Understanding Behavioral Incentives

An incentive is something which motivates a person to behave in a certain way or prefer one choice over another. Behavioral incentives are highly relevant for employers, who seek to find ways to drive more effort and better performance from their employees. As well as increasing productivity and morale, they can also be used to encourage specific cultures such as team collaboration or innovation, to reward high performers and to attract and retain good people. Types of incentive an employer might adopt are:

• Financial incentives such as a pay rise, annual bonus, spot bonus, profit shares and stock options.
• Recognition incentives like thanking employees for a job well done, giving regular praise and peer recognition of key achievements.
• Reward incentives such as giving gifts, long service awards etc.
• Appreciation incentives such as company events and celebrations, paid group lunches, sponsored attendance of sporting events etc.

The Potential Risks

Despite their popularity, using incentives to drive behavior can be difficult for employers to get right. Deciding which behaviors you want to incentivize, what kind of incentive to use and how to apply it is a potential minefield, where there is a significant risk of damaging the very behaviors you seek to encourage. Here are three key things to be aware of when designing and using behavioral incentives:

1. They Mix Up Our Motivations

When using incentives, it is important to know the difference between extrinsic and intrinsic motivation. Extrinsic motivation happens when people perform an activity in order to get a reward, or to avoid a negative consequence or loss - also known as loss aversion. [2] This includes things like studying hard in order to get a good grade, taking part in a sporting activity to win an award or meeting a deadline to avoid upsetting your boss. In this case, the reward or avoidance of a negative sanction is a stronger motivating factor than the actual activity being undertaken. Conversely, intrinsic motivation describes when someone is motivated to do something because they find it personally rewarding and enjoyable, rather than in pursuit of a specific reward. Examples of intrinsic motivation including playing a sport because you find it enjoyable or reading a book because you find the subject matter fascinating. Research has shown that using financial incentives to influence behavior can interfere with extrinsic and intrinsic motivations. Paying someone to do something has been shown to reduce the intrinsic motivation they feel towards the task. Dubbed ‘crowding out’, this phenomenon was demonstrated as early as 1971 by prominent psychologist Edward Deci. [3]

2. They Mess With Our Morals

Numerous experiments have shown that rewarding people with financial incentives can backfire when they undermine what esteemed economist Adam Smith termed ‘the moral sentiments’. [4] Most people want to be seen as ethical in their actions, and to ‘do the right thing’. To illustrate, a famous study by Richard Titmuss looked at the impact of rewarding people for donating blood. It showed that people do it because of their altruistic, caring nature, rather than the desire to make money. Introducing a payment put people off donating, and numbers of donations dramatically fell. This approach affected the moral intentions of the donors as people give blood because it is a caring, good thing to do, rather than something which will make them money.

3. They Can Drive Completely the Wrong Behaviors

We have seen how the incorrect use of behavioral incentives can mix up our motivation for doing something as well as affecting our moral intentions. Furthermore, when organizations get incentive schemes wrong, they can drive undesirable or counter-productive behavior, often with disastrous consequences. For example, the endless push to maximize profits and achieve bigger bonuses is blamed for the crisis in the financial sector and across global markets.

Tips for Using Behavioral Incentives

If you are thinking about introducing incentives in your organization, at the outset it pays to think carefully about the core, positive behaviors you wish to encourage. You can do this by:

• Getting the basics right. Make sure that everyone understands the objectives your organization has in offering incentives, and that the specific criteria for being awarded an incentive is spelled out. Communicate the criteria to all employees, and use examples of positive behavior so that people understand exactly what you are looking for.
• Tying any incentives to clearly defined strategic priorities. For example, if your strategy depends on people being innovative and creative, ensure you promote a culture of safety, where experimentation is encouraged and rewarded, and those who fail in pursuit of new ideas won’t be punished for it.
• Adapting to change. As the priorities and needs of your business evolve, so must your incentive systems. Getting incentives right (and indeed keeping them effective) requires a finely balanced approach, which is unlikely to be achieved at the first attempt. It is therefore important to expect that some fine tuning will be required as you start to understand the impacts (both intended and unintended) of your incentive structure.
• Looking out for unintended impacts. A key part of ensuring that your incentive structure remains successful is to minimize the negative impacts that can arise from it. As well as taking a flexible, adaptive approach as outlined above, you also need to adopt a ‘bigger picture’ view, so that you can quickly identify negative behaviors as soon as they arise. You can do this by trialing or piloting the introduction of incentives in one area of the business, and closely monitoring the impacts.
• Focusing on group rather than individual performance. This is essential if you want to encourage people to be more collaborative and share ideas. Rather than rewarding individual performance, instead link incentives to group performance and ensure you focus on celebrating team achievements.

In summary, it is important to understand that harnessing the positive effects of behavioral incentives depends on how well they are designed, the form in which they are given (monetary or non-monetary) and how they interact with our intrinsic motivations and social motivations. [5]