Psychology of Incentives Part 3

Short Term Incentives (STI)

Short Term Incentives (STI)

Behavior psychology provides valuable insights into incentives and rewards and understanding this science, does enable us to better understand the drivers or motivators of incentives. It is axiomatic that HR practitioners must become behavioral psychologist Jedi’s in order become an incentive ninja’s.

However, when it comes to Short Term Incentives (STI) behavioral psychologists and economists are divided in their opinions.

Opinions against STI

At the outset one must acknowledge that a plethora of research and experiments, has been conducted examining the value of short-term incentives or rewards – and in concluding that rewards are counterproductive. Given this, the following is a brief overview of the work, and opinions, of some behavioral psychologists:
The University of Rochester’s Edward Deci and Richard Ryan studied the “free-choice paradigm”. Participants in an experiment were paid to draw. The compensation to draw was then taken away. Participants who were at first paid to draw, drew less when there was no payment. Paying people to draw changed how they viewed drawing, undercutting the intrinsic motivation that made it fun in the first place.
Alfie Kohn in his seminal article in the Harvard Business Review entitled “Why Incentive Plans Cannot Work” stated:
1
“One of the findings in psychology that has been shown over and over again [is that] the more you reward people for doing something, the more they tend to lose interest in whatever they had to do to get the reward”.
2
“Incentives, a version of what psychologist call extrinsic motivators, do not alter the attitudes that underlie our behaviors. They do not create an enduring commitment to any value or action. Rather, incentives merely – and temporarily – change what we do”.
3
“As for productivity, at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for not doing that task successfully, simply do not perform as well as those who expect no reward at all”.

Frederick Hertzberg famously stated that just because too little money can irritate and demotivate, it does not mean that much more money will result in satisfaction and increased motivation.

Given the foregoing opinions of eminent scholars, one could be excused for immediately scrapping any STI!!

Opinions for STI

Economists however disagree with the findings of these experiments. They postulate that the salient function of incentives should be to increase the productivity of the activity. The research does show that one should not introduce an incentive scheme and then change it or discontinue it. The initial plan design must be an adroit and well-designed plan which will stand the test of time and motivate employees to perform individually and collectively, to achieve the strategy of the company.

Jenkins when formulating his article “Financial Analysis” studied 28 previously published studies and found that 57% had in fact had a positive effect on performance but only when the performance measures were quantitative in nature, such as producing more of something and/or faster. The take-away from this is that STI performance targets must be quantitative – achieve an EBITDA of X. This design feature was also discussed in Part 2 where Agency Theory dictates that where the principal has information to verify agent behavior, the agent is more likely to behave in the interest of the principal.

We have been saying this for years – any goal, objective or performance condition should have a calculable ROI (return on investment) and be “self-liquidating”; where the cost of the incentive represents a percentage of value added for the company.

Hockenbury and Hockenbury state that “Incentive theories proposed that behavior is motivated by the “pull” of external goals, such as rewards, money, or recognition.”

Prendergast in his article entitled “The provision of incentives in firms” found that there was empirical evidence that the use of incentives improves performance.

Lazear in his article “Performance pay and productivity” examined the impact of a change from fixed salaries to piece-rate compensation in an auto-glass factory. Productivity soared and output per worker was increased by 44%.

Conclusion

In light of the conflicting opinions elucidated above, we feel that we need to declare our

We are firm advocates and promoters of STI

We contend that an appropriately designed scheme will support and reinforce a high-performance culture and encourage ethical behavior consistent with the company’s values. However, the risk-reward must be balanced where the scheme is structured in such a manner that it incentivises the employee to promote sustainable long-term growth, without encouraging excessive risk taking or a short-term parochial focus.

The scheme should be designed with a view of encouraging recognition and strengthening the psychological engagement with employees, while at the same time, providing top talent with an extrinsic monetary reward for their hard work and dedication.

Psychology of Incentives Part 4
Contact Us

COOKIE POLICY

Welcome to our website.

1. Introduction

This Cookie Policy explains how we use cookies and similar technologies on our website axioconsult.com. This policy is designed to help you understand what cookies are, how we use them, and the choices you have regarding their use.

2. What Are Cookies

Cookies are small text files that are stored on your device (computer, tablet, or mobile phone) when you visit certain websites. They are widely used to enhance your online experience by remembering your preferences and actions over time. Cookies are not harmful and do not contain personal information like your name or payment details.

3. How We Use Cookies

We use cookies for various purposes, including:

    • Essential Cookies: These cookies are necessary for the basic functioning of our website. They enable you to navigate our site, use its features, and access secure areas.
    • Analytical/Performance Cookies: These cookies help us understand how visitors use our website. They provide information about which pages are visited most frequently, how long visitors stay on each page, and whether they encounter any error messages. This data helps us improve the performance and usability of our website.
    • Functionality Cookies: These cookies allow our website to remember choices you make (such as your username, language, or region) and provide enhanced, personalised features.
    • Targeting/Advertising Cookies: These cookies are used to deliver advertisements that are relevant to your interests. They may also limit the number of times you see an ad and help measure the effectiveness of ad campaigns.

 

4. Your Cookie Choices

You have the option to manage your cookie preferences. You can usually modify your browser settings to accept, reject, or delete cookies. Please note that if you choose to block or delete cookies, some features of our website may not function properly.

5. Third-Party Cookies

We may allow third-party service providers to use cookies on our website for the purposes outlined in Section 3. These providers may also collect information about your online activities over time and across different websites.

6. Updates to This Policy

We may update this Cookie Policy from time to time to reflect changes in technology, law, or our data practices. Any changes will become effective when we post the revised policy on our website.

7. Contact Us

If you have any questions about our Cookie Policy or how we use cookies on our website, please contact us at

By continuing to use our website, you consent to the use of cookies as described in this Cookie Policy.