The misconception about incentives and performance

Company Culture

Higher the incentive, higher the performance. I am sure you heard that many times. It turns out it is not true.

Most of the business world today functions on a simple premise that the bigger the incentive the better employee performance. And likewise, companies trying to achieve better results often think that simply incentivizing the employees is a one-stop solution.

It turns out that this is a big misconception.

Scientific studies and research show that materialistic incentives (like bonuses) work only when the employee is working on very simple, straight-forward problems, that have clear set of rules, only one clear path to solution and rely solely on one’s mechanical skills. For example if you need to have 10,000 envelopes stamped, incentive will give you better employee performance. But for any business today, this is a very narrow context as more than 70 percent of all employees work in service or knowledge-related jobs. Most of us do things that are more complex than stamping envelopes, right?

As followup research has shown, if a task requires even rudimentary cognitive skills (aka “turn on your brain”), higher incentives will lead to poorer performance then they were with no incentives at all! Yes, when even slightest creativity is involved, higher incentives generate the opposite result. Stop a second and ponder on this really profound discovery.

Dan Pink in his famous TED talk, proposes that what really motives the higher performance of people doing creative work is respect, autonomy, possibility to achieve mastery and alignment with the purpose. He gives a vivid example of Microsoft’s encyclopedia Encarta and it’s “battle” with Wikipedia. Encarta was a very well planned, very well funded project, involving highly incentivised professionals ran by even more incentivised managers. Wikipedia as we all know does not pay a cent to contributors, they are highly autonomous and rewarded only with the feeling of satisfaction that they contributed to something meaningful. The end result – Encarta lost the battle and was discontinued in 2009 (read about it on Wikipedia).

Incentive economy may have made sense a hundred years ago when most work was done by workers on the assembly line, doing mostly mechanical tasks. Nowadays though, it appears it does not make any sense. Incentivising executives is wrong as all scientific evidence shows that not only it doesn’t work, but actually degrades performance. It is certainly hard for mainstream business thinkers to accept that, and Forbes seems to still promote the idea that incentives are the best motivators. Since scientific evidence is undisputed, that leaves a few options – either Forbes is not aware of this research, deliberately ignores it or they are taking all executives for monkeys?

However for me it is clear. Developers, designers, sales, customer relations – if they want to contribute to the company bottom line in today’s competitive market they need to be thinking, and thinking hard. Copy-paste development or copy-paste support just doesn’t work for top tier products. And while these people need to be adequately rewarded, we can not excessively rely on incentives as they demoralize professional activity. People need to be given power, opportunity to grow and a sense of purpose. This is what ultimately will make them love Sundays in anticipation for Mondays at work.

Photo by opensourceway