Does Money Serve as an Effective Motivator for Certain Types of Work, But Not Others?

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Does money serve as a more effective motivator for certain types of work, but not others? That is the fundamental question explored by scholars in a recent working paper. Pamela Osborn Popp, Ben Newell, Daniel Bartels, and Todd Gureckis have written a paper titled, "Can Cognitive Discovery Be Incentivized With Money?" They conducted six experiments. In the first five experiments, they asked research subjects to examine a set of items. The participants had to determine how the items might be categorized sensibly into groups and then assign them appropriately. The scholars describe this task as "rule discovery" work. In the sixth experiment, the subjects engaged in "rule implementation" work. In that study, the scholars told the subjects what the categorization process should be, and the participants simply had to apply that criteria. 

The scholars found that money proved to be an effective motivator in the sixth experiment, but not in the previous five studies. The scholars conclude that tasks requiring creativity, insight, and discovery are quite cognitively challenging, and they depend on both attention and working memory.   They write  that "the results suggest that performance in tasks which require novel inductive insights are relatively immune to financial incentive, while tasks that require rote perseverance of a fixed strategy are more malleable."  

The researchers note that tasks in the workplace don't fall simply into these two categories though.  There's most likely a spectrum that stretches from the highly rote work to the extremely cognitively challenging tasks require high degrees of creativity.   Moreover, our work often involves some combination of these types of tasks.  Finally, the scholars remind us that this study focused strictly on one form of monetary incentive.  Non-monetary incentives may have different effects. 

Do Temporary Incentives Harm Intrinsic Motivation?

For many years, the conventional wisdom has been that offering temporary incentives reduces intrinsic motivation. University of Chicago Professor Oleg Urminsky summarizes the view held by many scholars and practitioners in the fields of business and education:   

The view that a temporary incentive could undermine intrinsic motivation has had a major impact on policy, particularly in relation to children and education. The author and lecturer Alfie Kohn has published several books on the topic, including one called Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes. Appearing on the Oprah Winfrey Show in 1996, he explained why he saw rewarding kids as a bad idea: “One of the findings in psychology that has been shown over and over again [is that] the more you reward people for doing something, the more they tend to lose interest in whatever they had to do to get the reward.”   He went on to talk about grades as problematic incentives, and he went further in his book, writing that verbal praise is coercive and should be avoided because it contains an implied threat to withhold praise in the future.

Urminsky describes new research conducted by University of Buffalo’s Indranil Goswami.  He points out that Goswami doesn't just measure what happens immediately after an incentive disappears.  Instead, he tracks the effects of incentives over time.   What did Goswami find?  Indeed, intrinsic motivation appears to drop when a temporary incentive is removed. However, that drop is extremely short-lived. After a short period, motivation returns to the pre-existing level, and in fact, it increases rather quickly to a point slightly higher than the original level. The charts shown here demonstrate the prediction from prior research vs. the new findings. Urminksy concludes, "The results are inconsistent with the dire warnings about incentives. Providing a temporary incentive can yield a boost in behavior while people are being paid, and only a small and brief decline afterward. Maybe incentives work pretty well after all."  He calls for more research given these interesting findings that challenge our conventional wisdom.  I agree.  We certainly need to learn more before we simply adhere to the pre-existing beliefs that incentives absolutely reduce intrinsic motivation.  

Law of Unintended Consequences

Organizations and people within them respond to incentives.  They just don't always respond the way that we would like them to do so.   We might have a policy designed with the best of intentions, but it may have serious uintended consequences.   Take, for example, this article from yesterday's Wall Street Journal.  It reports on a new study published in the JAMA: Cardiology.  Melanie Evans reports: 

The Affordable Care Act required Medicare to penalize hospitals with high numbers of heart failure patients who returned for treatment shortly after discharge. New research shows that penalty was associated with fewer readmissions, but also higher rates of death among that patient group.

The researchers said the study results, being published in JAMA Cardiology, can’t show cause and effect, but “support the possibility that the [penalty] has had the unintended consequence of increased mortality in patients hospitalized with heart failure.”

The article goes on to report some disagreement among researchers about the impact of this policy.  Nevertheless, it notes concerns by some physicians about the possibility of unintended consequences and the desire by many to see further research on this matter.

More broadly, this article reminded me that managers need to consider the law of unintended consequences as they establish policies, metrics, and procedures.  For instance, managers may have great intentions when they create a new incentive compensation scheme.  However, the reward system may cause behaviors that they did not foresee or intend to stimulate.  In fact, they may see some adverse effects because of the ways in which their scheme distorted behavior.   One can blame individuals for unethical behavior that emerges as people try to achieve ambitious targets and garner bonuses, for example.  Or, one could ask:  Did we create policies that unintentionally encouraged people to act in unethical ways?  I'm not excusing bad behavior, but I am encouraging to think carefully about the systemic reasons for unethical action within firms.  

Top Sales People Really Don't Make the Best Managers

The conventional wisdom is straightforward - the top individual performers don't always make the best managers.  That old adage holds true especially in the field of sales.  Many people believe that the best sales people don't make the best managers.   Is it true?  New research examines this assumption, drawing upon one of the most extensive databases ever collected to research this topic.  

Alan Benson, Danielle Li, and Kelly Shue examined data on salespeople at more than 200 firms. These scholars analyzed how individual performers did prior to promotion.  Then, after these individuals were promoted to managers, they examined how the performance of their new subordinates was impacted.   The richness of the data enabled the scholars to compare salesperson performance under this new boss vs. other previous supervisors.   What did they find?  Chicago Booth Review reports:  

The best salespeople did not make the best managers: demonstrated sales skill, as evidenced by managers whose sales doubled before their promotion, corresponded to a 10 percent drop each in the sales performance of new subordinates.  The typical newly minted manager is in charge of five people. Therefore, the doubling of a manager’s sales predicts a total team sales drop equivalent to half the sales of one worker.

Thus, the conventional wisdom is true.  Moreover, the negative impact of promoting the wrong people is substantial.  Companies need to understand the skills and qualities required to become good sales managers, and based on that analysis, they must change their promotion criteria.  Meanwhile, they must find other ways to reward top individual performers, rather than using promotion as a key incentive.   

What's the Best Incentive Compensation Strategy for Salespeople?

Harvard Business School Professors Doug Chung and Das Narayandas have conducted an interesting new study about compensation schemes for salespeople.  They conducted a field experiment with a Swedish electronics retailer.   The firm used a monthly quota system to motivate and reward salespeople.   The scholars tested the effect of shifting to a daily quota system.  What did they find? Overall revenue increased with the installation of a daily quota system. HBS Working Knowledge summarizes their conclusions:

They found that sales productivity increased by 4.9 percent, on aggregate, under the daily quota scheme. But the results were more dramatic among the lowest quartile of salespeople—those with the worst recent sales records in the company. That group saw an 18 percent increase in sales productivity under the daily quota.

Chung explains that low performers are susceptible to falling behind in a monthly quota scheme, becoming less motivated or less capable of meeting their quota the further they fall back. “So they just give up,” he says.

A daily quota, on the other hand, provides “a fresh start every day in which past performance does not affect current payoff and thus does not disturb current motivation,” the researchers write. “For high-performing salespeople, because they are more immune to the disutility of effort, even if they experienced bad luck earlier in the month, they would put in the additional effort necessary later in the month to meet their monthly quotas.”

However, this finding is not the end of the story.  The scholars also examined the type of products that these employees sold before and after the change in quota scheme.  As it turns out, the retailer sold many more low-priced goods with the new quota scheme, but fewer higher-priced, higher margin items.  Why?  The higher-priced items took more time to sell.  Thus, the daily quota system created a powerful incentive to push the items that were easiest to sell (the low-priced goods).  

What's the lesson of this story?  You have to decide what your strategic objectives are.  If you want volume, a more frequent quota makes sense.  If you are interested in being very successful at the high end of the market, then you do not want the quotas to be as short term in nature.  

P&G Overhauls Bonus System

The Wall Street Journal reports today that Proctor and Gamble has chosen to overhaul its bonus system for managers. According to the newspaper, 

"Starting Friday, annual bonuses for thousands of senior managers will be tied more directly to the performance of each leader’s specific business unit instead of being based on the company’s broader, regional operations. “We are trying to get a clearer line of sight between an individual’s responsibilities and their results and their compensation,” Chief Financial Officer Jon Moeller said this week in an interview.

P&G has been trying to reduce bureaucracy, give managers more autonomy to make key decisions for their units, and hold people more accountable for results.  This compensation system change fits with those other efforts.  You should not tie compensation more directly to a specific unit's performance unless you provide the unit manager with a sufficient level of autonomy to make important decisions.

We should keep in mind, however, that no compensation system is perfect.  Diversified firms, in particular, always face a tension between tying compensation to local unit performance vs. the results of large segments or even the corporation as a whole.   One the one hand, you want people to realize the benefits of managing their units effectively.  On the other hand, related diversifiers such as P&G want managers to cooperate with the heads of other units so as to realize important synergies.  The risk of this latest move for P&G is that managers may become too parochial, not thinking enough about how to collaborate with other units to achieve economies of scope.   

The Downside of Employee Recognition Programs

Could there be a potential downside to non-monetary award programs for employees? Management scholars Timothy Gubler, Ian Larkin, Lamar Pierce set out to examine this important question. They collected data from an attendance award program at an industrial laundry plant. The company recognized employees with perfect attendance at an all-hands meeting. From among those recognized, one person's name was randomly selected to receive a $75 gift card. 

The researchers discovered that people did respond positively to the incentive for perfect attendance. However, people also tried to game the system, and their attendance record sagged after they lost eligibility for the recognition. The scholars also found that, "The awards crowded out intrinsic motivation in internally-motivated employees, who were already performing well by coming on time in the absence of rewards. These employees had increased tardiness after the program was implemented and they lost eligibility." In other words, the recognition program caused a drop in motivation among those workers already doing the right thing with regard to attendance.  The drop in internal motivation by these good employees led to a slight drop in productivity in the plant overall. Gubler explained the findings to Science Daily:

"Conscientious internally-motivated employees who were performing well before the award program was introduced felt the program was unfair, as it upset the balance of what was perceived as equitable or fair in the organization. So their performance suffered -- not just in terms of their attendance but also through a motivational spillover that affected other areas of their work -- including productivity."

What's the lesson here?  I do not think we should conclude that organizations should not recognize the good work of their employees.  However, we should think about what precisely we are rewarding, and how it might affect the behavior of our best employees.  They might already be engaging in the behaviors we wish to encourage.  By rewarding people for what our best employees are already doing, we might be demotivating our stars.  

Older CEOs More Likely to Sell Publicly Traded Companies

Stanford's Dirk Jenter and and Dartmouth's Katharina Lewellen have conducted a new study about corporate takeovers.   The two scholars examined more than 9,000 publicly traded American companies over a nearly twenty year period.   They found that companies with older CEOs tended to receive more successful takeover bids.   In fact, CEOs ages 64-66 experienced a 32% increase in successful takeover bids relative to CEOs ages 59-63.  Note that the shareholders did just as well in the deals that occurred for both age groups.  Thus, older CEOs are not accepting lower quality deals.  However, they are doing many more deals.  We should not be surprised, of course.  Younger CEOs still have more years left in their working lives, and they know that selling their companies probably means the loss of their positions.  The key question is:  Are younger CEOs spurning potentially good deals, or are we simply seeing more acquirers focus on companies with older CEOs because they know that those executives are more likely to sell? 

Is Reputation a Bigger Motivator Than Money?

Erez Yoeli, Moshe Hoffman, David Rand, and Martin Nowak have conducted a fascinating new study that suggests reputation sometimes can be a bigger motivator than money.   They conducted a field experiment associated with a utility company's program in California to try to prevent blackouts. Some individuals were offered financial incentives to participate.  For other individuals, sign-up sheets were posted in common areas of apartment buildings.  Financial incentives did boost participation in the program.  However, the sign-up sheets had a much more significant impact!   Rand explained to the Harvard Gazette:  “When people know it’s a cooperative effort, they feel peer pressure to take part.  They think, ‘If I don’t do this, I’m going to look like a jerk.’ But if it’s not observable, then there’s no problem with not participating.”   Making behavior observable brings reputation to the forefront.  People care a great deal, in many cases, about how others perceive them.   Hoffman explained that Toyota may have used this self-perception concern to its benefit when designing the Prius.    “In fact, we think this is one reason why the Prius, for instance, is such a different-looking car. The designers at Toyota seem to have intuitively had this idea: designing a car that didn’t look like any other car so your neighbors can tell you’re driving a hybrid." 

The Dark Side of Employee Awards?

Timothy Gubler, Ian Larkin, Lamar Pierce have conducted a provocative new study regarding employee awards.  They collected data about an attendance award program at a private commercial laundry services company in the Midwestern United States.  One of the company's five plants chose to implement an award for good attendance.   Managers wanted to reduce absences and tardiness.   The other four plants did not institute this program.   The program was rather simple.   All employees without an unexcused absence or tardy in the prior month received recognition before their peers, and they became eligible for a drawing for a $75 gift card.  The program lasted for a bit less than a year.  Senior executives at the company eliminated the program because they felt it rewarded behavior that should be expected of everyone.

The scholars studied this program, and they found that the award produced two important unintended consequences.  Here is an excerpt from the paper's abstract:

First, employees game the program, improving timeliness only when eligible for the award, and strategically calling in sick to retain eligibility. Second, employees with perfect pre-program attendance or high productivity suffered a 6% to 8% productivity decrease after program introduction, suggesting they were demotivated by awards for good behavior they already exhibited. Overall, our results suggest the award program decreased plant productivity by 1.4%, and that positive effects from awards are accompanied by more complex employee responses that limit program effectiveness.

I don't think we should be surprised by these results.  When creating any type of incentive or recognition program, we should remember the law of unintended consequences.   Still the paper documents the phenomenon in a powerful way.   I find it particularly interesting that this award program clearly created a perception of injustice.  People felt that people did not merit recognition for simply showing up when they should anyway.  Perceptions of inequity should be top of mind when creating reward programs. These feelings are likely to trigger discontent and unintended consequences.  

Should You Purposefully Annoy Your Employees?

Ray Fisman and Tim Sullivan offer an interesting anecdote in today's "How To Be A Better Boss" article in the Wall Street Journal.   Fisman and Sullivan write:

Employees often wish managers were a little more understanding, but people tend to associate the idea of "understanding" with "nice." A little well-directed pain can be a good thing in getting workers to focus on the tasks they might otherwise choose to forget, and to increase overall productivity.  Given that developers often prefer programs to people, Kayak founder Paul English says, making them deal directly with customers' questions drove them nuts. Once they heard the same complaint two or three times, the engineers tended to stop and fix the code. As an added bonus, after taking his turn on customer-service duty, an engineer can pass the phone—along with its grating ring—down the line for someone else to deal with.

What an interesting example!   Of course, the phone calls work for reasons beyond the fact that they annoy the software developers.  The phone calls create a direct line of communication between the developers and the users.  Kayak has removed all the information filtering that often takes place between the users in the marketplace and the developers back at the office.  Moreover, developers get a real sense of what is just a one-off complaint versus a real pattern.   Too often, someone can shrug off a complaint from the sales force as an "isolated incident."  However, in this case, the developers can begin to see that a pattern exists, and that the incident is far from isolated.   Finally, the developers share the pain here.  We don't have a few "problem-solvers" focused on fixing bugs.  We have all the developers addressing bugs.  Everyone is accountable, as opposed to having a small unit that worries about fixing bugs.   The collective accountability goes a long way toward improving quality.  Once everyone knows that they will have to address these calls at some point, it also makes people take extra care to get it right the first time.  

Are Gifts Better Bonuses Than Cash?

The Wall Street Journal reports on a new study published in the American Economic Review.  Sebastian Kube, Michel André Maréchal and Clemens Puppe conducted an experiment, in which they compared workers' productivity when given a bonus vs. those in a control group.   Actually, they set up two different types of bonuses:  a 7 Euro cash bonus and a gift of a thermos worth 7 Euros.   They found that the workers promised the gift as a bonus were significantly more productive than those given cash, whether told the value of the thermos or not.

Now, one could conclude that the researchers have shown that gifts might have a better incentive effect in the workplace than cash.  However, I think we need to proceed with caution - a great deal of caution!  Here we have a simple experiment with the bonus only worth 7 Euros.  Would the same effect hold in the workplace if the amount of the bonus were much more substantial?  That's not clear to me at all.  So, while the experiment may be thought-provoking, I'm not sure it provides us practical guidance as to how to design incentive schemes for the workplace. 

Incentives for Crowdsourcing

The Boston Globe reported Sunday on an interesting new Chinese study about crowd sourcing. Professors Zhang and Zhu examined the behavior of non-Chinese after the Chinese government blocked it's citizens from seeing or using the Chinese version of Wikipedia. It turns out that non-Chinese reduced their contributions significantly. The scholars conclude that the size of a potential audience affects substantially individuals' incentives to contributeopening source projects.