7 Reasons Bonuses and Incentives Don’t Work (& What Actually Does)

by | BiggerPockets.com

Motivating others has always been a fairly difficult task. That’s true whether it comes to employees, vendors, our children, colleagues—or even ourselves for that matter.

As it turns out, it appears that one of the main reasons for all these motivation challenges is that we’ve been going about it all wrong. The problem is that people aren’t motivated by what we would think from having sat through Economics 101 in college. Yes, people do respond to incentives, but there’s a lot more to it than that. Furthermore, how they respond to incentives is far different than we had previously thought.

I came to this conclusion from reading Daniel Pink’s excellent book Drive: The Surprising Truth About What Motivates Us. Pink walks us through the history of motivation, which starts at what he calls “Motivation 1.0.” This would include things like eating, drinking, sleeping, finding shelter, and trying not to get eaten by a mountain lion.

Sometime around the Industrial Revolution, firms became so large that a more thorough system of motivation needed to be implemented. The only thing that could be compared to these new massive firms was the army, so the early theorists in “scientific management,” such as Frederick W. Taylor, borrowed heavily from the military model. This is the good, ole-fashioned “carrots and sticks” model of motivation. If you do something good, you get rewarded, and if you do something bad, you get punished.

Makes sense, right?

The only problem is that while such a model may have worked back in the day when people were stuck in textile factories doing repetitive tasks, it doesn’t seem to work very well with what Peter Drucker calls the “knowledge worker.” As Daniel Pink thoroughly lays out, the evidence clearly indicates that such “if-then” rewards actually hinder performance. For example, he notes that:

“In 2009, scholars at the London School of Economics… analyzed fifty-one studies of corporate pay-for-performance incentives. These economists’ conclusion: ‘We find that financial incentives… can result in a negative impact on overall performance” (Pink 39).

So basically, you’re paying employees extra for reduced performance. Or perhaps you’re paying your children off for worse behavior. Or perhaps you’re inspiring all sorts of ill behavior in all sorts of people, including perhaps yourself. It’s something that’s strongly worth considering.

Pink lays out seven major reasons that the “carrots and sticks” motivation doesn’t work. They are as follows.

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7 Reasons Bonuses and Incentives Don’t Work (& What Actually Does)

1. They can extinguish intrinsic motivation.

Pink focuses on intrinsic motivation a lot. (That is the basis for what he recommends, Motivation 3.0.) For people to truly excel at something, they must want to do it. Yes, you can bribe someone to do something with money, but once the bribes go away, so does the effort. This is what has happened with experiments in paying students and what almost always happens when someone tries a crash diet. After the person hits their target weight, they balloon right back to where they started. Long lasting results require intrinsic motivation.

Related: How to Motivate Yourself and Others With an Internal Locus of Control

This boils down to what Pink calls the “Sawyer Effect,” named after title character in Mark Twain’s classic The Adventures of Tom Sawyer. In the book, Tom tricks his friends into not only painting his parent’s fence for him, but actually paying Tom for the “pleasure.” He does this by pretending that he enjoys painting the fence and doesn’t want to let anyone else join in. The idea is that if you pay for something specifically, it makes it feel like work and they won’t go at the task with as much enthusiasm. And if you act as if something is fun, you don’t need money because you enjoy doing it anyway. After all, everyone knows that we put more effort into things we actually want to do. And that’s true for employees, children, siblings, spouses, friends, colleagues, and the like.

2. They can diminish performance.

As noted above, research has consistently shown that such incentives actually reduce performance, and they do so at a pretty penny.

3. They can crush creativity.

Studies asking participants to solve a creative problem have generally shown that participants perform worse if there is a financial incentive. This may sound counter intuitive, but the reason is it seems to add pressure and also narrow the focus of the individual. People without such potential rewards feel freer to explore creative solutions.

4. They can crowd out good behavior.

Pink cites a study in Sweden that offered people who’d expressed interest in donating blood seven dollars if they actually donated. Thirty percent of those who were paid donated blood. Of the control group that wasn’t paid, 52 percent donated. It seems that offering people money for a good deed removes that warm and cuddly feeling we get inside when we do something charitable. It just becomes work. And donating blood for seven dollars just isn’t worth it.

5. They can encourage cheating, shortcuts, and unethical behavior.

This one is pretty obvious. If for example, you offer people money to hit a certain number in sales, that creates an incentive to cheat. We have seen this kind of thing recently with some of the cheating scandals involving teachers judged on the students’ test scores.

Related: The 7 Indispensable Team Members of a Property Management Company

6. They can become addictive.

People can become so accustomed to these types of incentives as to simply expect them, or even need them. Indeed, we’ve given one-off bonuses as appreciation to employees before that actually came back to bite us. That same employee simply expected it next year (or the next time they did a similar task) and was far more disappointed by not getting the bonus then they were enthused to get it the previous year. We basically paid money to get an upset employee.

7. They can foster short-term thinking.

Think of those corporate bonuses based on last quarter’s stock price. Can you see how that would incentivize just about anyone from the CEO to the salespeople to engage in short-term thinking instead of long-term, strategic thinking? Spoiler: Long-term thinking is better.

So What is the Answer?

At this point, I hope I have convinced you that “if-then” rewards, incentive-based compensation and bonuses are not a good way to motivate people in any part of your life. But what’s the solution? I will save the bulk of that discussion for next week. But in brief, Pink recommends trying to inspire a person’s “intrinsic motivation.” Regarding compensation, make it so it’s not an issue by paying enough to satisfy the employee (assuming that number is reasonable, of course). But from there on out, you need to find other ways to motivate someone. This can include providing challenges to overcome, opportunities to grow and learn, a fun and exciting work environment, a chance to “make a difference” and a chance to progress personally or professionally.

We’ll explore those ideas next week. Until then…

How do you personally motivate those in your business?

I’d love to hear from you. Comment below.

About Author

Andrew Syrios

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

16 Comments

  1. Cindy Larsen

    I like the idea of motivating people by giving them the opportunity to invest in the business. Once they own a “piece of the action”, if they are already a self motivated person, they have an additional incentive to want the business to succeed, not just as an employee, but as a part owner. An LLC taxed as an S-corp would be good for this if your business only involved a few employees all of whom you wanted to treat equally well. The business could have a 401k plan that would allow individual accounts with checkbook control over 410k funds for investing, and could allow company match on contributions, if and only if profits allowed for that. If the business profits, employees get to save double for retirement, or just get a share of the profits, in addition to salary. And the employee owners pay less FICA tax, than they would if they were self employed 1099 contractors performing the same work for the company.

  2. JL Hut

    Unfortunately for managers of humans, humans are complex. If you come up with a way to motivate one human, it may not work on another. We tend to try to motivate others by what will motivate ourselves, This does not work because we each have a different hierarchy of values. There is an old old book that says to raise up your children according to their bent. Children are no different that adults. Each has their own value system. If you want to effectively reward or punish an adult or child, find out what they value most and give it to them or take it away, depending on what your objective is. Simple right? except it can not be easily scaled across a large group of people. It takes skill and discernment on a manager’s part to do this, but if you learn to speak to them in their language (value system) you can hit a home run in motivation. If you are trying to motivate a employee by giving them a large $$ bonus and their motivational language is words of appreciation or thoughtful gift your $$ will not hit the mark. They will certainly take your $$ but you will not get much in return for your investment. I have used what I am proposing and it works amazingly well. But it is not easy to learn, like trying to learn a new language, it takes time and dedication. So, take the time to look outside your own sphere, your own value system. Observe, ask questions, listen and learn from the people around you. You might be surprised what someone else values.

  3. Chester Lee

    There are many studies on motivation, and no consensus on what works for everyone. That is because as humans, everyone has its own set of core values and everyone will answer the motivation questions differently. The financial industry and the sales industry would likely find issue with “7 Reasons Bonuses and Incentives Don’t Work (& What Actually Does)” Commission based sales people tend to work harder because their pay commensurate with their effort and how hard they work. New York Life did a study, and found that the higher the value the sales person identifies with money as a motivator, the more successful the sales person.

    “Regarding compensation, make it so it’s not an issue by paying enough to satisfy the employee (assuming that number is reasonable, of course). ” This is a caveat statement. Everyone has their price. I live by the belief that you get what you pay for.

  4. Joel Owens

    Money talks. Your article reminds me of many decades ago when working at Wal-mart. They would give paper certificates and all that crap each week. People wanted to see THE MONEY.

    All this rah-rah good feeling crap maybe it works for some employees but not all. Wal-mart and Home Depot were grown and built on employee incentives. The stocks tripled many times over and made lots of them millionaires. Today people work there just to get a check. Most could care less about all the feel good stuff. Generally if the environment is good to work in and people get along with their workers and are paid a decent wage then things are tolerable for most people.

    About 80% of the work force are not working their ideal job but out of necessity.

  5. John Murray

    Worker insecurities drive corporations to higher profits. Workers compete with each other and make corporations secure in their profits. The military model is somewhat different, the outcome of such a model is spinoffs of technology for private use. The military is where a society values are built, applied and drive advancement. Point of fact integration and the advancement of gender equality. This happens in the military and then is transferred to the other sectors. The military sets the pace for the advancement and prosperity of a society. This is very difficult for the private sector to mirror.

  6. Melanie Hartmann

    I wholeheartedly agree! My training is in school psychology and people drool over incentives for students. My personal and professional experience suggests that this “carrot and stick” method is rather ineffective. It will help a student/child that just needs push but who are otherwise intrinsically motivated to do well. Otherwise, it’s useless…

  7. Wenda Kennedy JD

    I have found that when I pay a bonus or give a raise, that person ends up working less hours. They tend to work just enough to make about the same each pay period — the amount they need to pay their bills. Most people are into MDR (minimum daily requirement). They only earn enough to survive. And usually the bonus or extra on their paycheck becomes a problem for them. They tend to spend that “extra” like drunken sailor. Since they have worked less, then they have problems making their bills. They are short that pay period and usually don’t understand why. I understand why it happens that way. They double count that money. It’s part of a thinking pattern that is very common.

    Funny, personally I have always worked more and smarter to make more money in response to a windfall. It spurs me on. But, I’ve been self-employed for 42 years.

  8. Erika G.

    I always believe that one good way to motivate employees is thru bonuses and commissions – but also, another incentive that could be given to them are training and seminars that will make them do better at their jobs. This will at the same time, help the employer in the future because they are investing on their employees’ skills and talents.

  9. John Murray

    The point missing is purpose and the motivation to achieve a goal. Back to the military model. Most people would not help another change a tire. Why would a soldier risk their own life under heavy fire to help another? There has to be higher goal and purpose to make individual perform at high levels. With the corporate model there is no higher goal, it’s money and compete for that money. It’s a form of self preservation, where there is no higher purpose or goal. So with money being the goal never will the individual perform at a high level, just enough to secure more money. This is why job burnout happens and that is fact.

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