Using financial incentives to accelerate change – is it a good idea?

Working through a change program requires time and resources. When things get difficult, managers might sometimes start ‘blaming’ employees for being inflexible, too rooted in the status-quo, or following their own agendas. On the other hand, the ‘recipients’ of change often complain about stress caused by too many initiatives happening in parallel, lack of vision and lack of leadership.

In such a situation it is tempting to look for shortcuts. One obvious idea is the use of money to make the new direction more attractive for affected staff. ‘Managerial common sense’ about how people are motivated suggests that paying someone explicitly to adapt a certain behavior should increase motivation and trigger the targeted change. And this is no coincidence given that traditional economic theory was built on this assumption. When Frederick Taylor developed his scientific management approach in the early 20th century, he argued that the deal between organizations and their members should emphasize extrinsic factors: “what workers want most from their employers beyond anything else is high wages”.

However, during the past decades increasing evidence became available that this statement is not true – humans are neither rational decision machines nor do they purely look for extrinsic motivation in the workspace. Rather, humans judge options (such as how to react to a new incentive scheme) in emotional and often irrational ways.

Ernst Fehr, a professor at the University of Zurich who is considered to be one of today’s most influential economists in Europe, conducted an experiment in 2002 that showed how the introduction of an explicit incentive might reduce employees’ voluntary effort.

In the experimental set-up, participants were divided into three groups, one without a variable incentive, one group with a positively framed incentive (“bonus”) and one with a negatively framed incentive (“fine”). The latter two options resulted in exactly the same pay-out pattern, the only difference being the ‘framing’ used in the communication to participants. However, what happened then sounds counter-intuitive from a traditional, ‘strictly rational’ point of view – participants with the negatively framed incentive (the fine) showed lower levels of effort than those who were promised a possible bonus. Even more surprisingly, and in contradiction to what many would expect, participants who did not receive any kind of incentive showed the highest level of effort of all three groups. So, what happened was that money somehow changed how people viewed the task at hand.

To be clear, that doesn’t mean you don’t need to pay employees at all. On the contrary, there is strong evidence that high base salaries motivate employees for higher performance. It’s only when companies start to introduce explicit remuneration for certain outcomes – like participating in a change effort – that things become more complex.

An explicit financial incentive can lead to a feeling of impaired self-determination when individuals perceive it as ‘manipulation’. An intrinsically already motivated person could feel that their intrinsic motivation is rejected by the company, and hence might reduce his or her effort. In some corporate environments, an employee’s social approval from his peers could reduce if he or she is perceived to be performing a task purely for the money rather than based on a wish to cooperate. According to some researchers, financial rewards also reduce intrinsic motivation when an employee perceives the fact that he or she is offered a bonus as an indication that the company considers the task to be unpleasant or contrary to the employee’s interests.

However, there is also some evidence that these psychological effects can be somewhat offset by very large incentives, at least in the short run. In an experiment with high-school students collecting donations, Gneezy and Rustichini found that effort decreased when a small donation was offered to students compared to no financial incentive at all. But, once the amount of the donation was increased substantially, effort started to increase as well.

So, what this means is that using money to motivate people to follow a certain course of action is likely going to be an expensive effort. And, even then, there is no guarantee for success.

Therefore, rather than aiming for a quick fix through financial rewards, successful companies will view the right compensation model as one small building block in a larger change program that will also include role-modelling, developing and communicating a compelling transformation story, co-creation processes, and appropriate training. Organizations as a whole can only change when individuals alter their on-the-job behavior in appropriate ways. And for that to happen, people need to understand that remaining in the status-quo is not a long-term viable option, feel committed to the new direction, and have the necessary skills and resources to be able to cope with the change.