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Why Commonly Used Work Incentives Can Backfire

Pay-for-performance can jeopardize motivation and business success.

The best way to motivate people to work hard is by paying them for the performance they deliver. At least, this seems to be the implicit assumption in companies that structure work incentives in this way: Specific targets are set for sales volumes, customer satisfaction ratings, or product delivery deadlines, and individual workers are compared and rewarded according to their ability to achieve these targets. Sometimes, such incentives only work too well, as at Wells Fargo, where employees set up unauthorized accounts for customers to meet their sales targets.

Clearly, there is a downside to using such incentives and relying on pay differences as a source of work motivation. Yet the common belief is that fixed pay will make people lazy. Is that really true? It is not difficult to find examples of different types of workers and professionals who push themselves to try harder or work overtime even with a fixed wage. Teachers and consultants, therapists and nurses do this because they want to help the children, clients, or patients in their care. Chefs, journalists, and landscapers do this because they are convinced the work they do is important and take pride in doing the best job they can. Plumbers, electricians, carpenters and other craftsmen are motivated to work in this way because it allows them to gain respect from their co-workers and to further develop their professional skills. Nevertheless, these types of motivating factors are often ignored.

Neglecting work-related pride and respect as basic sources of motivation can backfire in different ways. Relying on pay-for-performance systems easily results in a competitive work climate. A multitude of studies carried out in different types of companies located across the world have revealed the downside of treating one’s workers in this way. In organizations with so-called competitive climates co-workers are disinclined to share important information or coordinate their activities, even if it would benefit the company to do so.

Employees in such companies are more likely to display a variety of organizational misbehaviors, ranging from the abuse of company property, to faulty record keeping and outright fraud. Such conditions can also facilitate irresponsible risk taking by leading workers to focus on short-term performance targets. This makes it more difficult to maintain long-term relations with customers or other stakeholders and prevents workers from investing in the development of new skills, procedures or products that do not yield the immediate results they are rewarded for. Yet in modern organizations, such inputs and initiatives from the work-floor are indispensable sources of innovation and flexibility—even if these cannot be captured in pre-set performance targets.

What are viable alternatives to competitive incentive systems? Results from many studies show that most people are willing to work well if they are treated fairly and are provided with the resources they need to do a good job. Even volunteer workers are keen to work hard as a way to develop themselves, be respected by their co-workers, and do a good job that they can take pride in. These important work outcomes tap into people’s basic needs for belongingness, competence, and autonomy that define intrinsic motivation—and are undermined by the provision of monetary rewards.

Developing ever more fine-grained procedures to define, assess and compare the performance of individual workers is not going to appeal to the fulfillment of these basic needs. Instead, the most difficult assignment in motivating employees is to create work conditions that allow them to work hard and do well, to notice and celebrate a job well done and to trust that this will inspire them to keep up the good work.


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