At the heart of most performance management systems is a reward program. However, even when we are doing everything else right, rewards can go wrong. Here, we explore five ways that external incentives can damage performance, from destroying altruistic behavior to distracting people from the task. Fortunately, most of these downfalls are avoidable. While not every behavior is suitable for pay-for-performance, we can provide rewards that are rewarding, helping to encourage the behavior we value.
THE CARROT AND THE STICK are the starting point for creating the behavior that we want. We reward desirable actions and punish, often by removing rewards, actions that annoy. Rewarded behavior becomes more frequent, and punished behaviors eventually disappear. That, at least, is the idea. From economics, which is largely the study of incentives, to behavioral psychology, which specializes in reinforcers, we have academic reassurance that we are pursuing the recommended path. But as anyone who actually tried to put this simple logic into practice will find, it does not always work out as well as desired. We praise a teenager for doing well in her studies, rewarding her with a shopping trip to the mall, only to find that her grades steadily deteriorate thereafter. We encourage a spouse to try to follow our much more reasonable agenda, only to get him or her to dig his or her heels in opposition. We even encounter this mysterious disconnect when we give gifts. Gift givers typically expect a positive association between how much they spend on a gift and how much their gift’s recipient appreciates it. We reason that more money (i.e., a more expensive gift) conveys a greater amount of thoughtfulness. In fact, gift recipients report no such association between the price of their gift and their actual feelings of appreciation (Flynn & Adams, 2009). Much like gift givers who expect a greater, more positive outcome proportional to the size of the gift, organizations often find that external rewards such as pay do not
garner the outcomes they expect. In fact, sometimes to our bafflement, an incentive program turns out to be a disincentive program, where we are inadvertently reducing the very behavior we try to encourage. Why does this happen? Sometimes it is due to poor measurement: we do not recognize the proper behavior when it occurs or when we get it confused with something else. Most famously, rewarding CEOs with stock options is seen as a way to get the C-suite (the offices of the most senior-level executives with titles beginning with the word chief) to work harder, but this can have perverse consequences. Stock performance is not the same as CEO performance, and to raise stock prices, we actually incented some CEOs to manufacture or make up favorable financial reports. This is why Peter Drucker (Drucker & Zahra, 2003) described the practice as “the well-meant but idiotic belief that executives should have major stakes in the company, the stock options (which I have always considered an open invitation to mis-management)” (p. 11). At other times, rewards do not work because they are not contingent on performance. To the degree rewards are not reliably delivered, so people feel their hard work will not be dependably recognized, we can stop expecting the target behavior altogether regardless of how large the promised reward becomes. For a performance management system to work, people have to trust it. However, neither of these issues of implementation will be our focus. Performance Improvement, vol. 51, no. 8, September 2012 ©2012 International Society for Performance Improvement Published online in Wiley Online Library (wileyonlinelibrary.com) • DOI: 10.1002/pfi.21294
Reflecting the popularity of motivation books such as Daniel Pink’s Drive (2009) and the Brafman brothers’ Sway (2008), we discuss why the rewards...