Sticks and Carrots

Two articles in the Economist of January 16 caught my eye. The first Driven to Distraction was a commentary on Daniel Pink's new book Drive: the Surprising Truth About What Motivates Us. And the second was Carrots Dressed as Sticks (an experiment on economic incentives). Both were essentially about bonus and incentives schemes – a hot topic in any discussion of recognition and rewards in organizations. I get involved in these debates as I work with people designing or redesigning their organizations.

It's an area fraught with difficulty for several reasons:

  • Most big organizations have a single scheme for the enterprise so suggesting that a different form of incentive or bonus plan for one business unit would be more appropriate tends to go nowhere and the scheme that is in place is too unwieldy to be effective.
  • At a manager/staff level awards of bonus payments come out of a finite pot of money so I've sat in many long meetings where the allocation of tiny amounts goes hand in hand with deciding whether an individual is in the 'met', or 'well met', category of performance objective achievement with each manager pushing for his/her person.
  • There is not a great case for any strong link between individual performance and reward – there are too many intervening variables. This is a point that Daniel Pink apparently makes in his new book. (I'm interested to see that Schumpeter, aka Adrian Wooldridge, the Economist columnist, describes Pink as "a highly motivated self-publicist" – I interpreted this, plus the subsequent discussion, to mean that Schumpeter was more than skeptical of Pink's theory). Listen to Pink talking about the book in the HBR Idea Cast, What Motivates Us.

  • It assumes that financial rewards will motivate people – and that isn't necessarily the case. People value other types of non-financial awards e.g. promotion (that may or may not involve more money), extra holiday days flexible working schedules, training and development, and so on and some companies use these other motivators. Obviously there is an indirect cost of these but they do allow for individual preferences on motivators.

In my view, this 'menu' approach works better. It acknowledges the point – made by Schumpeter – that bonuses and incentives do work but goes further to recognize the financial ones are not either the best nor the only way to motivate people. The downside of this approach is that it is organizationally difficult to administer and leads to arguments of parity. (Is two days off the equivalent of …).

One of the points made in the Carrots Dressed as Sticks article was that the wording of the letter informing people of the details of the (financial) bonus scheme made a big difference to performance. The letter was worded in such a way to suggest that workers would lose a provisionally awarded bonus if they did not meet production targets (rather than saying they would receive a bonus if they did meet production targets). In the experiment "the fear of loss was a better motivator than the prospect of gain".

This notion of 'nudging' people through language and other methods in the desired direction is explored in the book Nudge: Improving Decisions about Health Wealth and Happiness. which designers of bonus and incentive schemes would be well advised to take a look at – not least because it suggests that whatever incentive scheme is decided on the way it is presented will make all the difference to the results that it achieves.