3 Reasons Why Cash Incentives Don’t Motivate

Research finds that big cash incentives are more distracting than motivating

You might think that the more money an employee earns, the happier and more motivated he or she will be. Well, according to Tim Judge of the University of Florida, higher pay rarely leads to better results. His study of 15,000 individuals suggests that the link between money, motivation, and performance is much more complex. In fact, he concluded that even if companies let people set their own salary levels, they still wouldn't enjoy the job more. 

A Gallup survey into employee engagement interviewed 1.4 million people at every pay level, across every industry, in no less than 34 countries. And they too concluded that job satisfaction has little to do with money.

Everyone wants to earn enough to pay the mortgage, look after the family, and have enough left over for life's essential luxuries, but it appears that the more people focus on their salary, the less attention they give to the things that actually make them perform better. And those are: satisfying their intellectual curiosity, learning new skills, and (surprise, surprise) having fun at work. In some instances, money actually demotivates us. Arnold Schwarzenegger once said: "Money doesn't make you happy. I now have $50 million but I was just as happy when I had $48 million." Thanks for that, Arnie.

The theory goes that if salary and bonus is too much of an incentive, people focus on the money rather than on thinking "outside the box." And once they stop doing that they become far less effective. The best way to motivate people is to pay them a fair wage and make them feel valued within the company. This way they concentrate on the work, rather than the money. 

But what about financial bonuses to motivate people at work? Surely offering more money is the best incentive there is? Well, apparently not. Dan Airley and his colleagues at Duke University conducted a study where they asked three groups of economic graduate students from Narayanan University to go to local villages near Madurai in Southern India and ask subjects to perform a series of tasks. The tasks required the participants to use skills such as attention, memory, concentration, and creativity. (For example, one task was to play a memory game while throwing tennis balls at a target.) Each of the three groups was incentivized at different levels. One group was offered one day's pay to do well, the second was offered two weeks' pay to do well, and the third group a whopping five months' pay to do well. 

You may have already guessed the outcome of the experiment. Groups one and two performed at exactly the same level as each other despite the second being incentivized at 10 times the rate of pay. And group three, who could have pocketed five months' pay, performed worst of all. 

So why is this? According to psychologists, "supersized" incentives can be cognitively distracting. The theory goes that there's so much at stake, it impairs performance rather than improves it. In high pressure situations some people tend to either panic or choke. According to Ariely this is what happened to the students who were offered the biggest cash incentive. They thought too much about the task in hand, as well as how bad they were going to feel if they failed to take advantage of this chance in a lifetime.

So, does money incentivize people? The answer appears to be "yes" -- if it's not too much for the individual, but "no" if it's so large that you can't think about anything other than protecting it.

Not only does paying big bonuses have no direct correlation to better performance, cash often doesn't work as well as gifts as an extra incentive for employees for three reasons. 

1. Cash is considered "just" income. 
$50 will go in all directions, and none of it seems worth much. But a piece of merchandise, bought in bulk at $50 a piece, will have a much higher value in perception. To win a meal for two at a nice restaurant or win a free half day's holiday is a great motivator for some people.

2. Cash has no "trophy value" or lasting effect. 
When was the last time somebody showed you their paycheck? If somebody wins an award they'll tell everyone they know and say how proud they are. Awards make people feel important and also give them that sense of belonging. Award winners often form their own "cabal" and feel they part of success.

3. Cash programs usually lack goals.
"Do your best" is not a goal. Without a specific target there's a risk people will just try a little harder but then tire of doing exactly that.

Money matters. And the vast majority of people want more. But it's not just about the money.

Philip Hesketh is a multiple award-winning professional speaker on the psychology of persuasion and influence. He helps people improve their relationships and increase their sales. This excerpt comes from his new bookPersuade: Using the Seven Drivers of Motivation to Master Influence and Persuasion, now available.