Caulkin on why incentives stink

07 June 2016 -

Incentives don’t drive better performance, and here’s why

When the only answer to repeated failure at a certain task is ‘try harder’, it’s a sure sign you’re in the presence of madness as reputedly defined by Einstein – doing the same thing repeatedly and expecting a different result.

If a plausible way of working persistently fails to materialise, that’s usually nature’s way of telling you that you’re barking up the wrong tree.

There are several misbeliefs in management, from maximising shareholder value to performance management, but perhaps the discipline’s most frustrating obstinacy is its faith, against a Himalaya of evidence, that organisations can get the best out of people through financial incentives.

“It is difficult to overstate the extent to which most managers and the people who advise them believe in the redemptive power of rewards,” Alfie Kohn began a celebrated article in the Harvard Business Review adumbrating a slew of studies demonstrating the limitations of incentive pay and its unintended consequences.

Yet there is no hint of retreat from, or even slowing of, the spread of the practice, which is now almost as routinely used to spur greater performance from public sector workers as CEOs and bankers.

Why? A major reason is ideology.

Ever since Adam Smith and The Wealth of Nations, self-interest has been at the heart of classical economics. This was duly incorporated into the finance-based management theories of the 1980s – forgetting that Smith’s subject was individual butchers and bakers, not firms with many employees, and that he also wrote a book, which he thought equally important, called The Theory of Moral Sentiments

In the US, the motivating power of the pursuit of riches is part of the national psyche. It sounds so obvious, but it’s complicated. In Hard Facts, Dangerous Half Truths and Absolute Nonsense, Jeffrey Pfeffer and Robert Sutton rank motivation and incentives among the most slippery of half-truths. While we tend to believe everyone else is motivated by money, it may rank lower in our own list of priorities.

Although people alter their behaviour to meet incentives, they rarely change the attitudes that underpin it – so that, when an incentive is removed, its effect is, too. Kohn writes: “‘Do this and you’ll get that’ focuses attention on the ‘that’ instead of the ‘this’ – a dangerous tactic if quality, risk or relationships with other people are the object.”

Incentives can’t make you cleverer, more compassionate or more moral. In fact, their only reliable positive impact is on effort in simple tasks that can be easily measured – and, even then, only when workers are not dependent on others.

Where work is cooperative or intellectual, incentives make results worse.

They are a stressor as well as an attractor, explains behavioural economist Dan Ariely – think of Who Wants To Be A Millionaire? contestants who reach the last stages. “Do rewards motivate people?” asks Kohn. “Absolutely; they motivate people to get rewards.”

The success of this self-fulfilling prophecy in bribery makes its removal near unthinkable – but that is almost certainly the best management option.

Research says that all incentive pay schemes are far too ambitious, absorb vast amounts of management resource and demotivate more people than they motivate. Getting rid of them would free up resource and increase happiness.

Companies would be unlikely to implode as a result.

Shell’s ex-chairman Jeroen van der Veer confessed that he would have done the same job on half the salary (or double), as you’d hope. Would you prefer to be operated on by a surgeon motivated by professionalism or one motivated by money, ie greed?

Consider why we don’t pay bonuses to the military, tasked on society’s behalf with the most important risk management of all.

Finally, let’s hear it for psychologist Frederick Herzberg: “If you want people to do a good job, give them a good job to do.”