Why Financial Incentives Can Backfire

Why Financial Incentives Can Backfire

At Science of Us, Melissa Dahl discusses an interesting experiment from behavioral economist Dan Ariely’s upcoming book Payoff: The Hidden Logic That Shapes Our Motivations. In the experiment, employees at an Intel semiconductor factory in Israel were told at the start of their workweek that they would get a modest cash bonus, a voucher for pizza, or a compliment from their boss if they got all their work done, to see which of these rewards had the greatest motivational effect. The results were surprising:

After the first day, pizza proved to be the top motivator, increasing productivity by 6.7 percent over the control group, thereby just barely edging out the promise of a compliment (in the form of a text message from the boss that said “Well done!”). Those in the compliment condition increased their productivity by 6.6 percent as compared to the control group. But the worst motivator, much to the company’s surprise, was the cash bonus, which increased productivity by just 4.9 percent as compared to the control group.

It wasn’t a big cash bonus, at 100 NIS, or about $30. Even so, what happened over the next several days was surprising: On the second day of the workweek, those in the money condition performed 13.2 percent worse than those in the control group. This leveled out over the next several days, but for the week overall, the cash bonus ended up costing the company more and resulted in a 6.5 percent drop in productivity. From the employer’s perspective, a cash bonus is worse than offering no incentive at all.

Pizza and compliments, on the other hand — people like pizza and compliments. Over the course of the workweek, the output of the workers in these conditions slowed a little, becoming by the end of the week closer to the productivity level of the control group (but still better than no incentive). All told, the compliment proved to be the very best motivator, though Ariely thinks that if the experiment had gone the way he wanted, pizza would’ve fared best.

This is reminiscent of a famous 2000 study, also in Israel, of what happened when a daycare started imposing fines on parents who were late to pick up their kids. The idea behind the fine was to disincentivize late pickups, but after it was introduced, the number of late pickups actually increased substantially. That study, like Ariely’s pizza experiment, shows how often financial incentives backfire.

Before the daycare fine, parents had all these intrinsic incentives to pick up their kid on time (don’t want to be viewed as a bad parent, don’t want to make workers stay past closing, etc). By introducing the fee, the daycare canceled out intrinsic motivations and basically gave parents a signal that it was okay to leave their kids longer. Hence the title of the study: “A Fine is a Price.” The same principle applies to what happened at this semiconductor factory. The employees didn’t see $30 as enough of a reward to merit exerting more effort to obtain—or conversely, they saw $30 as a price worth paying for not meeting their goals. The intrinsic motivation of wanting to do a good job was replaced with a specific amount of money.

But the pizza and the congratulatory text messages were more successful motivators—why? Probably because they’re forms of social recognition. Nobody sees the extra thirty bucks in your paycheck, but a pizza? Your coworkers can see that. A text from your boss? That’s a direct representation of you to your boss and a social interaction. The science of motivation is still inexact, but social recognition is increasingly seen as an important tool for communicating to an employee how much their organization values them.

We’ve done some interesting work at CEB on what we call the “Motivation Paradox.” While most organizations invest in financial rewards to improve employee performance, and specifically their willingness to support their colleagues, we’ve found that financial rewards can actually hinder employees’ intrinsic motivation to help one another out. To encourage employees to be better enterprise contributors, employers need to find ways to stimulate that intrinsic motivation; part of the answer is to make collaboration itself rewarding, rather than just rewarding collaboration. (CEB Corporate Leadership Council members can read the full study here.)