Money and Motivation: How Incentives and Behavior So Often Fail to Align

In a study my colleagues and I did in the early 2000s examining the factors that drive post-IPO success, we found that none of the traditional audited financial metrics had any statistically significant predictive capabilities. In fact, the only measures that mattered were intangibles, including the alignment of employee interests with corporate strategy.

So, here we are a decade later and not much has changed. So-called 'pay-for-performance' schemes enjoyed a brief moment of celebrity before aberrant capital market behavior unveiled that the formulas had been gamed to executives' advantage and shareholders' distress. Fraud, greed and overreaching played a role, but the larger issue was the miscalculation of incentives with outcomes.

Money matters. But so does fairness, pride, opportunities for advancement, relations with immediate supervisors and belief that the entity for whom one labors is both rationally managed and well-regarded. People want to believe in what they do. And outside of financial services, will generally make trade-offs that reflect those values and priorities.

This is not to say that financial incentives always fail. But it is to say that they do not always work. The measures employed often reflect forces over which the person being evaluated has little or no control, which encourages gaming the system. As the following article makes plain, a host of non-financial measures may have more motivational force than bonuses or sales goals. Which simply reinforces that old line that business would be easy if it weren't for customers and employees. JL

Scott Keller comments in the Harvard Business Review:

Upton Sinclair once wrote, "It is difficult to get a man to understand something if his salary depends upon him not understanding it." If your business objectives aren't linked to employee compensation, it sends a strong message that they aren't a real priority, and motivation is adversely affected The flip-side, however, isn't true. When business objectives are linked to compensation, motivation to drive for results is rarely meaningfully enhanced. The reason for this is as practical as it is psychological in nature. Most executives' annual compensation plans are so full of key performance indicators that the weighting of any one objective becomes largely meaningless in the grand scheme of things. Furthermore, variables in most compensation plans typically emphasize financial metrics whose results depend on a myriad of variables — many of which are uncontrollable. Finally, most companies don't have deep enough pockets to significantly increase overall compensation for employees to the extent it will make them take significant notice. Given all of this, the reality is that in the vast majority of companies are unable to depend upon compensation as a significant motivator. So if financial incentives aren't a big lever, where can leaders look to increase motivation? In our research for Beyond Performance we found there is a simple one that is often overlooked: Moving beyond the 'market contract' with employees and forging a stronger 'social contract'. Those of you who have read Dan Ariely's Predictable Irrationality will recall the difference between a market and social contract being illustrated by imagining you are invited to your mother-in-law's house for a special dinner. She has spent weeks planning the meal, and all day cooking. After dinner you say thank you and ask how much you owe her. How would she react? Chances are she'd be mortified. The offer of money changes the experience from a social interaction built around a reciprocal long-term relationship to a market transaction that is financially based, shallow, and short-lived. But what if you had brought your mother-in-law a bottle of wine as a contribution to the feast? She'd probably have accepted it graciously. The offer of a gift rather than payment indicates that social and not market norms are in play. Consider another example made famous in Levitt and Dubner's Freakonomics. A daycare center decided to impose a $3 fine when parents were late picking up their children. Instead of encouraging them to be punctual, it had the opposite effect. Late pickups went through the roof. Why? Before the fine was imposed, there was a social contract between daycare staff and parents, who tried hard to be prompt and felt guilty if they weren't. By imposing a fine, the center had inadvertently replaced social norms with market norms. Freed from feelings of guilt, parents frequently chose to be late and pay the fine — which was certainly not what the center had intended. When it comes to creating motivation in the workplace, leaders consistently underuse social norms to shape behavior. Social norms are not only cheaper and more practical but often more effective. The American Association of Retired Persons once asked some lawyers if they would offer their services to needy retirees at a cut-rate price of around $30 an hour. The lawyers declined. Then the AARP asked if they would offer their services for free. Most of the lawyers agreed. When compensation was mentioned, the lawyers applied market norms and found the offer lacking. When no compensation was mentioned, they used social norms and were willing to volunteer their time. In the workplace there are many ways to invoke social versus market norms in order to more deeply connect to employees' sense of meaning. The CEO of Wells Fargo, John Stumpf, marked the first anniversary of its change program by sending out personal thank-you notes to all the employees who had been involved. Indra Nooyi, CEO of PepsiCo, goes so far as to send the spouses of her top team handwritten thank-you letters. After seeing the impact of her success on her mother during a visit to India, she began sending letters to the parents of her top team as well. John McFarlane of ANZ Bank sent a bottle of champagne to every employee for Christmas with a card thanking them for their work on the company's "Perform, Grow and Breakout" change program. Some managers might dismiss these as token gestures with at best a limited impact. In keeping with the significant body of evidence from the social sciences, employees on the receiving end would beg to differ. They say that the resulting boost in motivation and connection to the leader and the company can last for months if not years. In its simplest form, social contracts are invoked by recognition by peers and superiors. When Infosys Technologies hands out awards to recognize exceptional performance, it invites the nominees to present their work to a big audience that includes management council members and employees from all locations. This not only gives the award winners senior exposure and peer recognition, but serves as a role-modeling exercise and a demonstration of the value placed on behaviors such as collaboration and teamwork. Perhaps the most simple application is to not forget that words can be the most persuasive motivators of all. As Sam Walton, founder of Walmart, put it, "Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune."