Behavioral Economics and Employee Motivation & Engagement

Earlier employee motivation theories state that employees will work harder, stay at the company for a longer time and be more engaged in their work in exchange for higher wages.

To date, numerous studies show that monetary rewards are the least efficient among all employee incentive tools.

What has caused this paradigm shift? Give it up for the behavioral economics!

Behavioral economics is a method of economic analysis that applies psychological insights into human behavior to explain financial decision-making.

In other words, behavioral economics explains why people make decisions that are not in their best financial interest, such as under-saving for retirement despite advice and projections from their financial planner. It explains why an employee chooses to retire even though working an additional year would significantly increase their pension. Behavioral economics can also tell why an employee incentive or recognition program that offers only monetary rewards might not achieve the desired results.

Make sure you’re not biased when you design your recognition program

Many company leaders realize the link between engagement and business performance. They are investing in recognition strategies that should increase employee engagement. But the fact is that only about 1/3 of U.S. employees care about their work.

The price U.S. companies pay for the implementation of incentive programs based on outdated psychological concepts and technologies is enormous. Programs that encourage cut-throat competition among team members. Belated incentives that are not associated with the desired behavior. Rewards delivered in a way that makes addressee want to quit immediately, and similar things cost companies millions of dollars.

You can be more efficient when you have a proper mindset and understanding of the latest tools (for example) that are available for the design of incentive program.

The Incentive Research Foundation suggests that companies can effectively harness behavioral economics to drive employee performance and engagement, through these best practices:

User-friendly system

How easy is it for the employee to understand what is expected of them, track report their progress and redeem rewards? Is your program mobile-friendly?

Non-Monetary Reward choices

Are they appropriate to the employee audience? Are both experiential and tangible rewards offered that provide trophy value and have meaning to the recipients?

Cooperative incentives

Rewarding top-performing teams is more effective than pitting individuals against each other for a single reward.

Charity incentives

A study from Duke University put behavioral economics in a business setting to the test, providing an incentive for employees to give money to charity.

The researchers found that the desire to conform to the norms of other contributors resulted in additional donations to the charity. This supports the effective use of team incentives, where each member does not want to be the one to let the rest of the team down, and will increase performance accordingly.

Public recognition

Extrinsic rewards that are announced in a public forum contribute to an employee’s self-esteem and the way in which they are viewed by management and peers.

Immediate rewarding

Studies also prove that rewarding the employee(s) as soon as possible after the goal has been achieved is the most effective and memorable for the employee. Immediate rewards solidify the connection between the behavior and the reward.

Residual value

When employees feel valued and recognized for their accomplishments, they will tell others about the experience. They’ll share news of their rewards (much more likely when it’s a tangible reward vs. cash), and their positive feelings about the company that recognized them. This increases engagement and turns employees into advocates.

You can make it

Humans are hardwired to make judgment errors. Employees may need a nudge to make decisions that are in their own best interest. Understanding where employees can go wrong in their decision making is the first step toward structuring effective programs that help them make the right decisions.

Using a behavioral economics approach to motivation allows companies to understand and capitalize on the powerful role that emotions play in employee performance. Partnering with a firm that specializes in building effective employee engagement and performance improvement programs will ensure that all of the latest motivational theory best practices will be built into your programs.

Check our website for more information on modern incentive programs.