The Real Impact of Incentives on Performance at Work

At the core of the psychology of human behavior is the idea that we are incentivized to do things to pursue pleasure (carrots) and to avoid pain (sticks).

But what role do material incentives such as cash, vouchers, and awards play at a time when intrinsic motivators like purpose and growth are influencing the kinds of work people choose to do and the companies they choose to work for?

Incentive Programs Boost Performance

A 2010 meta-analysis conducted the International Society of Performance Improvement (ISPI) found that properly constructed incentive programs increase performance by anywhere between 25 and 44 percent. The same study found that these incentive programs engage participants and help companies attract quality employees.

They also concluded that monetary incentives are twice as effective as non-monetary incentives, which may come as no surprise.

The researchers argued for individual incentives over team incentives, in order to help eliminate social loafing.

They also concluded that incentives increase employee persistence by 27 percent and mental effort by 26 percent on existing tasks.

Conditions for Success

According to the researchers, a properly constructed incentive program accounts for psychological factors that drive human behavior.

This extends to:

  • Current performance being inadequate
  • The cause of inadequacy performance is due to a deficiency in motivation
  • The desired performance can be quantified
  • The goal is challenging but achievable
  • The desired behavior does not conflict with other organizational goals

An earlier 2001 study by the Society of Incentive and Travel Executives (SITE) found that only 8 percent of workers surveyed would have achieved goals without an incentive program. SITE’s findings echo that of ISPI, finding that incentive programs targeting individuals and teams increase performance by 27 and 45 percent respectively.

They posited additional conditions to the success of such programs:

  • Long-term incentives are more powerful
  • Incentive programs structured with employee input work best

A third study by Dortmund’s International School of Management found that extrinsic rewards incentivize creativity and innovation performance but only if it is clear why the work needs to happen, i.e. there was a clear purpose behind the work.

Incentives in the Retail Sector

A fourth study by Cornell University on performance-based incentive plans in the retail sector also found that the implementation of a performance-based incentive program is associated with increases in sales that persist and increase over time.

They also found something that game theorists will find interesting — that the impact of such programs is far more effective with permanent employees than it is with temporary workers. This is because permanent employees are incentivized to play a large number of ‘games’ with customers, and are therefore motivated to build better relationships with them, translating into future sales.

Income, Happiness, and Motivation

Popular research Daniel Kahneman and Angus Deaton on the link between income and emotional wellbeing found that emotional wellbeing rises with income but only up to US$75,000, and that a high income improves life satisfaction but not happiness.

On the subject of happiness and subject wellbeing, we tend to base a lot of it on our comparisons with peers (not something I am personally an advocate of — far better to run your own race), and a 2019 study by Steve Ford found that if someone feels that their salary is competitive relative to their peers, purely cash incentives don’t serve as a motivator for top-tier employees.

Motivating High-Paid Employees

Per Abraham Maslow, once people have their basic needs satisfied, they look to satisfy their higher needs, and so the same holds true for motivating top-tier employees.

This is where intrinsic motivators related to purpose, autonomy, and growth come into play, something well-documented in Dan Pink’s book, Drive, on the science of human motivation. Helping top-tier employees who have their basic needs fulfilled meet their higher needs is a more effective way to motivate them than simply throwing more money at them, which, as we’ve already seen, isn’t strongly correlated with greater happiness.

When it comes to intrinsic motivation, researchers found a significant positive effect of intrinsic motivation on the creativity and performance of knowledge workers and that extrinsic and intrinsic motivators should be offered in tandem.

Ultimately, if you feel you are earning what you deserve, you’re more likely to seek out higher-order goals such as meaning and inner peace. As AngelList founder and tech-millionaire, Naval Ravikant, put it, the reason to win the game is to be free of it.