Now do I have your attention? I’ve written on the subject of motivation and incentives in the past, but recently have come across some additional information and research that continues to challenge conventional business wisdom as it relates to use of monetary incentives to encourage higher performance. In my almost 40 years of business experience, I have noticed that those who challenge conventional wisdom and go against the herd mentality often create competitive advantage.

Much of what I am going to cover in this article comes from two sources. One source is Dan Pink, who is author of Drive. I have heard several talks that he has made. The other source is a Harvard Business Review article written by Alfie Kohn, who wrote Punished by Rewards: The Trouble With Gold Stars, Incentive Plans, A’s, Praise and Other Bribes. Both sources come to the same basic conclusion-there is a disconnect between what science knows and what business does regarding the motivation of people. There is 40 years worth of research into human motivation that tends to get ignored in the design of most financial reward systems in place in the business world today.

In 2005, a paper was published documenting several experiments conducted by professors at MIT, Carnegie Mellon, and the University of Chicago Business School. The study was sponsored by the Federal Reserve Bank. The purpose of the experiments was to see whether high monetary rewards had a negative impact on performance. The experiments involved participants performing several tasks ranging from strictly physical to those requiring creativity, judgment, and conceptual thinking. The participants were told ahead of time what the reward would be for a given level of performance. The awards ranged from low to very high.

The results were the same in all three instances. The only situation where there was a correlation between the size of the reward and performance was for physical tasks where the amount of effort directly correlated with performance. However, when the task involved just the slightest amount of cognitive ability, performance was worse with the higher rewards. The large reward caused people to narrow their focus to the reward rather than the task. The bottom line of this and numerous other similar studies is that you cannot buy creativity and innovation with financial incentives.

Extrinsic motivation, or the “carrot and stick” approach only works for a short time and only on tasks that are repetitive and physical. Once the incentive or punishment is removed, motivation goes with it. Incentives and punishment do not alter the attitudes that underlie behaviors. Commitment comes from intrinsic motivation which is the internal desire to perform. Rewards do not impact intrinsic motivation.

In another study done in the mid-1980’s, Richard Guzzo, professor at the University of Maryland, correlated financial incentive programs to workforce productivity. The study involved data from 98 different studies on the subject. His findings were that there no correlation between financial incentives and productivity, absenteeism, or worker turnover. What he did find was that training and goal-setting programs had a greater impact on productivity that pay-for-performance plans.

This does not mean that money is not a motivator. People need to feel that they are paid fairly in order to be motivated. If you cut people’s pay in half, there certainly would be a negative impact on performance. However, if you doubled people’s pay, you won’t necessarily see better work. I have always found pay is a relative. No one ever has all the money that he or she wants. People need to feel that they are fairly compensated in relation to others doing the same work. One of the biggest issues affecting morale and motivation today is the perception that pay received by top level people in companies is out of line with the rank and file workers.

I think it is also important to distinguish between reward and recognition. Reward is an “if-then” proposition. If you do this, then you will receive that. It is established ahead of time. On the other hand, recognition is given after the fact. In 1977, my boss gave me a check for $20,000 authorized by the company president for a major cost savings project that I developed. At the time, this was close to a year’s salary. It was a total surprise. My motivation for this project was strictly intrinsic because I had no expectation of any type of financial reward.

As the research confirms, the “if-then” rewards only have an impact if you want people to produce more or work faster, and they have total control over the output. A farm worker picking vegetables would be an example where incentives would increase performance. However, most jobs in today’s work place are not this simple. They require people to think, reason, and be creative. In many cases, the worker does not have control over all of the factors which impact performance. It can be demotivating to have a reward which is influenced by factors outside the control of the person.

Ultimately, high performance comes from creating an environment where people are intrinsically motivated. According to research by Dan Pink, three factors contribute to intrinsic motivation. They are autonomy, mastery, and purpose. Autonomy is having the freedom to control and direct one’s own work. Mastery is the is the urge to get better. Purpose is being able to make a contribution. The more that jobs can be designed to incorporate these three factors, the less the need to use extrinsic motivation.

The point of all of this discussion is not to have everyone go out tomorrow and scrap all of their pay-for-performance systems. That would be impractical and probably create more problems that it solves. However, understanding the science behind motivation and rewards can help executives make better decisions in the future.

Author Bio: Ryan Scholz works with leaders whose success is dependent on getting commitment and high performance from others. He is author of Turning Potential into Action: Eight Principles for Creating a Highly Engaged Work Place. For more information, visit his web site at http://www.lead-strat-assoc.com.

Category: Leadership
Keywords: Incentives, motivation , rewards, leadership, psychology