Busting Incentive Myths Part I: Define Incentive

Part I

What is an Incentive

Enron in 2001. Wells Fargo in 2016. Wall Street (name the year). Incentives feed the need for greed and, as a result, can get a bad name.

Incentives can get a bad rap, in part, because they are designed poorly. But what if they're done properly?

For certain jobs, incentives can have a positive impact on productivity. Incentives heighten focus and attention. They naturally urge workers to set goals. They help employees differentiate between earning a living and being recognized for their efforts.

They are best suited for salespeople with direct responsibility, either your own sales employees or your channel partner's sales reps in some cases. However, incentives are not meant for jobs where boosting effort could derail effectiveness such as accountants, compliance professionals or data analysists. When done correctly, incentives are powerful tools.


What Is an Incentive

The term incentive combines both the design of how to earn as well as the reward itself.

The most common form of an incentive is a contingency-based reward, or, "Do this, get that." It's when a reward is offered that is contingent on a person's behavior to do some particular thing during a specified period.

...the design of the incentive and the nature of the reward must be tailored to the audience in order to be successful.

Incentives are not commission plans or at-risk compensation, even though those can be contingent on performance, too. Typically, incentive plans are designed to help focus an employee's efforts for a short period.  Also, they are different from commissions in that the means to earn and the rewards delivered for the incentive can change from period to period, whereas commissions are usually consistent over long periods.


Why Incentives Work

Incentives work by stimulating the parts of the brain that respond to emotion. Incentives, like many emotions, feel good and the brain seeks more of them.

Incentives encourage action to do (or not do) something, typically different or more than what is being done now. In other words, an incentive is intended to motivate incremental behavior. 

In ancient times, humans needed to be able to flood the body with energy when a tiger jumped out of the bushes. They needed an energy reserve to be able to switch from walking to running in a split second. To do so required that day-to-day levels of effort were low and sustainable for long periods. This allowed the body to keep some fuel in reserve for exceptional situations, like when an ‘incentive' came along. Today, we're not so different.

In modern times, the incentive isn't to stay alive, but it is to close deals by the end of the month. A person can, in a variety of circumstances and short surges, push beyond their regular activity rates with an extra level of effort. This is the what the incentive is trying to capture: the short burst of focused, extra energy. The only way that can happen is if there is some reserve. Incentives cannot operate well if they are continuously used.  

It's also important to note that incentives work universally. They are successful in virtually every culture and society on earth. They are successful at the highest and lowest ends of the socio-economic spectrums. They work equally well on men and women. Incentives can appeal to the irrational or the rational. However, the design of the incentive and the nature of the reward must be tailored to the audience in order to be successful.


Common Problems with Incentive Design & Rewards

Taking due notice of the fact that incentives can be successful under a wide variety of circumstances, each person is unique.  DNA and psychological personality traits of each person can be different, including gender, social status, and earning level. Ethnicity is braided uniquely into each person's disposition, work environments vary, and cultural norms fluctuate from corporation to corporation. All these complications must be taken into consideration when designing the incentive.

To ensure a predictable response to an incentive requires that certain idiosyncrasies are given their due and that designers of incentive programs commonly fail to consider.



In the next part of this series, the first of several common incentive mistakes will be addressed and what can be done about them.


Tim Houlihan is the founder and chief behavioral strategist of BehaviorAlchemy, LLC, a consultancy using a behavioral lens for improving the actions of workers, customers and policy makers. He co-founded Behavioral Grooves, a meetup and podcast with listeners in more than 80 countries. Previously, Tim was Vice President of Reward Systems at BI WORLDWIDE where he was responsible for a $300 million global portfolio of reward systems, acted as the firm’s thought leader in behavioral sciences and was the chief liaison to research partners around the world. Tim believes people underestimate the role of the unconscious in our behaviors. The application of good behavioral science can remedy that.