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Financial Incentives: Can you really buy your way to better performance?

Reading Time: 5 minutes

Money. Some say it’s the root of all evil, others claim it makes the world go around. We don’t know about all that, but what we do know is that money is probably one of the big reasons why your employees show up to work every day. 

So what do you do when you want them to become more productive? 

Giving them more money for good performance seems like an obvious, classic economical-thinking answer, but is it really the best tool for motivating your teams long-term? 

While there is some evidence of these incentives boosting short-term levels of engagement & motivation (who doesn’t love a little bump in the pay packet!)  the real answer is a lot more complicated, with increases to performance often being very short-lived.

Financial incentives can increase short-term engagement

In 2018, a study by the UK recruiting firm Genesis Associates found that 85% of surveyed workers felt more motivated to perform well when offered a financial incentive. During incentive periods, 73% of employees reported that the atmosphere in the office was “good” or “very good.” On top of that, it also increased a company’s profits by an average of £80,000 a week during the course of the study.

But only if you pay well

For money to work as any kind of motivating factor, the amount has to be worthwhile. Too little, and it can actually damage motivation. Hundreds of college students took part in an experiment where they were asked to report their willingness to help move a sofa after being given one of two incentives, or being in the control group, which had none. Students in the control group actually exhibited more willingness to help than those who received the low incentive (50 cents), or even the so-called high incentive of five dollars.

A version of the study was also performed with sweets instead of money (the study called it candy, whatever that is…). Sweets were found to have little effect on participants’ willingness to move the sofa. Dan Ariely, the lead researcher behind this experiment (and Professor of psychology and behavioural economics at Duke University and a regular contributor to WSJ & Forbes), refers to this as “Dual Market Theory.” This refers to the idea of there being both a “social market” and “monetary market” in terms of motivation to work. 

The willingness of people to perform tasks in a monetary market depends on the reward size versus the scale of the task. In a social market, the level of compensation has little effect on willingness to help. As the researchers predicted, those who were offered sweets fell into the social market model, along with those in the control group.

Dan Ariely is a leading research in the field of behavioural economics and his work helps explain why money isn't enough for boosting employee engagement in most cases.
Dan Ariely live on stage at USI 2017

But not too well…

Ariely has performed various studies into the subject of financial incentives as an engagement tool (if you haven’t already, we’d highly recommend reading some of his pop-science books, especially ‘Predictably Irrational’). He explains the psychological impact of financial incentives like this:

‘If I ask you to help me change a tire on my car you might be willing to help, but if I offer you a dollar for this you don’t say to yourself “gee I get to help Dan and I get a dollar”. In contrast you say: “It’s a dollar, I don’t work for a dollar” and you’re less interested in doing this.’

One of the criticisms you might level at the study we referred to in the last section, as well as the verbal example we just quoted, is that the amounts of money in question are chump change. They couldn’t possibly have the financial impact of the sorts of bonuses you might get in the business world.

But some of Ariely’s other studies test using significantly higher incentives. 

One experiment involved Indian villagers playing games of ‘memory, creativity and motor skills’. To ensure that the incentives were significant enough to be worth testing, he set the lowest reward for scoring highly at these games at 40 rupees, and the largest at 400 rupees. The latter was roughly equivalent to that spent by the average individual living in India for five months. 

In this experiment, they found that those with the highest incentives actually performed the worst. Ariely theorised that the larger rewards impeded performance by creating too much pressure.

In 2016, Professor Ariely was interviewed by Business Insider. He highlighted a study he had conducted of computer chip assembly workers in an Intel factory. They worked in cycles of four days on, four days off.

 Prior to the study, these workers could earn a bonus equating to around thirty dollars on the first day of every work cycle by meeting that day’s target. During the experiment, these workers were divided into four groups, each receiving different forms of reward:

  • Group 1: Continued monetary reward equating to $30.
  • Group 2: No reward (control group).
  • Group 3: A pizza coupon roughly $30 in value.
  • Group 4: A message from their boss complimenting their work.

All three forms of reward increased performance on the first day compared to the control group. But in the days that followed, the monetary group’s productivity tailed off significantly. The group who received positive reinforcement from their manager declined much more slowly. 

Ariely summed this up pretty succinctly in the interview: 

‘When we pay people, we can see an immediate increase in productivity, but what we don’t see is we also create a long-term disassociation, where people basically say, “Really? That’s it? That’s the reason I’m here?”’

Does more money improve performance in the way economical thinking would suggest it does?

Money is only one, relatively small aspect of what drives employee engagement

While financial incentives may have their uses, Ariely’s work highlights the importance of a multi-faceted approach to employee engagement. Financial security is only one of the benefits we get from work that influences engagement and productivity.

It’s important to consider how other forms workplace reward and experience might be impacting the productivity of your employees. One of the best ways to facilitate this is through the use of recognition & exposure processes as well as open and honest cycles of two-way feedback. Employees are more likely to be engaged if they feel like interest is being taken in their workplace wellbeing, experiences and career development.

This is one of the things Weekly10 does best. 

Our weekly check-in enables managers to get informative updates from their employees that take only minutes to complete. Employees can even perform their own impromptu updates if they need to raise an issue. 

Employers can also reap the benefits of positive reinforcement by enabling employees to recognise and shine a light on the great work of their colleagues and help managers to share success stories up through an organisations hierarchy, giving much-desired exposure to the top talent in their teams – the lifeblood of career progression for many.

If you’re interested in Professor Dan Ariely’s work and want to find out more, visit his website. For everything else, you need to know about employee engagement, check out our blog.

Or maybe you’d like to see more of how Weekly10 empowers managers to engage their teams and drive performance growth?

Head of People Science