The 6 Rules for Rewards

How to Move from Extrinsic to Intrinsic Motivation

In 2001 American energy and services company Enron collapsed into bankruptcy because its managers liked their bonuses more than they liked the truth. They incentivized themselves to maximize their own paychecks, not the success of the organization [Duarte, Resonate p.199]. Similar creative financial practices occurred at Parmalat, WorldCom, Bernard L. Madoff, AIG, Barings, and many others. Corporate history is littered with the remains of organizations that allowed individual greed and egos to outgrow the solvency of the company. And bonus systems are still implemented all around the world “to incentivize performance”, despite the fact that experts have known for decades that there’s no proven correlation between bonuses and performance [Fleming, “The Bonus Myth”].

It may come as a shock to many to learn that a large and growing body of evidence suggests that in many circumstances, paying for results can actually make people perform badly, and that the more you pay, the worse they perform. — Nic Fleming

Indeed, self-optimization at the individual level might be the biggest problem in free markets in the western world. Bankers in the USA and Europe have been so focused on their personal results that they collectively plunged the world into one of the deepest recessions the world has ever seen [Buchanan, “Banking Cheats”].

Extrinsic Motivation

Rewards are among the trickiest and least understood tools in management. But when applied in the right way they can generate significant results. Unfortunately, a common assumption among managers is that nothing works like money when you want to make people work harder, longer, or more efficiently. It’s also often assumed that such an extrinsic motivation works best when implemented as a financial bonus. Both assumptions are wrong.

Money is as important to knowledge workers as to anybody else, but they do not accept it as the ultimate yardstick, nor do they consider money as a substitute for professional performance and achievement. In sharp contrast to yesterday’s workers, to whom a job was first of all a living, most knowledge workers see their job as a life. — Peter F. Drucker, Management [p.42]

Scientific research has revealed that incentives for performance work the other way around. The anticipation of a reward (either money or something else) works contra-productive since it kills people’s intrinsic motivation. The incentives ensure that people stop doing things just for the joy of the work. It is called the overjustification effect [Kohn, Punished by Rewards p.320]. Instead of expecting and feeling enjoyment, people expect a reward.

Another problem is that rewards based on outcomes increase the risk of cheating, since people’s focus is on “getting a reward” instead of “doing a good job”. When you reward employees based on outcome, people will take the shortest path to that outcome [Fleming]. Bad behaviors with dysfunctional side-effects undermine the organization’s performance, while the employees walk away with a bonus. Or with their colleagues’ pension funds.

Extrinsic motivation, with big incentives based on outcomes, is like a hot air balloon with a basket of gold. It’s expensive, and it’s hard to make it fly.

Intrinsic Motivation

Fortunately, there is some good news too. Rewards that trigger intrinsic motivation are more effective and cost a whole lot less.

In a well-balanced change effort, rewards come third. Influence masters first ensure that vital behaviors connect to intrinsic satisfaction. Next, they line up social support. They double check both of these areas before they finally choose extrinsic rewards to motivate behavior. If you don’t follow this careful order, you’re likely to be disappointed. — Kerry Patterson, Influencer [p.194]

Rewards can work for your organization, and not against it, when you take the following six rules into account:

1. Don’t promise rewards in advance.
   Give rewards at unexpected moments, so that people don’t change their intentions and focus on the reward. When acknowledgement of good work comes as a surprise, research says intrinsic motivation will not be undermined [Pink, Drive l:524].
2. Keep anticipated rewards small.
   Sometimes you cannot prevent people anticipating a potential reward. In such cases, according to research, big rewards are likely to decrease the performance of people. This might be because the stress of anticipation will interfere with people’s working memory [Fleming].
3. Reward continuously, not once.
   Do not look just once per month or once per year for something to celebrate. Every day can be a day to celebrate something. When people do useful work every day, every day is an opportunity for a reward [McCrimmon, “Celebrating Success”].
4. Reward publicly, not privately.
   Everyone should understand what is rewarded and why. The goal of giving rewards is to acknowledge good work, and have people enjoy it too. To achieve this, a regular public reminder works better than an annual private one [Alberg, “Celebrate Success”].
5. Reward behavior, not outcome.
   Outcomes can often be achieved through shortcuts, while behavior is about decent work and effort. When you focus on good behavior, people learn how to behave. When you focus on desired outcomes, people may learn how to cheat [Fleming].
6. Reward peers, not subordinates. Rewards should not come just from the manager. Find a way for people to reward each other, because peers often know better than managers which of their colleagues deserve a compliment [Tynan, “Reward Employees”].

These six rules for rewards give you the best chance at increasing people’s performance and enjoyment, while encouraging intrinsic motivation instead of destroying it. Notice that an incidental compliment addressed at a colleague in a meeting, for a job well done, satisfies all six criteria. A well-aimed kiss, blown carefully across a conference table, can also do wonders, I’ve noticed. (Just kidding!) It’s not that difficult to implement rewards well.

Jurgen Appelo is Europe’s most popular leadership author, listed on Inc.com’s Top 50 Management Experts and 100 Great Leadership Speakers.

References

Duarte, Nancy. Resonate: Present Visual Stories that Transform Audiences. Hoboken, NJ: Wiley, 2010. Print.

Fleming, Nic. “The Bonus Myth: How Paying for Results Can Backfire” <http://bit.ly/fK7uXJ> NewScientist, 12 April 2011. Web 23 July 2012.

Buchanan, Mark. “Banking Cheats Will Always Prosper” <http://bit.ly/fbEwlT> NewScientist, 23 March 2011. Web 23 July 2012.

Drucker, Peter. Management: Revised Edition. New York, NY: Collins, 2008. Print.

Kohn, Alfie. Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes. Boston: Houghton Mifflin Co, 1993. Print.

Patterson, Kerry, et al. Influencer: The Power to Change Anything. New York: McGraw-Hill, 2008. Print.

Pink, Daniel. Drive: The Surprising Truth about What Motivates Us. New York, NY: Riverhead Books, 2009. Print.

McCrimmon, Mitch. “Celebrating Success at Work” <http://bit.ly/N1XLrP> Business Management @ Suite101, 9 April 2008. Web 23 July 2012.

Tynan, Dan. “25 Ways to Reward Employees (Without Spending a Dime)” <http://bit.ly/XAdfV> HR World, 2007. Web 23 July 2012.