Do incentives work?

23 minutes

Contributors

Neal Ashkanasy

Professor of Management

Nisvan Erkal

Professor of Economics

Episode Notes

Have you found it hard to motivate yourself these past two years? What incentives would have turned things around? We talk to two experts about incentives and learn that humans aren’t as rational as we’d like to think, making the business of incentives a tricky one indeed.

Ginger Gorman: Hey what motivates you? Is it being told you’re good at something? Is it money maybe? Or a reward of some sort?

Why don’t we take a straw poll?

At work are you motivated to do a good job because:

A) You are paid to be there

B) You’ll get a commission or bonus

C) Because it gives you a sense of personal achievement

or

D) Because you feel guilty when you don’t.

Dinner party guests:

Probably D the most, actually.

Ok so you’re paid to be there but you feel guilty when you don’t.

I guess to get paid.

Ruby? What about you?

Probably a mix of A and D. Probably money and guilt.

What about you, Rachel?

Also a mix of A and D because I like to do a good job of what I’m doing but also I really don’t want to be homeless.

Question 2…

When you shop are your purchases motivated by

A) Quality

B) Sales

C) Ethical choices

D) You see it, you want it, you buy it!

Ginger Gorman: What do you reckon Zee?

Dinner party guests:

“Uhh, um, ahhh – my ethics go out the window. Ok, sales.”

So you want it, it’s desire for it, but it’s also got to be cheap.

“I don’t want to phrase it like that!”

Probably be sales because I don’t get paid enough, so I’ve gotta watch out for that.”

“If it’s on sale I’ll look at it two or three times then I’ll buy it.”

Ginger Gorman: I know, I know. Every social scientist listening is screaming at me right now for doing a straw poll… but I promise the peer-reviewed stuff is coming.

So what did this very anecdotal, decidedly unscientific party conversation tell us about incentives?

Nisvan Erkal:

The central thesis in economics is that incentives work. Whenever we want to correct behaviour or shape behaviour in a certain way, we can rely on incentives.

And a large amount of research in microeconomics has gone into how to design the incentives in the optimal way.

Ginger Gorman: Nisvan Erkal is a Professor of Economics from the University of Melbourne.

Nisvan Erkal:

Now, when I talk about incentives, here, I’m talking about extrinsic incentives, given to people from external sources. And these can be financial or non-financial. For example, just by praising someone, or with the promise of praising someone, you can also give them incentives.

Ginger Gorman:

Those extrinsic incentives Nisvan mentions are probably familiar to many of us – perhaps you’ve been motivated by a cash bonus or a commission in the workplace.  Or as a consumer, a big sale might be an extrinsic incentive to buy a frock or a swish pair of shoes that you didn’t need.

Then there are intrinsic incentives… where the motivation comes from within…but don’t assume that by internal motivation that I mean altruism.

Nisvan Erkal:

Some people will be motivated by social image, and others will be just motivated by because they like to do it and they themselves want to be the person doing something. And other ones be purely motivated by how they respond to extrinsic financial incentives.

Ginger Gorman:

Ok, so you’re trying to motivate someone. Perhaps at work, perhaps at home. What will get you the better outcome? Reinforcing the intrinsic incentives? Or straight-up offering a more tangible reward?

Nisvan Erkal:

I’m afraid there is no clear answer. And but I mean I guess the first step is to acknowledge this complexity in human behaviour and then try to develop ways to address that heterogeneity in different ways. So now, once you acknowledge it, then you can try to motivate behaviour through multiple channels.

Ginger Gorman:

This is Seriously Social, I’m Ginger Gorman and on the pod today we’ll find out how incentives motivate us… or how they demotivate us as the case may be.

Ginger Gorman: When it comes to workplaces, Professor Neal Ashkanasy has this to say.

Neal Ashkanasy:

People do need rewards. Rewards work.

Ginger Gorman: Neal is a Professor of Management in the Business School at the University of Queensland and also a Fellow of the Academy of the Social Sciences in Australia.

Neal Ashkanasy: You offer somebody a monetary reward, which is quite attractive for achieving a goal and they will redouble their efforts to achieve it. On the other hand, we need plenty of strokes plenty of pats on our head. We are very much motivated by wanting to feel welcome. Wanting to feel that it’s a positive environment that we work in. And surprisingly, we can take some quite severe knocks and still feel like that.

Ginger Gorman: In other words, people can face all sorts of challenges in their job, like working 14 hour days, or caring for sick children, or rescuing abused animals, and they won’t mind turning up to work each day because they know they’re appreciated.

On the flip side, material rewards won’t work alone if everything else is pretty dire.

Neal Ashkanasy: Imagine you’re in an organization that’s particularly difficult, rather abusive where you just hate coming to the office every day. And you come in and you do your work and then the boss throws everyone a huge Christmas party and gives everybody awards and that sort of thing and thinks that’s going to make up for all the misery that the employees have been experiencing throughout the throughout the year, but that doesn’t work.

We need an uplift to help us handle the hassles that go on day to day throughout our life.

Ginger Gorman: I’ve certainly been in this situation myself and I know many people I’ve interviewed in non-profits, for example, who are being paid actually quite poorly, but they believe in the work so much, and they’ve got supportive colleagues and so they stay there beyond what I would consider reasonable and I’ve certainly done that as well myself.

Neal Ashkanasy: You’re speaking to an academic – we work ridiculously long hours.

I’m currently approaching retirement, I’m on a 50% appointment. And I like to tell my friends that there’s 168 hours in the week and I’m halftime, so I only have to work 84 hours a week.  My wife doesn’t appreciate that, by the way. But academics are an example of one group that really works because we believe that we’re making a difference. And I guess we get strokes when we get the famous publications.

Ginger Gorman: And what happens when we don’t get those uplifts?

Neal Ashkanasy: If that psychological contract is broken, if you just feel that you become physically ill, every time you come to work, etc. It doesn’t matter what sort of positive contract you have, you’re going to break it.

And you’ll see it constantly in the news, especially with sports stars. You’ll say that the relationship between a coach and a well-known player has broken down, and the player insists on going to work somewhere else. And the public is saying, “oh, why are they doing that? Surely they know that they’re getting this amazing package at the moment.”

But now the psychological contract will trump. People simply do not feel safe or comfortable working in a situation where they feel that their organisation is not supporting them.

Ginger Gorman: Are there other situations where incentives don’t work, and they are actually almost absorbed by the person in the opposite way? It might be that they’re seen as a disincentive or punishment even.

Neal Ashkanasy: In psychology, there’s a particular phenomenon we refer to as negative reinforcement. We all know what positive reinforcement is, I mean, you get animals to do amazing things by giving them positive reinforcement. But negative reinforcement is when you reward somebody well, but then you threaten to take the reward away from them. And that can then itself act as a huge disincentive. So if you reward somebody at a higher level, and then say, “Well, if you don’t turn up, you don’t shape up, we’re not going to be able to continue this level of remuneration,” even though the lower level of remuneration might be very positive, the person feels that they’re belittled, it’s going to feel that they’re going to affect their esteem. And people will feel literally that they’ve been they’ve been punished simply by still getting a good salary package, for instance, but it’s not what they really were led to expect they should be getting.

Ginger Gorman: Something else that happens in workplaces: employees begin to compare incentives.

Neal Ashkanasy: Psychologists call that equity theory. We actually do a cost-benefit analysis. How much has that person put in that got them that reward? And how much have I put in that’s got me no reward?

So people are making those sorts of comparisons all the time. And it’s a great recipe for unhappiness.

We tend to make comparisons with like others. So I won’t compare myself for instance, to a famous movie star and say: “The movie star gets paid $50 million. Why aren’t I getting $50 million?” But I will compare myself to the person who’s in the office two or three doors away and saying: “Well, what’s that person doing that they’ve gotten that reward, I can do better than them anyway.”

So we’re making these social comparisons, but we do so on a sort of semi-rational basis in that we, we make the comparisons with people that we can compare to ourselves.

Ginger Gorman: Jo Pybus thinks she may have unlocked the secret for incentivising herself.

Jo Pybus: I was no slacker when it came to procrastination. I had countless runs on the board for putting off to tomorrow, what I should do today.

And I really wanted to get my body back in shape after having the kids.

So I started this program that included running a couple of days a week, and I became quite proficient in setting the alarm only to turn it off and go back to sleep. So I was good at that.

Now, this went on and on. And it was really exhausting waking to a 6 am alarm that reinforced my defeat before I even got started. So I got really angry with myself. And I set myself an ultimatum that if I didn’t get up that very next morning, I would simply stop trying to do that program.

Now I’d always had the resources and I’d always had my husband’s support. And I always had a fully functioning alarm clock, but now I had something else.

And that was a fear of what I might miss out on. If I didn’t give it a good hard go.

So I really broke the seal on my procrastination and develop something that has really powered me since and that’s not a fear of failure that I’d be awful at running, but a fear of regretting not trying to run in the first place.

And so this was the beginning of what I now call my regret intolerance, which is a term I heard on a podcast recently and it served me well as I went on to represent Australia three times as an age group triathlon and cyclist.

Ginger Gorman: I’ve never heard that term before they regret intolerance. How do you define it inside your own mind?

Jo Pybus:

If I look at it now in, in respect to what I’m, you know, doing now –  five years ago, I decided I wanted to become a writer. And the first thing I did was dive headfirst into writing a novel, having no idea how to write a novel.

But for me, it was when I looked online, and I saw suggestions that 97% of manuscripts never get finished, that I realised that was it. That was the carrot that was dangling in front of me, here’s another endurance event and a finish line.

I knew that I had very little chance of ever becoming successful at being a novelist in terms of publishing and turning into a movie and making millions of dollars.

I mean, there’s enough data out there that suggests writers are poor. But it was the idea that there was something that I could finish, and I want it to be one of the 3% of people that finish their book.

Ginger Gorman: I think that’s great and more power to Jo for finding a way to motivate herself.

But is it healthy to be driven by a fear of regret? It’s certainly not a policy HR departments can develop to motivate their workers.

The reality is, humans aren’t as rational as we’d like to think we are… and all sorts of emotions work as intrinsic motivators…

And something that can happen with extrinsic incentives, is that people start to question them if they seem disproportionate to the action.

Here’s Professor Neal Ashkanasy again…

People do make these sort of quasi rational decisions. Equity theory is basically a rational decision-making process about irrational things, if you want to put it that way. We’re constantly making these comparisons, especially when people are giving us a reward that seems out of whack.

That’s going to raise suspicions every time: “What’s wrong with this, that you that you have to give me such a such a big reward?”

Ginger Gorman:

It could be that the intrinsic incentives are enough, and adding a material reward, particularly one that seems disproportionate, can make you question your intrinsic incentives.

There are other problems too. Professor Nisvan Erkal says sometimes we will misinterpret incentives as a lack of trust.

Nisvan Erkal:

I may interpret it as saying: “They don’t trust me to do the right thing. And that’s why I’m being provided incentives to do this.” Or you may think “this must be a risky task or a difficult task” and that’s why they’re providing me incentives to do it.

So from the existence of incentives, you make inferences. And those inferences may change how you perceive the situation and may change your motivations. One thing to keep in mind when you’re giving incentives is the short-run versus the long-run effects. So how you how your perception of the situation changes may have some impact in the short run or not. And it may also affect that may have an impact in the long run, or not, and it may change your motivation both in the short run and long run,

Ginger Gorman: Can you give me an example of what you mean?

Nisvan Erkal:

Yes, so for example, there was a field study done in Israel with childcare centres. It was a problem that parents were picking up their kids late and they decided to impose a small fee for being late. What they observed is that in the short run the fees actually caused the parents to come and pick up their kids even later. And you know, one interpretation you can give for this is that it’s changed how they perceive the situation. Before you know maybe I was trying to do the right thing as a parent because I was worried about getting bad looks or I was worried about my kid feeling bad, you know, while others are picking up their kids, he’s not being picked up.

Once there is a fee that I can pay it changes how I perceive it, and now I can pay a small fee and I just get longer care. In that way we say it’s “crowding out” your internal motivation not to be late. So your other reasons for not being late.

Ginger Gorman: So just let me get this clear in my head basically before I had to pay a fee for picking up my kid late, I was worried about the social implications. I was worried that my kid’s going to look bad; I’m going to look bad. But once I can pay money, I think it’s a service, I’m paying for this, I can come late to get my kid. I’m just going to spend some extra time at work and finish this task and I’ll just pay the money.

Nisvan Erkal: Exactly. You have your internal reasons for not being made. And then this fee introduction, basically says: “Now I can buy more care. And maybe it’s not that big a deal that I’m late, because it’s a small fee that I’m paying.” In some sense, it maybe trivialises the situation.


Ginger Gorman:

And then he said in the long run, there was also an impact. So what was that longer-term impact on the late fees and the parents?

Nisvan Erkal:

So what they observed is that when you remove the fees, and if you compare the parents who were subject to the fees versus the parents who weren’t, the control group what they observed is that the parents who were subjected to the fees continued to come later than they were coming before the introduction of the fees.

Ginger Gorman: Ok, people’s behaviour is tricky, which makes figuring out how to motivate them challenging.  And it’s about to get even trickier.

Sometimes an incentive can redirect a person’s motivation into the wrong places.

That’s one reason economists do a lot of research to find the right incentives – because we don’t want people focusing too much on the juicy reward that lies ahead at the expense of achieving the desired outcome.

Nisvan Erkal:

If you pay teachers, depending on the performance of their students, then they’re just going to prepare the students for the exams. So you’re shifting their attention from the overall learning experience and, you know, emphasising different aspects of learning, to just focusing on what you are giving incentives on which is, you know, performance in the exams.

Ginger Gorman: It’s also possible for extrinsic incentives to become intrinsic, if a person begins to feel the personal benefits of their actions.

Nisvan Erkal:

Say you start to follow a more healthy lifestyle, through incentives given to you or you start to do better in high school, because you were given some extrinsic incentives for getting good grades. Then once you learn the benefits of having a healthy heart lifestyle, or once you learn that being successful actually makes you feel really good, then your internal motivation for following a healthy lifestyle or working in school may grow. And in that way, the initial provision of explicit incentives, may actually change how you perceive things in a good way, and may increase your internal motivation in the long run.

Ginger Gorman:

So I can’t help but circle back to my earlier question… when should you offer rewards, and when should you let people just do something because they want to?

Nisvan Erkal:

In areas where people are more motivated by financial rewards, incentives are going to work better. And there is plenty of evidence that tells us the incentives we give in the workplaces for rewarding performance work well, but with a lot of caveats.

Ginger Gorman: Here’s Professor Neal Ashkanasy again.

Neal Ashkanasy:

The current literature tells us that wise incentives are tailored to the individual. When you try to motivate people, you need to understand what actually motivates them. Are they going to be motivated by the holy dollar? Or are they going to be motivated by feelings of respect?

People vary in the extent to which those particular effects are motivating and a good HR department will work out person by person on an individual basis, what’s going to be the best approach to motivate an individual, obviously, within the constraints at the organisation itself has.

But any policy that’s applied in that without considering that humanistic side is going to run you into trouble.

Ginger Gorman: Ok last question – you exercise because:

A) It makes you feel good

B) It makes you look good

C) You feel guilty if you don’t or

D) You’re a Hollywood actor and you’re paid $60 million per movie to look like a Marvel hero.

Dinner party guests:

I don’t work out at all!

I’d like to think it makes me look good, and I hope in the end if does, but actually it makes me feel good

Probably A, B and C and I wish it was D.

Ginger Gorman:

Thanks for listening to Seriously Social, I’m Ginger Gorman.

If you’re enjoying the podcast one of the best ways to support us is to subscribe – and if you listen through Apple Podcasts, drop a review in there for us as well, we love reading them and it helps other people find us.


Seriously Social is produced by Kim Lester, engineered by Mark Gageldonk aka Baldey and executive produced by Sue White and Bonnie Johnson. It’s an initiative of the Academy of the Social Sciences in Australia.

Next time…

Young People and Debt…are they to blame for their own financial woes? Or should the Boomers, Gen Xers and even the Geriatric Millennials shoulder some of the responsibility?

See you next time.

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