Monetary Incentives

Yet another warning about monetary incentives: they typically work less well than most folks would like to believe. Although incentives seem to work in the short run, they ultimately fail and can even do lasting harm (e.g., mechanically counting WIP R&D candidates). Many reports have shown employees do inferior work when only enticed with money, grades, or other incentives. Incentives for good behavior produce at best temporary adherence. In fact, using artificial inducements to motivate people risks them losing interest in what they are being bribed to perform. Rewards turn play into work, and work into drudgery.

Most management books emphasize the importance of monetary incentives for driving performance. However if you use pay for performance with staff involved in creative endeavors, the creative endeavor will suffer. We aren't looking for R&D staff to work harder; we want them to work smarter. In creative organizations there is absolute no way you can define the work you want up front with enough precision so that an economic incentive plan doesn’t get hijacked.

Disincentives or fines can have counter-intuitive results, especially if the penalized individual uses them to assuage their own moral constraints. Freakonomics provides a classic example of the day care center that instituted fines for parents late in picking up their children. Before the fine parents felt morally obliged to pick up their children on time. After the fine they associated the late fee as payments to babysitters.

For a very insightful discussion on this topic, view the webpage and listen to the podcast found at: Daniel Pink on Drive, Motivation, and Incentives.