A Creative Way to “Fix” Incentives?

Incentives have been with us for a long time. As a tool drive performance, there is nearly 100 years of solid argument for their use in organizations. More recently, however, their use has been called into question. As industrial age work transitioned to knowledge work, many began to question whether or not incentives would stay effective. Peter Drucker argued that knowledge workers would be less interested in money and more interested in doing great work. Teresa Amabile summarized decades of research findings on incentives and creativity when she stated that extrinsic motivators like incentives could actually have detrimental effects on tasks requiring creativity, an argument later popularized by best-selling business author Daniel Pink. Despite this evidence, most companies aren’t looking to abandon their incentive programs – but maybe they could find a way to tweak them to work better.


A recent economic paper might have found such as way. A team of economic researchers led by Harvard University’s Roland Fryer (and including Steven Levitt of Freakonomics fame) recently flipped the incentive model on its head and tested on one of the most incentive-resistant professions in America: schoolteachers. Even with large pushes from lawmakers for pay-for-performance in schools, the use of incentives on teachers has yet to be proven effective. Typically these programs work by promising bonuses to teachers based on students’ performance on standardized tests. Fryer and company tweaked their program to do the opposite. Instead of promising to give bonuses on the back end, they wanted to test the effect of giving bonuses up front and then requiring they money back if performance wasn’t met.


A total of 150 teachers were randomized into several groups, including a control group, a traditional pay-for-performance group, and another group given a $4,000 bonus up front and told it would be reduced in relation to their students’ performance. The results were as impressive as they were surprising. On average, the students taught by the upfront bonus group outperformed students with similar backgrounds by up to 10 percentage points.


One possible explanation for this effect is “loss aversion.” Simply put, we’re more motivated to protect assets that we already have than to attempt to gain more assets. Once we are given an object or sum of money, we begin to build psychological connections to it, picturing the ways we’ll enjoy owning it or remembering fondly the ways we’ve used it. Perhaps what was missing from the incentives equation was the subtle push provided by the thought of loss.


These findings have some interesting implications for managing performance. Perhaps we should hand out bonuses in the beginning of the quarter. Or maybe we could keep a running tally of money lost during a bonus period instead of listing what individuals are “on plan” for. Perhaps these findings have a larger question for the use of incentives, questions in the same vein as Drucker and Amabile: If it takes the threat of losing money to make an incentive work, is it even worth having an incentive program?