The Behavioral Science Behind Choosing the Right Incentive

Getting incentives wrong can be expensive. In the U.S., the top 400 sales teams spend between 45 and 65 billion dollars on variable compensation every year to encourage employees to perform better or reach a desired outcome. However, companies often choose the wrong type of incentive when it comes to changing employee behavior.

In order to achieve milestones and help employees perform their best, employers often reach for their wallet first. Intuitively, this makes sense: most people think about money when they think about incentives. This kind of incentive is often a lump sum at the end of a project, and many employers assume that the more money they offer, the more motivated employees will be to perform well.

In reality, financial incentives are only one type of incentive, and not always the most effective at changing behavior. While financial incentives can sometimes help encourage specific one-off behaviors, such as signing up for a program or participating in a training course, researchers have shown that they are rarely successful at bringing about complex or sustained behavior change.

For employers looking to encourage better performance over time, this type of complex and sustained behavior change is often what’s needed. So how can we avoid unnecessary spending on incentives that don’t work in the long term? A good place to start is looking beyond financial incentives alone and considering all of the different incentive types that are available to us.

Here are five less traditional incentives and the behavioral science behind why they might be a better option:

1. Concrete rewards - Financial incentives are often deposited into an employee’s account, making them less concrete and almost invisible. To increase motivation, organizations should focus on incentives that employees can see and more importantly feel in the moment. When something is concrete and visible, we want it more. Researchers have shown that concrete rewards, such as t-shirts, iPhones, or Fitbits, can be much more motivating than the equivalent amount given as money. When we get a physical prize to recognize our performance, it feels more tangible and exciting than an automatic deposit into our bank account.‍
2. Points - A potential downside of choosing concrete rewards is that the employees you’re trying to motivate may not care about the specific prize you chose to motivate them. That’s not going to work; if an employee doesn’t care about the incentive, they won’t be motivated to do what it takes to get it. Knowing that employees have diverse preferences, employers can leave some room for employees to personalize the rewards they get. One way to offer choice and personalization is through giving employees a “currency” such as points that can be redeemed for concrete rewards in a marketplace, similar to airline points models where frequent flyers can receive free flights and also select “rewards” from a catalog of products. The idea of letting employees choose incentives from available options in a marketplace may seem a bit counterintuitive: A case study by Crimson showed that employees said that they would prefer cash incentives. However, the same study showed that the employees were actually more motivated by a marketplace where they had the choice of rewards.
3. Praise- In the midst of busy day-to-day work life, it’s easy to forget about the importance of recognition. A study by researchers at Intel and Duke University showed that workers’ productivity rose more if they were rewarded with a note thanking them for their “hard work and great achievements in yesterday’s shift” than if they were given a cash bonus. In fact, just the promise of praise from their boss increased performance by 6.7%, up from 4.9% for a small cash bonus. It turns out that praise is still a powerful motivator even when it’s not coming directly from a person. A New York hospital struggled with getting their medical staff to consistently sanitize their hands before and after entering their patients’ rooms. To address it, they put an electronic board in the hallway that gave employees instant feedback when they sanitized their hands. Every time they did it, the board would say something positive, such as “good job!”. This seemingly minor incentive improved compliance rates from 10% to 90% in only four weeks.‍
4. Lottery Incentives - Have you ever thought about the strange contradiction of people buying both lottery tickets and insurance? As human beings, we generally avoid taking risks or putting ourselves in situations that involve uncertainty. However, when it comes to lotteries we often do the exact opposite and seek out risk instead. When we have the option of taking part in a lottery, we tend to overestimate our chances of winning even when our chances are low. Nobel prize-winning behavioral economist Daniel Kahneman refers to this phenomenon as Prospect Theory. Because we overestimate our chances of winning, the opportunity to take part in lotteries can motivate employees even when there’s just a small probability of receiving a high payoff.‍
5. Prosocial Incentives - Most incentives are designed with the assumption that employees will be happier and more motivated if they are given more money to spend on themselves. That may not always be the case. A study of Belgian, Canadian and Australian teams found that getting a $25 or $50 voucher to spend on charities or colleagues rather than yourself, made employees both happier and more productive. If your organization doesn’t have a large budget for incentives, prosocial incentives may be especially powerful. Research by Alex Imas found that participants worked harder for charity than for themselves, but only under the condition that the amount of money was relatively small in the first place. When the bonus was larger, they preferred to keep the money themselves.

What’s the takeaway?

Giving employees financial incentives is a common way to push them to pursue goals that the company cares about. Financial incentives have their strengths, but research in behavioral science tells us that we also need to take into account their limitations if we really want to increase motivation and change behavior.
One of the key takeaways from this research is that variety is key. So the next time you’re thinking about offering your employees a bonus, why not try mixing it up and choosing something different?