Do Performance Incentives Backfire? New research suggests that they can, but whether they do or not, they’re tricky tools.

February 28, 2014

CFO.com | US

Do Performance Incentives Backfire?

New research suggests that they can, but whether they do or not, they’re tricky tools.

David McCann

In a previous career incarnation when I supervised people, I exhibited several behaviors that weren’t covered in Management 101. I treated each person differently, tried to make friends with everyone, tolerated insubordination, gave perversely glowing reviews to mediocre performers and delegated only when supremely necessary.

(Stop looking at me like that. It worked. At least, the various people I reported to let me keep doing it for 20 years.)

Another shortcoming was my system of rewarding people for excellent performance. I didn’t have one. Once while interviewing for a job — the interviewer, surrealistically for me, was Jerry Tarde, the iconic editor-in-chief of Golf Digest and a personal hero of mine — I was asked, “What do you do to reward people?” I sure didn’t want to disappoint Jerry, but I didn’t know what he was talking about. I was nice to them. That wasn’t enough?

I didn’t get the job.

Well, a wisp of redemption wafted my way this morning … maybe. Its source was an article about a study by some Dutch scientists, purporting that the effect of performance incentives can actually be opposite from the intended one. The research found that “the potential for a bonus can send the brain’s reward centers into overdrive and interfere with [the] ability to process information,” the article states.

Read the article and judge for yourself. The study’s conclusion is based on psychological tests that appear to this lay observer as kind of goofy, insofar as providing proof that incentives backfire. The distractive effect described in the study may apply when those being tested are trying to earn a reward by successfully completing a short mental task as a clock ticks. But that’s not what incentives look like in the workplace.

I can see how some kinds of incentives, like cash for joining a gym or completing a wellness profile, may be ineffective and pointless. But counterproductive? You might waste the minimal cost of such a program, but your work force is not going to be lesshealthy because of the offer.

Stock options are incentives. The danger inherent in them is not that executives will fail to earn them, by trying so hard that their brains get fuzzy for an entire year, or three years, or whatever the time period during which the reward can be earned. The danger, as we’ve seen all too often, is that they may take excessive risks that are injurious to shareholders in order to grab the brass ring.

Performance incentives are complicated. That’s so both for the company in structuring them, so as to provide the best chance of achieving certain ends; and for those who are incentivized, in the course of trying to attain them. It’s best to look at this with care and take nothing for granted.

Oh, one last thing. A postscript to future potential employers: All that stuff at the top of this article? Pay no mind. I made it all up. Just a smidgen of artistic license.

 

Overdosing on Incentives

Stock options, gift certificates, and lump sums of cash are the tools of choice that employers use to motivate staff to strive for success. It’s widely assumed that the promise of a monetary bonus improves a worker’s drive, concentration, and performance.

But a new study shows that these motivational rewards may have the opposite effect on some people. In these individuals, the potential for a bonus can send the brain’s reward centers into overdrive and interfere with their ability to process information, a team of American and European researchers has concluded.

The chemical in question is dopamine, a neurotransmitter that plays a variety of roles in the brain. In addition to fueling reward-seeking behavior, it also plays a role in learning, attention, problem-solving, and other cognitive functions, as well as mood and sleep. Certain drugs, such as cocaine, are known to elevate dopamine levels in the brain.  And low dopamine production in the brain is associated with depression, distractibility, and apathy.

Scientists led by Esther Aarts of Radboud University in the Netherlands collected brain-imaging data from volunteer participants, and later asked these recruits to participate in a word task. The participants were signaled that they would get either a high or low monetary reward for correct performance on the exercise.  Each test began with the words LEFT or RIGHT appearing inside arrows on a computer screen.  In some cases, the word corresponded to the direction in which the arrow pointed (e.g., LEFT appearing in a left-pointing arrow.) In other cases, the word was incongruent with the direction indicated by the arrow (e.g. RIGHT appearing in a left-pointing arrow).

Participants were told to press a response button (i.e. a left or right button) matching the meaning of the word in front of them.  Sometimes they were cued on the congruency or incongruency of the target word and arrow. (For example, a red cross signaled that the word and arrow would be incongruent, while a green circle indicated congruency. )  But other times they saw only a question mark as a cue.

The volunteers earned a reward only when they responded correctly and within a time limit.

Unsurprisingly, people performed worse in incongruent trials compared to congruent trials, and also performed poorly when they received no prior congruency cue.

But the brain images revealed something deeper. When promised a high reward, participants who had measured high on baseline dopamine levels performed well on congruent trials, but comparatively poorly on the incongruency task.  It appeared the participants with a lot of dopamine in their systems were so distracted by the potential reward that they had trouble concentrating on the task.

In reporting on their findings in the journal Psychological Science, Aarts and her colleagues suggest that for people with naturally high dopamine levels, the promise of a bonus for good performance could actually “overdose” the reward centers of their brains.

There’s no way of knowing the dopamine capacity in an employee needing some motivation. But the latest findings suggest that offering a big bonus as an incentive may not generate the best return.