How to design incentive systems


Many believe that if you create the right system of incentives people will perform better at what they are needed to do.

For example, with sales people you just need to get the commissions and bonuses right and that will result in people meeting and exceeding targets.

But is this really the case?

An increasing amount of research (and a helping of common sense) suggests that it isn’t.

Linking a reward directly to behaviour has an unwelcome side effect – it tends to reduce how much you want to do it.

Ideally, you want behaviour to be intrinsically motivated: people do a good job because they want to, children eat greens because they want to, people turn off the lights when the leave a room because they want to.

In their book Intrinsic Motivation and Self-Determination in Human Behavior the authors, Edward Deci and Richard Ryan, write that “the research has consistently shown that any contingent payment system tends to undermine intrinsic motivation.”

Such payments can have a corrosive impact on organisational performance, especially when you are asking people to do complicated or interesting things.

People quickly learn just how much they need to do to get the payments, and no more.

Or they “game” the system – by making decisions that protect their own payments while ignoring the decisions that may provide a greater overall benefit.

It turns out that there are at least two things you can experiment with to break this cycle.

First, make rewards a surprise. If you can’t predict when you will be rewarded, you don’t link the reward to what you do, and that has less of an impact on your behaviour.

Second, it turns out that people are more motivated when given a choice between a bad task and a worse one.

Try this on your kids: see how much longer they do their homework when given an choice to do that, or clean the dishes versus being able to watch TV when they are done.

The silver bullet, however, is to aim for incentive systems that design in goal congruence.

Goal congruence simply means that individual goals are consistent with, or agree with the larger organisational goals.

It requires looking at more than just the person and their role but also consider how what they do interacts with and influences the larger organisational system.

This is easy to say, but not that easy to do.

But that is also why organisations that can pull this off should be able to show real improvements in organisational productivity and behaviour.

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