Financial Incentives: Good or Bad?

Contributor: Fred Egler, Esq.
Senior Counsel at Reed Smith LLP in Pittsburgh, fellow of the American College of Trial Lawyers, a Past President of the Allegheny County Bar Association, and was the Editor-In-Chief of the Pittsburgh Legal Journal for 15 years.

The following contains excerpts from Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us.

Financial incentives (pay-for-performance) have shown to be effective for improving productivity in jobs that are repetitive or transactional. However, as our society moves towards jobs that require more creativity –design, creating marketing campaigns, software, inventing products, etc. – financial incentives are not only less effective at eliciting performance, but can actually impede performance.

“Behavioral scientists often divide what we do on the job or learn in school into two categories: ‘algorithmic’ and ‘heuristic.’ An algorithmic task is one in which you follow a set of established instructions down a single pathway to one conclusion. … A heuristic task is the opposite. Precisely because no algorithm exists for it, you have to experiment with possibilities and devise a novel solution. Working as a grocery checkout clerk is mostly algorithmic. … Creating an ad campaign is mostly heuristic. You have to come up with something new.

“During the twentieth century, most work was algorithmic…. [W]e could reduce much of what we did – in accounting, law, computer programming, and other fields – to a script, a spec sheet, a formula, or a series of steps that produced a right answer. … The consulting firm McKinsey & Co. estimates that in the United States, only 30 percent of job growth now comes from algorithmic work, while 70 percent comes from heuristic work. A key reason: Routine work can be outsourced or automated; artistic, empathic, non-routine work generally cannot.

“Researchers such as Harvard Business School’s Teresa Amabile have found that external rewards and punishments – both carrots and sticks – can work nicely for algorithmic tasks. But they can be devastating for heuristic ones. Those sorts of challenges – solving novel problems or creating something the world didn’t know it was missing – depend heavily on … the intrinsic motivation principle of creativity, which holds, in part: ‘Intrinsic motivation is conducive to creativity; controlling extrinsic motivation is detrimental to creativity.’ In other words, the central tenets of Motivation 2.0 [external ‘carrot and stick’ motivation] may actually impair performance of the heuristic, right-brained work on which modern economics depend.

“Partly because work has become more creative and less routine, it has also become more enjoyable. That, too, scrambles Motivation 2.0’s assumptions. This operating system rests on the belief that work is not inherently enjoyable – which is precisely why we must coax people with external rewards and threaten them with outside punishment. One unexpected finding of the psychologist Mihaly Csikszentmihalyi … is that people are much more likely to report having ‘optimal experiences’ on the job [in heuristic work] than during leisure. But if work is inherently enjoyable for more and more people, then the external inducements at the heart of Motivation 2.0 become less necessary.

“What happens when you give people a [complex] conceptual [problem] and offer them rewards for speedy solutions? San Glucksberg, a psychologist now at Princeton University, tested this in the early 1960s by timing how quickly two groups of participants solved the … problem. He told the first group that he was timing their work merely to establish norms for how long it typically took someone to complete this sort of puzzle. To the second group he offered incentives. If a participant’s time was among the fastest 25 percent of all the people being tested, that participant would receive $5. If the participant’s time was the fastest of all, the reward would be $20. Adjusted for inflation, those are decent sums of money for a few minutes of effort – a nice motivator.

“How much faster did the incentivized group come up with a solution? On average, it took them nearly three and a half minutes longer. … Indirect contravention to the core tenets of Motivation 2.0, an incentive designed to clarify thinking and sharpen creativity ended up clouding thinking and dulling creativity. Why? Rewards, by their very nature, narrow our focus. That’s helpful when there’s a clear path to a solution. They help us stare ahead and race faster. But ‘if-then’ motivators are terrible for [complex conceptual problems]. As this experiment shows, the rewards narrowed people’s focus and blinkered the wide view that might have allowed them to see new uses for old objects.”

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