BSG nugget: Incentives do work…

…but probably not in the way that you expect!

And since you have just passed New Years, it probably means that this is last chance for your organization to finalize your bonus schemes despite a whole body of work from motivational theorists over psychologists and latest behavioral economists has been pointing out that monetary incentives are challenging in most organizational settings:

Firstly, as Daniel Kahneman points out in his landmark book, Thinking Fast & Slow, money drives individualism over team work: “The general theme of these findings is that the idea of money primes individualism: a reluctance to be involved with others, to depend on others, or to accept demands from others”. Your company is more likely than not a highly integrated organism, where the whole is greater than the sum of the parts and your departments depend on each other for success: finance depends on operations, which depends on sales, which depends on marketing, which depends product development and vice versa.

Secondly, as Dan Ariely, another key behavioral economics player, has described again and again, money tends to take you away from focusing on the overall purpose of an organization and towards maximizing your own benefits – and they are often difficult to align. Sales is good, so more sales is better – except of course when sold below profit, above available inventory, in a way that compromises future sales etc. And sales is actually the easiest to measure and align!

Thirdly, as shown by Daniel Pink in the video below, money as an incentive even in relatively basic jobs tend to reduce rather than increase your performance. You need to pay a fair compensation to avoid demotivation, but what actually works is focus on building your autonomy, mastery and purpose into your job – so being able to decide within your working area, being able to develop strong skills in your working area and finally connecting your working area with a higher purpose.

Clearly incentives work, but not in the way that you want, so what to do? Well, here are three quick tips:

  1. When individual rewards do not work, try to think of a team approach – this both helps before AND after the reward, as it is part of a shared experience, win and celebration.
  2. When money in itself primes a focus on your own financial benefit at the expense of the organization look for less direct monetary rewards such as an experience or invest in strong purpose organizations with employee ownership.
  3. When money as a direct incentive actually reduces performance then why not simply remove it. Pay fair compensation, build fantastic jobs and maybe build in a profit sharing approach, so you can be sure that both your organization and your company wins at the same time.

And yes, most of the rules and tools on what, when and how to measure and reward still needs to be considered. If you want to design your organization, metrics and change programs, so they fit how real humans think and behave, contact me at or +45-23103206.

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