Could it be that we are designing and communicating incentives for our highest performance all wrong? A recent study titled “Reappraisal of incentives ameliorates choking under pressure and is correlated with changes in the neural representations of incentives” appears to show that the fear of losing a reward allows people to perform at the edge better than the desire for earning more award. This study specifically looked at the impact of incentives on motor and neurological performance in high-pressure situations. While this may not apply to an average broad-based plan, it seems to have possible application in the high-stakes game of executive compensation.
On its surface, this seems counterintuitive to me. It feels like having money to lose would be more pressure inducing than having money to gain. Perhaps middle and lower levels of achievement are motivated by upside potential, but higher levels of achievement require different psychology.
I remember reading an academic paper years ago that detailed how CEOs took fewer and fewer risks the more money they were paid, or had built into outstanding equity compensation. The authors believed that this was due to individuals not wanting to risk their own sizable stake for the sake of trying to earn even more. (yes, I am still trying to find a link to it…) Essentially, executives became afraid of striking out and stopped hitting home runs.
The real question should be what this may mean for future incentive plan design. For most companies, probably nothing. For companies that perform at the very highest level, it may mean a reevaluation of their programs. Perhaps instead of a Minimum-Target-Maximum, we need All of It-Less of It-Even Less of It-None-of-It. Maybe the “All of It” level would be linked to a 25-30% probability of achievement, rather than the current practice of setting the Maximum to a 10-15% chance of success.
The supporting communications would be focused on everything you will lose if you don’t perform. This seemingly depressing and negative approach would clash with nearly all of most companies current messaging, which tends to be focused on all the possibilities if you do even better. Imagine a presentation starting with “Don’t suck, because you’ll lose it all!” The researchers even suggested that their approach to communication may have had some impact on the results.
…we found that loss aversion did not significantly interact with the appraisal condition to influence task performance. One potential explanation for this is that in both conditions of the present study, and unlike in Chib et al. (2012, 2014), participants were explicitly instructed to reflect on the consequences of gaining and losing the incentive presented on each trial. By encouraging this approach, as opposed to allowing for differences in cognitive strategies to manifest as a result of individual differences in incentive sensitivities and loss aversion, we may have reduced any intrinsic interindividual effects of loss aversion.
Of course, this is just one more datum point in the ocean of information covering performance, motivation, behavioral economics, personal psychology and no much more. It is too soon to use this data to change everything, but it is long past time to evaluate your incentive plans and try some innovative new ideas. Perhaps we all need to come to work with a bit more of a “what am I going to lose” attitude and see if our performance ticks upward.
Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.
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