Do Incentives Actually Cause Failure?

Should you incent employees or not? What form should incentives take?

New research suggests the idea of an incentive is a good thing, but once employees get that idea in their heads it can, in fact, hurt their performance.

“When the stakes get too high, performance can suffer, according to a new paper from researchers at California Institute of Technology. By studying brain-scan data of volunteers performing a basic motor task (controlling an object on a screen) for money, the Caltech team found that once the incentive for successfully completing the task hit a certain threshold, the brain's reward center began to shut down, a response tied to loss aversion.

“Previous studies have suggested that success rates decline with high incentives because people can be too motivated, but the newest research suggests otherwise, finding positive responses in the reward-response area only when the incentive was first introduced. In other words, participants responded well to the initial incentive but grew distracted once the task was under way.

“Worries over losing the carrot—even before the carrot is in hand—can lead to failure, said Vikram Chib, a postdoctoral scholar at Caltech and lead author of the report. The bigger the carrot, the more fear and the more fear, the more failure.”

What does this mean? Should you never use incentives? Should you kick the “President’s Club” to the curb?

There are rarely such absolutes in the business. There are instances where incentives can be good for a big goal or a long-term project such as hitting annual sales targets. But for day-to-day encouragement of employees, recognition is a better approach.

What’s the difference? Recognition is given as a surprise after-the-fact, avoiding the problem of the dangling carrot and the accompanying fear of loss and ultimately failure. Indeed, by creating a culture of recognition and not just another “recognition program,” employees can be freed from fear of failure in an environment designed for greater innovation, teamwork and camaraderie.

What kind of culture do you work in? Is it cut-throat competitive, collaborative, recognition-based, or fear-based?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[Dan Walter]

This research suggest what most professionals have had a "gut feel" for. Too much of a good thing can be a bad thing. One thing that may help combat this is avoiding the common tactic of putting all ones eggs in a single basket.

When it comes to executives, most of their potential incentive is tied up in a single instrument (usually stock options or unit), that is tied to a single modifying metric (usually stock price or Total Shareholder Return) over which the individual truly has little control.

We need to find a way to explain to shareholders and the media how "old-fashioned" ideas like perquisites and a more broad variety of reward and pay instruments may cause programs to be more difficult for the outsider to understand, but may be better suited to driving the performance those same people crave.

[E. James (Jim) Brennan]

First question: were the volunteer subjects of the experiment all students? Inferences drawn from the reactions of students controlling a screen object, like a video game, might not apply to the behaviors of a thirty-something trying to close a sale to buy baby new shoes.

Second question: what's new about the idea that placing a disproportionate amount of your total compensation into the "at-risk" category will turn most people off? It takes a special personality to survive in occupations with high potential contingent earnings but low guaranteed pay.

Agree with Dan, of course, about balance in all things. Also, one should never forget that incentives expose failures at many levels and create disengagement issues when they DO work. There are a million ways to abuse incentives, while the appropriate paths to incentive success are so limited that consultants are reluctant to explain too much about the ideal process.