influenced more by emotion than by rationality.

Employee motivation is complex and requires a carefully calibrated cocktail of autonomy, mastery, purpose and a strong sense of affiliation. CEOs and boards who look to simplistic financial incentives clearly misunderstand the problem.

Hard issues require hard work and if CEOs and boards are not working hard, they are not working hard enough.

Sanjeev Nanavati is a senior faculty of Leaderonomics. He is also a senior advisor to a global management consulting firm, a big four accounting firm and the chairman of a publicly listed company. He also coaches C-suite executives to improve their performance. Until recently, he was the longest-serving CEO of Citibank Malaysia. To engage the author for consultation work in your organisation, email us at training@leaderonomics.com. For more Hard Talk articles, click here.

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