Incentives & Disincentives: Will They Affect Performance?

At last year’s RILA Loss Prevention conference in Orlando, I presented a general session where we talked about the various performance “levers” that exist and how they can be used more effectively.  There is a tendency for managers to push on the same one or two levers over and over again, even if they are not the ones that will have the most impact on performance.

In a previous posting (August 31, 2009), we discussed task clarification in some further detail.  In this post, we’ll look at one of the most commonly used performance management techniques – incentives.  We’ll also look at the intertwined issue of disincentives.

Incentives are such a strong part of management history that we have numerous idioms and sayings about them, such as “You can catch more flies with honey than vinegar” and the oft-used “carrot or the stick.”  According to one study, over 75% of American corporations use some type of incentive scheme ranging from stock options to “Employee of the Month” awards to piecework pay for factory workers.  In fact, they are so pervasive that we often take their effectiveness for granted.

As a result, when there is a performance gap in the workplace, we often turn first to the idea of providing incentives – a reward for the desired performance – or disincentives – a punishment if the desired performance is not achieved.  However, there are many “levers” of performance and incentives will only work if the causal issue for the performance gap is related to motivation.

Here are some examples of when incentives will not be effective in changing performance: 

  • The employee does not have the capacity to perform the desired objective
  • The employee does not have the knowledge or skill to perform
  • The employee does not have the needed materials, tools, or resources
  • When other incentives are more important than the one you are offering
  • When disincentives outweigh the incentives offered
  • When the incentives offered are not actually tied to the desired performance
  • When the incentive scheme incorporates too many different performance objectives
  • When the incentive scheme is so complicated that an employee cannot determine the link between their performance and obtainment of the reward

In fact, there is not even universal agreement that incentives actually work in the first place.  Writing in the September-October 1993 issue of Harvard Business Review, author Alfie Kohn, argues that, at best, reward programs produce temporary compliance.    But, when it comes to productivity, he cites over two dozen studies that “have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all.”

Additionally, poorly designed incentives can backfire and produce undesired results.  In his book The Only Thing That Matters, Karl Albrecht describes watching an employee at a call center picking up a ringing phone and simply hanging it back up without talking to the caller.  When asked about it, the employee said they were measured and rewarded on answering the phone within 3 rings.

Shortly after starting as the Director of Loss Prevention for a retailer a number of years ago, I inquired about the dramatic drop in check write-off losses for the current year versus the previous year.  What I found is that the previous year’s write-off was the worst in company history and, as a result, the Senior Vice-President of Operations had sent out a memo to all management and all stores that this problem must be addressed and the financial results brought in line.

But, what we also found out was that check tender sales were way down and we were receiving a number of complaints from customers.  It seems that many store management teams, in their effort to address the check write-off issue, were simply refusing to take checks unless they could call the bank to verify funds were available.  At night, customers were sometimes being told, “If you have the money in your account, go to the ATM across the street and get the cash.”

You can imagine the impact these practices had on productivity, customer service, and, ultimately, on sales.  Clearly, these were not the results the Operations head had intended.

Alternatively, Nicole DeHoratius and Ananth Raman published a study in 2007 that showed how changing a store manager’s incentive in a retail setting can affect their attention towards shrinkage and loss prevention.  In the studied retailer, the company changed the emphasis of the store manager compensation plan to increase the weight given towards sales, thus decreasing the emphasis on the prevention of inventory shrinkage.  As most of us might expect, the company saw an increase in both sales and shrinkage.

Clearly, I’m not arguing that there is no place for incentives in the workplace.  Rather, when evaluating how you achieve desired performance, a careful analysis must be done that examines all the factors that influence performance.  Simply dangling a “carrot” or threatening the “stick” in isolation will probably not produce the lasting results you desire.

As always, I welcome your comment, disagreement, and dialogue.

One Response to Incentives & Disincentives: Will They Affect Performance?
  1. Bill Sims
    September 9, 2010 | 8:09 AM

    This is a very well thought out article regarding incentives and disincentives. I will come back to you soon with some different research that offers an alternate perspective to that of Alfie Kohn, Daniel Pink, and others.

    A few quick thoughts….

    As Dr. Aubrey Daniels says “If you’re using incentives and you think it’s easy, you’re doing it wrong. Incentives can be used or misused. People, can screw up anything. But to say that the use of incentives is ineffective is a position that is not supported by the research in behavioral science nor by the practical experience of thousands of managers.”

    In many of your examples above, the evidence is clear that the incentive did work, although it produced an un-intended consequence through poor design.

    A scalpel can cut your throat and kill you or remove a brain tumor and save your life.

    My motto: Don’t blame the scalpel, blame the surgeon

    I’m off to Alaska to present “Green Beans & Ice Cream: The Recipe for Behavior Change.” I encourage you to view it free of charge at http://www.billsims.net and share your thoughts with me.

    While I’m on the plane I’ll try to spend some time to reply to your thoughts in more depth, along with supporting research. In the meantime, the billsims.net link will probably help shed light on this complex & confusing subject.

    Great work!

    Thanks… Bill Sims