Episode 7: Incentives & Motivation

Intro

Hey, It’s Dallas, and I have a question for you.

But first, let’s pretend that you work for a large non-profit organization, and you’re, let’s say… the Director of New Donor Acquisition and it’s your job to rally an internal team to go out and raise as many donations as possible for your organization’s cause.

The team that you oversee is directly responsible for going door-to-door to ask people to donate to your cause.

And because you oversee a team of some of the most important members of a non-profit – the donor acquisition team – you’re paid a bonus of up to 5% of the total donation amount your team raises.

As a tool to incentivize your team to perform at a higher level, hopefully acquiring more donations, you can incentivize your team members by giving them 1% of the total donation amount they raise, but this incentive will be paid out of your 5% bonus.

Or, you can just keep the 5% bonus to yourself.

Obviously, what you’re trying to figure out right now is if giving a 1% incentive to your team will result in them actually working harder, performing better, and generating more overall donations so that your remaining 4% bonus ends up being greater than the 5% bonus you would have received had you not given your team the 1% incentive.

Oh, and ideally that 1% incentive given to your team, and the potential increase in performance will lead to more donations for the charity.

You didn’t forget about the charity, did you?

So anyway, that’s the question. What do you do? Do you keep your 5% bonus to yourself, or do you shave off 1% for your team, incentivizing them to perform at a higher level, hoping that it leads to an overall increase in donation volume?

Take a second and consider it…..

Okay, so I’m guessing you decided to be the good boss that you are and give your team the 1% bonus incentive. In fact, 76% of managers chose to incentivize their team this way.

But, when you compare these two groups – the donor acquisition teams with no additional performance incentive, and the teams with a 1% bonus incentive tied to their performance – the teams who were incentivized to perform at a higher level, actually underperformed when compared to the non-incentivized groups. And by a significant amount – and every single time this was tested.

Even when the team’s bonus incentive was raised all of the way up to 10% of all donations raised, they still underperformed compared to the non-incentivized teams.

That doesn’t seem to make sense, right? You’re probably saying to yourself that if you had a performance incentive dangled in front of you – in this case monetary – you’d obviously do a better job, you’d maybe work a little harder, be a little more persistent and you wouldn’t take no for an answer so easily, and ultimately you’d get better results.

Right?

But that’s actually not what the research shows… and there’s a lot of research on the topic.

So, then what’s happening? How is it possible that adding performance incentives can actually result in a negative impact on the overall performance? It’s actually not as complicated as it sounds…

Let’s take a quick break and then we’ll dive in….

The Research

The question I opened this episode with is based on just one of the experiments conducted by Uri Gneezy and Aldo Rustichini in their paper titled – and possible spoiler alert here – “Pay Enough or Don’t Pay At All.”

In this specific study, they divided teams into two groups, each was told they’d need to go door-to-door to solicit donations for a charity. The first group – the control group – was given nothing more than a motivational speech about the value of the work they were about to do and then sent on their way.

The second group was given the very same motivational speech about the value of the work they were doing, and they were then informed that they’d receive a bonus of 1% of the total donation amount they raised.

Now get this… over 500 members, the average amount raised by non-incentivized group members was $239. And the incentivized group? $153. A 36% decrease in performance.

A little surprised, Gneezy and Rustichini kept testing this, and kept getting similar results.

So they added a third group, gave them the same motivational speech, but this time they told them they’d receive 10% of the total donations raised. And the average donation amount? Only $219. That’s higher than the 1% groups but still worse than the non-incentivized groups.

This study is just one example of how a monetary incentive can actually act as a demotivator – in this case undermining the value of the work they are doing by applying a commission structure – and it shows how incentives can actually reduce overall performance.

And there’s a lot more research that supports this.

For example in another famous experiment – one of the earliest on the subject – was done by Edward Deci in 1971.

In this study Deci divided his respondents into two groups – the control group and the experimental group.

Each group was given a Soma cube – which is one of those wooden Tetris-like blocks that can be assembled in a bunch of different ways. 240 to be exact.

In the first session, both groups were told to find as many solutions to the puzzle as they could within the given 8-minute time period. Neither group was incentivized or knew that would be incentivized at a later stage. The results from this session acted as a baseline.

In the second session the control group was given the exact same task – find as many solutions in 8-minutes as possible. But the experimental group was told that they’d be paid $1 for every solution they were able to find during the second session’s time limit.

Now, what’s different here is where Gneezy and Rustichini were purely measuring output – which was the amount of donations received. But Deci had an additional layer in his study which measured effort or interest – which was time spent actually working on the puzzle.

What Deci found did vary slightly from what Gneezy and Rustichini found. Deci found that when the monetary incentive was introduced, the experimental group did in fact work “harder,” by spending 26% more time working on the puzzle when they were being paid to find solutions.

But like in Gneezy and Rustichini’s studies, the incentivized group underperformed, finding less solutions than the non-incentivized group in session two. And not only did they find less solutions than the non-incentivized group, they found less solutions than what they themselves found in their first session, before they were incentivized.

Adding the monetary incentive resulted in this group spending more time to achieve a worse result.

But Deci wasn’t done there.

At the end of the second session, Deci told each respondent – time’s up, put the cubes down, the study is over. Then he left the room under the guise that he was going to get a notepad for the post-survey study.

But unknown to the respondents, this actually started a secret third session, also lasting 8 minutes.

As Deci continued to monitor the two groups, he found the control group, who was never incentivized to work on the puzzle in either of the previous two sessions, actually picked it back up when he left. And not only did they pick it back up, they actually spent 17% more time working on it in the third session than they did in the second session. They actually put more time in outside of the timed study during this secret third session than they did during it! This group wanted to keep working on the puzzle, they wanted to find more solutions.

The experimental group, on the other hand, in this third, secret session – when they thought the research was done and their $1 per solution incentive was removed – their motivation to pick the puzzle up and try to find more solutions declined significantly. Instead, they tended to pick up the magazines on the table or just stare at the wall until Deci returned.

Without the reward, they didn’t care about finding more solutions. Their interest in the puzzle was gone.

No pay, no play.

And these studies show the same results, across different researchers, regions and types of tests.

When students are paid for each correct answer on a test, they do worse than the students who aren’t paid at all. When a late fee is added to daycare pick up times, more parents are late. When copywriters are paid per headline, they produce more headlines than unpaid copywriters, but the headlines perform worse when tested on readers.

When money is tied to performance, weird things start to happen.

But… we all have money tied to performance. If you perform well at work, you get to keep your job. Do real well and you might even get a raise. And if all of a sudden your boss removes your incentive to work – your salary – you’re definitely not going back.

And this is why it’s important to understand how incentives work – or don’t work. Because we’re all incentivized in a variety of ways throughout the day. We have monetary incentives to perform well at work – you may even have a commission or bonus structure tied to performance. We’re incentivized to behave within certain societal norms such as not screaming fire in a crowded building. We’re incentivized by those around us to treat each other kindly or risk losing relationships. We’re incentivized to raise our children right so that they become well adjusted adults. We respond well to some incentives and not to others.

So, it’s important to understand when to apply incentives to increase motivation and when your incentives may actually be undermining the performance you’re after.

But before we can get there, we need to develop a stronger understanding about what drives overall human behavior and our underlying motivations.

Why It Works

We’re going to take a minor detour here to dive a little bit deeper into overall behavioral analysis and how our understanding of human-behavior and motivations has evolved over time.

The first key figure in behavioral psychology was a guy you’ve probably heard of – Sigmund Freud. Freud was the first main figure to come along and build a blueprint for what he believed were the main drivers of human behavior and motivation.

Initially Freud put forth his Eros theory, or his “life theory.” Freud believed that the basic tenets of life itself are what drives our motivations – things like survival, pleasure, reproduction. He believed that any single behavior or action a person was performing, could be attributed to at least one of these elements.

He believed that humans were these semi-simple creatures that only wanted to enjoy themselves, have sex, and stay alive.

But later in life, Freud came to believe that life instincts alone just couldn’t explain all of the types of behaviors he was observing. So he amended his life theory to state that human behavior could also be driven by a second set of items – death drivers.

These drivers were used by Freud to explain behaviors like aggression, risky decision making, or could be used to explain why people continually relive past traumas, or even suicide. He believed people were either motivated to live and thus set out to seek joy and pleasure, or they were truly motivated by death and sought out high-risk activities, believing that, “hey if we’re all going to die anyway, let’s have some fun.”

Together, Freud’s life and death theory became known as the instinctual, or the Freudian approach to behavioral analysis and acted as the first real attempt at applying a global explanation to why each person behaves the way they do.

After Freud, there became a new school of thought in the 1930’s. This was the belief that our behaviors are driven through the continual conditioning of our environments and by those around us.

Meaning that as we’re growing up, or as we go through our lives and our careers, we begin to form our behaviors based on how our behaviors have historically been reinforced by those around us – positively or negatively.

For example, if each morning you greet your colleagues as they come to work, they may tell you how nice it is to see you each morning. And if you enjoy that kind of feedback, that behavior becomes positively reinforced within you and you continue performing behaviors similar to that for as long as you receive a similar response – or conditioning – from those around you.

On the other hand, if everytime you try to share an opinion in a meeting, and your boss laughs you off and doesn’t take you seriously, you’ll allow that conditioning to internalize itself in you. In the future – even at future jobs with new bosses – you’ll be more reluctant to speak up because of how you’ve been conditioned in your past environments. Whether you realize it or not.

This belief was popularized by Ivan Pavlov and his research on how easily humans and animals can be conditioned to perform – or to not perform – certain behaviors based on various forms of repeated external stimulus.

For example – as simple as it sounds to us nearly 100 years later – he was the first to demonstrate that over time and with consistent conditioning, the simple ringing of a bell can cause dogs to salivate, because they’ve been conditioned to believe that when that bell rings, they’re about to get a nice meal.

While this sounds rudimentary, examples of how conditioning appears in our everyday lives can be seen in how children who grew up with trauma behave as adults, how veterans returning from war experience PTSD in response to loud noises, how actors respond to applause and how employees respond to horrible bosses and customers.

This is why messy parents raise messy kids, it’s why kids raised in a home with more autonomy and choice are better at regulating their emotions and behavior over time than kids raised in authoritarian environments, it’s why employees who are given more control of how they approach their work are more likely to come up with creative solutions versus employees trained to follow a checklist, it’s why businesses managed by leaders with terrible attitudes tend to have terrible customer service representatives.

The environment and the things happening in it, condition our behaviors and how we respond.

This became known as stimulus-response theory and was the prevailing theory for nearly 40 years.

And then in the 1980’s another school of thought began taking over. And this is where we finally come full circle with the point of this episode.

In the 1980’s our man with the puzzle, Edward Deci, came along and said, “well actually, our motivation to engage in a behavior comes from our inherent satisfaction with the behavior. Our behavior is not naturally tied to a desire for a reward or a specific outcome.”

Deci believed that at our core, we can simply enjoy an activity by seeing it as an opportunity to explore, learn, and realize our potential. None of which need to be tied to a result, an incentive, survival or life and death.

He also believed that we have the ability to make choices and manage our own life, the way that we want to – not because we were conditioned to behave in a certain way.

This became known as the self-determination theory. Being self-determined means that you feel in greater control over your life, as opposed to being non-self-determined, which can leave you feeling that your life is controlled by others.

At the center of the self-determination theory is what Deci called intrinsic motivation. He believed that if you’re intrinsically motivated – or naturally motivated – to do something, you’re exponentially more likely to do it. And the more you do it, the more likely you are to be good at it.

Deci went on to lay out the three main elements that drive intrinsic motivation as autonomy, purpose, and mastery.

Basically, people are intrinsically motivated to do something when they can act independently, feel that their efforts matter, and gain satisfaction from becoming more skilled.

Think about you right now, listening to this podcast. If you’re listening to it because you’re intrinsically motivated to learn more about human psychology and decision making in order to grow your business and increase sales, you’re likely enjoying yourself, and actually learning.

You had a choice to listen – autonomy, you have a purpose – which is growing your business, and you’re improving craft through the things you’re learning in this episode – mastery.

Now contrast intrinsic motivation with extrinsic motivation, which involves engaging in a behavior to earn external rewards or to avoid punishment.

If your boss forced you to listen to this podcast, or if you’re not a leader in a business, if you have no motivation or care about human psychology, you’ve made it this far in the podcast simply through persistence and you’ve probably learned nothing. That’s because you didn’t come to this podcast independently, you don’t have a purpose for listening and you’re not attaining mastery in your field by listening. You aren’t intrinsically motivated to listen. You’re extrinsically motivated because your boss told you to do it.

Think about Deci’s Soma puzzle. He measured the number of solutions people found in the time given, he measured how much time was spent on the puzzle, he also measured enjoyment with the puzzle.

The group that was not incentivized – not paid for performance – spent more time on the puzzle even when time was up. During their time they found more solutions than the incentivized group, and they reported higher levels of enjoyment while doing the puzzle. They were intrinsically motivated, they were self-determined to solve the puzzle.

By giving the second group an incentive, their attention shifted from their intrinsic motivation to an extrinsic reason – the money. Their perception of what they were doing shifted from “I’m doing this because I find it interesting” to “I’m doing this because I get rewarded for it, not because I find it interesting”. When this intrinsic motivation shifted, their results declined.

So, what do we do with all of this? We have to pay our teams. We have to get paid to do our jobs. So what do we do?

Well, we can start by looking at the ways we can use this new understanding of human behavior, and then put it into action to motivate and incentivize not only our teams, but ourselves to perform at a higher level.

What To Do About It

There’s this standard belief that business owners have that monetary incentives are tied to an activity, and as those monetary incentives increase, performance will also increase. The reasoning goes that exerting effort is unpleasant, and money is good. So more money equals more effort.

As in… pay me and I’ll work. Pay me more and I’ll work better.

But in order to believe this, you have to also believe that there’s an ever increasing linear correlation between money and effort. Like on a line graph. As money increases, effort and motivation increases.

While money can drive effort and motivation to a certain point, it can’t be true forever. There has to be a point where more pay can’t buy more motivation and effort.

If you were to believe in this ongoing linear correlation of pay and effort, then that means if you ever want to make more money, you have to hold back your effort to keep some reserved for future sales. Or you’re already giving your maximum level of effort and there’s no room left to exchange money for more effort.

As a personal example, there are periods of time where I’m putting everything I can into my work. All of my effort. There is no more effort to give or performance to add. I’m intrinsically motivated to behave in this way. I’m motivated to put in the maximum level of effort because I love what I do, and I want to keep getting better at it, and I’m going to keep doing it whether someone is paying me to or not.

If extrinsic motivations show up in the form of clients wanting to pay me to do what I do, but do it for them, great – I do own a business – but I can’t put in any more effort, or find any more performance, or try to get better just because some more dollar bills showed up. The best I can do is reallocate the effort that I’m already exerting into new places.

I can’t reserve effort and motivation. I can’t wait for money to show up to get me out of bed everyday. I can’t refuse to put in the work and effort until someone pays me to work on their business or projects.

I have to have the motivation and effort, and be putting that effort out there every single day, because that’s why people want to pay me.

This is why turning hobbies into jobs is dangerous. You’re replacing something you’re intrinsically motivated to do, something you love doing and that you have an innate desire to keep doing, and then you start evaluating it through extrinsic factors like how much money it’s making you, or how others evaluate your performance. Then you’re doing it less, enjoying it less and now you have one more job and one less hobby.

Ooof.

So that makes sense for us. But, what about our teams? Because, as business owners, or career-oriented leaders and entrepreneurs, we naturally have an intrinsic motivation to continue growing our businesses and careers. But what about our entry and mid-level employees? The ones who aren’t quite as intrinsically motivated to watch our businesses grow, or who aren’t super motivated yet for a promotion or to take on a large amount of responsibilities?

How do we keep them motivated and working hard? How do we strike the balance between extrinsic motivations – what we pay them to show up every day, and their intrinsic motivations?

If you’re to believe Deci and the self-determination theory, motivation develops from within us. It’s grounded in our basic human need to develop our skills, maximize our abilities, act based on our own free will, and to connect with others and to our environment. When those needs are met, that’s when people put in the hours, and the effort, they work hard to master their craft and elevate their performance.

A person’s intrinsic motivation is not stoked by a threatening, demeaning boss, who looks down on them and lobs insults at them on a daily basis. Motivation doesn’t develop from high-pressure, unreasonable and looming deadlines, or annual performance reviews where they need to pander for a raise, internal politics, or from overbearing SOPs and account managers.

But this is lost on most bosses. Most bosses – whether good or bad intentioned – are creating environments that are killing the intrinsic motivations of the exceptionally talented people they are hiring.

Because creating an environment based on extrinsic motivations is easy. It’s easy to pay people a lot of money to work in toxic cultures – they just don’t stay very long or produce very good work. It’s easy to host a Taco Tuesday, add a Keurig machine and a ping pong table. But it’s shallow and short term. Creating an atmosphere in which people feel free to act autonomously, and creatively work together towards the organization’s shared goals is much, much harder.

But it’s worth it.

Because having intrinsically motivated people – people that want to be there and want to work hard – requires giving them autonomy and freedom of choice. It requires letting them look at each new challenge with a fresh set of eyes. It requires letting people pursue mastery in their craft, no matter how long it takes them. It requires creating positive feedback loops and acknowledging the emotional labor that goes into the mastery of their craft. This is what drives people to want to continue doing the work they’re motivated to do, and to do it at a higher and higher level. This is the atmosphere that is hard to create, but well worth it for the business to create.

Because your team’s best work, or even our best work, our most creative work, our best ideas come when we feel that we’re acting on our own accord, with a clear purpose and mastering our craft, moving towards achieving the goals that we find meaningful to us.

So if nothing else, here’s what I want you to take away from this.

Money follows effort. Money can motivate you, but money can’t be allowed to control you.

And profit follows people. When you, as a business owner, are putting profits before your people, you’re creating a purely extrinsically motivated environment. The people in this authoritarian type of environment will underperform compared to your competitors who are hiring talent that actually wants to work inside their walls. When your competitors have the talent that is intrinsically motivated to produce high quality work, your competitors will produce better results. Better results get better clients. Better clients create more profit. And those clients will go to your competitors.

The money, the profits, the awards – they all come after you put in the work, after the effort. They are the byproduct of hard work. Not the other way around.

Put in the effort. Show the results. Show what you’re capable of doing. Demonstrate the mastery you have over your craft.

Because when you become overly motivated by money, you’ll lose the intrinsic motivation it takes to actually be the best at what you do. You won’t have the motivation to put in the time it takes to be the best. You won’t have what it takes to be truly engaged in what you’re doing or have the ability to master your craft.

Without motivation. Without mastery, you won’t have the money.

Dallas McLaughlin