In his 2009 bestselling book Drive: The Surprising Truth About What Motivates Us, Dan Pink makes the compelling argument that monetary rewards compromise performance. Yet most organizations continue to use and trust monetary incentives. Why the disconnect?
There are two issues at play. First, research suggests monetary incentives reduce performance, but research also suggests monetary incentives increase performance.
Pink’s key message is monetary incentives reduce the performance of complex tasks but enhance the performance of simple tasks. The essence of the argument is financial incentives cause people to work faster and focus on the incentive.
When workers have a simple task to perform, they do it faster to receive the reward. However, when workers have a complex task, their performance decreases because they spend time and energy focused on the reward — which detracts from solving the complex problem, according to Pink’s research.
He draws from an age-old experiment created by Karl Dunker in the 1930s that gives people limited time to complete a simple or complex puzzle and then manipulates the monetary incentives to suggest monetary incentives decrease performance with complex tasks. But, really, the findings suggest that when workers have a short and finite time in which to work, monetary incentives decrease performance on complex tasks. This makes sense.
If a worker has a limited amount of time to work and uses this time thinking about an incentive, she exhausts the time that should have been spent solving the problem. Also, by trying to complete the task quickly, one may skip or shorten the thinking time needed to solve the problem, instead of assuming a trial-and-error approach.
Monetary incentives can increase performance, provided workers have the discretion to increase that most valuable asset: Time.
While monetary incentives can divert attention away from creative problem-solving, they encourage people to spend more time addressing the problem by working longer and working smarter.
To realize the rewards, workers will think about the problem during work and non-work time — people may think about ways to address this challenge when at home.
Additionally, monetary incentives encourage workers to reprioritize their work to spend more time on what is valued and less time on tasks that are not.
The key to using monetary incentives is to implement them only in situations where workers have discretion in time allocation and outcomes.
The first challenge may lie in the very nature of the work. If it is transactional in nature, the role may have limited flexibility to allocate discretionary time as the extension of the time spent on one transaction impacts subsequent transactions.
As a guideline, roles that are project-based — where the work requires some level of analysis and creative problem-solving — and where the end-to-end completion time is measured in months or years, rather than hours or days, are probably better-suited to monetary incentives.
Another challenge — and perhaps this is where programs fail — is that discretion in time allocation is subjective. Providing the same financial incentive to a person with few demands outside of work and to a person who has a very busy life may have differential effects.
For example, Stephanie is 26 and married. She does not have children. Both she and her spouse spend their time outside of work socializing with friends and enjoying flexibility. Sam, who works in Stephanie’s department, is 43 and married with three kids. His time outside of work is spent commuting and participating in extracurricular activities with his children.
In this scenario, monetary incentives aimed at increasing performance will likely have a positive impact on Stephanie, who will look to prioritize her work and exert extra effort in non-work time in response to the incentive. She should see the incentives as reward for what she likes to do anyway, which will be perceived positively.
For Sam, on the other hand, the incentive may be an unobtainable distraction. Assuming Sam is less able to allocate discretionary non-work time, he will at best be able to reprioritize his work time. And rather than focusing his attention on creative solutions, some of his mental resources will be absorbed by thinking about the monetary reward. As a time-generating effort, he may try to work faster but this may lead to more errors.
Finally, because he will be racing to get the reward, this may turn work that previously was intrinsically motivating (because he got satisfaction from the job) into a transaction that is less satisfying (to receive the reward).
What employers should do
This would suggest organizations should only apply monetary incentives to roles with longer discretionary work cycles.
It would also suggest the universal application of monetary incentives has the potential to backfire, recognizing that different employees have different opportunities for exerting discretionary effort.
While one-size-fits-all incentive plans may be the easiest to implement and, on the surface, the fairest way to treat workers, it may be necessary to tailor incentive plans to different team members based on the discretionary time and effort available to them.
Angus Duff is a professor of business administration at Trent University’s campus in Oshawa, Ont. He may be contacted at email@example.com.