Author: Fabiola Eyholzer
Due to the industrial era belief that money is the strongest (and only effective) motivator for employees, traditional Performance Management approaches are strongly linked to cash incentives. But ever since Daniel Pink’s “Drive” (and decades of scientific studies) we know, that 21st century knowledge workers are in fact intrinsically motivated and driven by mastery, autonomy and purpose. It is time to rethink your motivational theory.
Traditional Performance Management approaches are strongly linked to compensation – especially bonuses. This has its root in the industrial era believe that cash is the strongest (and only effective) motivator for employees.
But, ever since Daniel Pink’s “Drive” (and decades of scientific studies) we know, that it is a different story for 21st century knowledge workers. They are intrinsically motivated and driven by mastery, autonomy and purpose. Embracing this new thinking means fundamentally rethinking current takes on our motivational theories and our bonus programs.
Most people can easily resonate with the need to rethink our motivational approach (after all, they themselves are intrinsically motivated). But at the same time they have doubts when it comes to alter or even eliminate cash incentives. After all how else can we guarantee the maximum outcome if not through a carrot and stick approach – especially now that we need to ask ever more of our employees in order to be able to compete?
Agreed: cash incentives work – under certain circumstances. They were created in an era when tasks involved routine and mechanical skills. In that kind of settings bonuses (still) function exactly the way they are supposed to: the higher the reward, the better the performance. However, the equation completely changes the moment you add the need for even rudimentary cognitive skills.
So, if your company operates with people who mainly do routine tasks you are fine with stimulating productivity through bonuses. But if you are like most of us, you will work in an industry that thrives on the creativity, passion, and agility of knowledge workers.
If you want to tap into their full potential, you must at least be aware of following top 7 obstacles of cash incentives:
1 Destroy intrinsic motivation
We have believed for so long that a person’s motivation is increased by the promise of a financial reward that we have accepted it as given. But Edward L. Deci confirms «When money is used as an external reward for some activity, the subjects lose intrinsic interest for the activity». Consequently, by holding on to our (still largely unquestioned) faith in the virtue of incentives, we are forgetting the hidden cost that comes from undermining the intrinsic motivation of a whole workforce.
2 Diminish performance
This is something that is hard for us to swallow: Bonuses diminish performance. There are countless scientific studies to proof that. For instance: the London School of Economics finds that «financial incentives […] can result in a negative impact on overall performance». And Dan Ariely tops that with his discovery in a trial of MIT students: «In eight of the nine tasks we examined […] higher incentives led to worse performance».
3 Corrupt collaboration
Despite declarations that performance management goals are aligned to ensure collective achievements, and thus, encourage collaboration, the truth is: Incentives often have a significant individual component to it and since this is the part that each employee can actively influence, it is where the focus will be. Hence, collaboration is corrupted. Unfortunately, we see this phenomenon not only on an individual level but also on a unit/department level, where teams rather optimize themselves than collaborate and overachieve on a corporate level.
4 Limit the breadth and depth of our thinking
Research shows that rewards can limit the breadth and depth of our thinking because of tangible “if-then” motivators. An example: We tell one of our employees: “If your customer rating is above 4.5, then you will receive your bonus.” We are not saying: “We want you to create an awesome customer experience, one where you come up with new ways that will leave our clients in awe and our competitors in the rear mirror”. Instead we encourage our people to find the easy fix and take the low road. There is nothing wrong with being efficient in what we do and finding the most direct route to get there. But it becomes an issue, when it cripples our creativity and narrows our focus, and encourages minimalism and inside-the-box thinking.
5 Foster unethical behavior, short-term thinking, and unnecessary risk-taking
There is no denying: The promise of a cash award (does not necessary but certainly) can lead to unethical behavior, short-term thinking, and unnecessary risk-taking. And too often, the potential devastation long-term effects on the organization had to give way to a short-term optimization for individual incentives. You have most likely seen this happening in other organizations or even experienced at our own company. And we have certainly all experienced the rippling effect of such behavior on a whole economy.
6 Accelerate addiction
Financial rewards are extremely addictive. Daniel Pink again sums it up so nicely: «Unethical actions and addictive behavior have in common, perhaps more than anything else, is that they are entirely short-term. Addicts want the quick fix regardless of the eventual harm. They successfully achieve their short-term goals, but threaten the health of the company two or three years hence».
7 Fuel the vicious circle trap
Financial rewards are not only extremely addictive but also trap you in a vicious circle. Once you start offering rewards there is no going back. We cripple the inherent drive of a person and replace it by a system that tells them they are entitled to be rewarded. And it becomes increasingly difficult to motivate them. And if there is no reward it does not come the task does not get done. After all, the system tells them that only tasks that are incentivized are worth doing.
This is not to say that people are (per se) being greedy and unethical. We are all simply rational human beings responding logically to a particular incentive system. And of course we don’t say no to a generous year-end-bonus. But if we are honest, that is not the real reason we enjoy going to work in the morning; and it is certainly not what drives and motivates us and makes sure we are engaged and dedicated.
This indicates the malfunctioning of cash incentives are – as is so often the case – not to be blamed on the players within the system but the system itself. Consequently, we need to challenge the system and the believes it is built on.
When we talk about a new take on rewards people usually think we are simply replacing bonuses with another element of compensation. But the required change is more complex than that. After all, we have to be careful not to replace one evil with another.
Let us remember what rewards are about: They are about validating efforts, acknowledging achievements, and showing appreciation. Here are some ways to break the current bonus dilemma:
- Eliminate traditional bonus programs completely
- Go for random rewards rather than a fix schedule contribution, otherwise rewards become predictable and thus expected
- Invest in non-contingent “now that” rewards rather than conditional “if-then” bonuses to encourage creativity, focus, and out-of-the box thinking
- Mix tangible and non-tangible rewards, whereby intangible rewards like informative feedback, acknowledging gestures and language, LinkedIn recommendation etc. usually carry more weight than physical gifts.
- Honor value based behavior, maybe even more so than you award achievements. This can include acknowledgements for collaboration, continuous learning, knowledge sharing, creativity, but also personal achievements for people who have overcome a difficult situation in their private life
- Remember the power of social recognition in form of peer-to-peer appreciations and see how they make both parties proud, not just the recipient but also the benefactor
- Involve your people and give everyone a voice in form of nominations and votings
- And above all: be authentic and proud in whatever form you share your acknowledgements
There is a lot of talk about the Zen of Compensation. Basically, it is about getting the topic of money off the table. This is certainly a very sensible thing to do. After all, how do you want to avoid people being money-driven, if you keep focusing on money? The recipe seems simple: Ensure internal and external fairness, pay more than average, and use wide-ranging, relevant and hard to game metrics. The solution is hardly that simple.
We are talking about a huge system change and that cannot be done just by fixing cash incentives. There is more to it. Here are some things that are more valuable to employees and are harder to match, than pay and raise:
- Cherish and trust your most valuable asset: your people not just in words, but even more so in deeds
- Create a stimulating, interactive work environment that fosters enjoyment-based intrinsic motivation – the strongest and most persuasive driver
- Grant autonomy through freedom, empowerment, self-organization, and inspiring leadership instead of control & command micro management
- Nurture the passion and aspiration to mastery through constant feedback, continuous learning and relentless improvement as well as transparency and unrestricted knowledge and information sharing
- Encourage collaboration in interdisciplinary teams
- Trigger creativity and innovation by eliminating boxes and turf wars
- Inspire purpose and meaning through shared vision and goals
- Redefine career and growth outside of traditional hierarchical structures
We must embrace a shift in our mindset and adjust our systems accordingly if we want to overcome decades of underachievement and do business in a meaningful, inspiring way. Fixing our financial approach to performance management is a key component to that.
It is certainly not an easy road, but Daniel Pink gives us something to hang on to: «The good news is that the science demonstrates that once people relearn the fundamental practices and attitudes, and unlearn the negative ones, their motivation, and their ultimate performance, often soars. Any type X [eXtrinsically motivated] can become a Type I [intrinsically driven]».
This article is part of the series “How Lean | Agile Enterprises Push the Reset Button on Performance Management”
This post was contributed by Fabiola Eyholzer, CEO of Just Leading Solutions, LLC. More information about Fabiola, Agile HR and the services of Just Leading Solutions can be found at www.justleadingsolutions.com.