THE HIGH COST OF INCENTIVES: Why Paying People More Money Often Reduces Their Productivity

In a head-scratcher that has been documented in numerous studies, giving people monetary rewards routinely reduces performance. But why? How do you know when offering cash rewards will help or hurt? Consider five quick mysteries.

MYSTERY NUMBER ONE:

Go back in time with me to 1995. You are a fly on the wall in a board room, and around the mahogany table are huddled a dozen of the world’s greatest business minds. They are tasked with predicting which company will, ten years hence, dominate the nascent digital encyclopedia market. Two companies will vie for the title. First, is Microsoft, one of the fastest-growing companies in history, already boasting almost 18,000 employees and nearly 6 billion dollars in annual revenues.
They will launch MS Encarta. They will hire experts to write the articles, the process will be managed by highly paid and experienced executives, and the finished product will be marketed by their world-class advertising department and sold by incentivized sales professionals. Moreover, they will be granted a six-year head start before their rival is launched.

Company #2 is Wikipedia. Two guys found an online encyclopedia with a radically different model. None of the writers will be paid. People all over the world will write the articles just because they find the process to be gratifying. Many would spend 30 hours per week working for free when they might instead be gainfully employed elsewhere.
Which model will work? With the benefit of hindsight, we all know how this one turned out. Despite the six-year head start, Encarta went out of business in 2006, and Wikipedia now rules the world. But I’ll be not one of our experts would have predicted this outcome.

Why did people work for free harder and more effectively than paid professionals?

MYSTERY NUMBER TWO

In 1949, a University of Wisconsin psychologist named Harry Harlow ran an experiment on Rhesus monkeys in an attempt to discover what motivates us primates. He designed a puzzle (see photo) that required the monkeys to pull a pin, unhook a hook, and lift a latch, in that order. Harlow’s plan was to conceal raisins below the latch to incentivize the apes, but before he could do so the monkeys had already solved the puzzle!
This was a curious thing, because no one had communicated to the monkeys that they should try to solve the puzzle and there was no reward offered. They just did it because they found puzzle-solving intrinsically rewarding.
Harlow then thought, “Since they want to solve the brainteaser already, I’m going to supercharge their motivation.” So he put the raisins beneath the latch thinking that the monkeys’ performance would get even faster, but guess what? The monkeys’ performance got worse, not better. They made more mistakes and took longer to open the latch.
Hmmmmm.

MYSTERY NUMBER THREE

In Haifa, Israel, a chain of 10 Day Care Centers became troubled that parents often picked up their children late. It wasn’t fair to their employees to be forced to stay past quitting time. Across all of their childcare centers there were, on average, eight late pickups per week per center. So they announced that any parent arriving more than ten minutes late would be fined $3 per child per incident.
After the fine was enacted, the number of late pickups promptly went … up. Before long there were twenty late pickups per week, more than double the original average! The incentive had not merely failed, it had backfired. Apparently parents figured that $3 was a small price to pay for the privilege of not having to rush off to get their kids.

MYSTERY NUMBER FOUR

The Candle Puzzle has been used by companies for decades to analyze applicants’ problem-solving skills. A prospective employee is seated at a table placed against a wooden wall. On the table are three items: a book of matches, a candle and a box of tacks. The challenge is to affix the lighted candle to the wall in such a way that wax doesn’t drip onto the table. After attempting to use melted wax to stick the candle to the wall (which never holds) and then trying to tack the candle directly to the wall (which is futile because the tacks aren’t long enough), the typical person cracks the code in about 5 minutes. The solution is to dump the tacks out and then tack the box to the wall, put the candle in the box, and light it.

Some creative researchers then turned the exercise into a contest, offering a small cash reward for finishing among the top 25% of fastest times, and a big cash prize for finishing with the fastest time of all. Results… plummeted! The applicants took 50% longer to solve the conundrum!

MYSTERY NUMBER FIVE

Years ago, blood banks in Sweden were running low and donations were hard to come by. The banks then decided to pay people to donate their blood. By now, you can predict the outcome: donations dropped by 40%!

Why is it that carrots and sticks sometimes have the opposite effect of what was intended?

The common thread that weaves the above stories together is the nature of the motivating impulse. In all of them, the unpaid participants did what they did out of an intrinsic motivation. The Wikipedia authors found enhanced self-esteem and prestige in the writing. The monkeys enjoyed the challenge of solving a puzzle. The parents – even when they failed – tried to show up on time to get their children out of respect for the teachers’ time. The job applicants enjoyed a good brainteaser. And the blood donors felt a sense of personal pride in their gift. In each case, the addition of a physical or monetary reward had the effect of tainting the whole process and making it seem tawdry and unappealing.

The moral of the story (or stories, in this case), is that intrinsic motivation is far more powerful than extrinsic (financial) rewards. Assuming that a person feels fairly compensated in their base salary or wage, he or she is much more likely to improve performance in exchange for intangible rewards: thank-yous, kudos, plaques, public recognition, personal pride, job satisfaction, the feeling of having contributed something meaningful, a feeling of importance, the sense that one has improved the lives of others, etc.

Great leaders work diligently to inflame these higher motivations in workers. In one of those rare serendipities of life, this style of motivation is both cheaper and more effective.*

*It should be noted that monetary incentives work well on employees who are performing perfunctory jobs, like putting wheels on tractors in a factory. A worker who is told they’ll get $10 for every tire they install will work much faster. However, for those who work in jobs in which creativity is important, or which are philanthropic in nature, monetary incentives predictably backfire.