The Shortcomings of Monetary Rewards and What To Do Instead

Intuitively, one might assume that monetary incentives would be the most effective reward system; people want money, therefore monetary rewards should increase effort and maximize productivity.  Despite this common assumption, research shows that higher rewards don't always lead to more employee effort. Paradoxically, one study found the opposite actually happens, a phenomenon known as "incentive reversal."

Incentive reversal takes place when some team members wait for fellow coworkers to increase their effort so they can put forth minimal effort while everyone still earns the monetary reward. However, the employees who initiated greater effort will recognize that others are shirking their responsibilities and start putting in less effort themselves. Although this particular study uses incentive reversal to refer to this specific interaction between team members, the term can also be applied to the other ways financial incentives can backfire.

In Dan Ariely’s book Payoff: The Hidden Logic That Shapes Our Motivations, the author discusses a variation on this concept in the context of employees working for an Intel factory in Israel. When one group was promised a cash reward if they reached a certain production goal, the employees first increased their effort and quickly completed the goal. Once they were paid, however, their productivity dipped below what it was before the reward was offered. Dan also included a group who was offered a pizza party at the end of the week and another group that simply received compliments. It was only the group that got the “Well done!” and other positive texts from their boss who sustained high performance throughout the week.

So if monetary rewards aren’t the answer, then what is? There are two things, in particular, to foster: A) a sense of appreciation and B) connections between people. Both feeling-appreciated and strong human connections are strongly linked with happiness according to the world’s longest-running study on human happiness, the Grant and Gleuck study out of Harvard. In fact, the current director of the 70+ year study, Dr. Robert Waldinger, asserts in a recent Ted Talk that the only thing that makes us truly happy is stronger, deeper relationships, and it is no secret that deeper relationships are forged when we recognize the value we see in others and we feel they recognize our value in return. It’s extremely powerful to realize it is a lack of human connection - loneliness - that is most correlated with negative outcomes like alcoholism and depression. This is why many of us were encouraged to engage with the student sitting alone at recess; the positive benefits of good relationships are undeniable at every life stage, including at work.

Feeling appreciated by and connected to coworkers will help employees feel happier, which then positively affects motivation, effort and ultimately, output. Of course, a company must pay its people fairly, that is a given, however, to access the very best its people have to offer, throwing more money at them will not trump appreciating them and encouraging them to appreciate each other because that’s what creates a genuine sense of community. It is that community that explains why some offices have employees who do just enough to get by while others are filled with enthusiasm to innovate, create and do more.

“The Problem with Financial Incentives - and What to Do About It” (Knowledge @ Wharton):

“Employee Appreciation Pays Off” (Forbes):

“Mo’ money, mo’ problems? The Impact of Rewards on Employee Engagement” (Disco Blog):