Over 500,000 people visited Farnam Street last month to expand their knowledge and improve their thinking. Work smarter, not harder with our free weekly newsletter which offers a collection of time-tested multidisciplinary knowledge you can add to your mental toolbox.

Are we undermining intrinsic motivation with antiquated incentives?

Our mix of jobs has changed from algorithmic tasks into heuristic based ones but our approach to incentives is still lost in the algorithmic past. Many popular management techniques—budgets, goal-setting, and financial reward systems—actually undermine the conditions that encourage intrinsic motivation.

…Economists love to talk about incentives and how they shape behavior. They often assume that poor behavior is the result of faulty incentives—think of the recent financial crisis—and that good behavior reflects well-structured incentives. But … the relationship between incentives and behavior is often vastly more complex than how social scientists portray it. In many cases, drive and mindset are more important than the compensation program.

The Migration from Algorithmic to Heuristic

One of the allures of incentives is the possibility that they encourage behaviors (cause) that lead to a desired outcome (effect). So an incentive system must determine the outcomes it seeks to promote, what behaviors lead to those outcomes, and how to encourage individuals to engage in those behaviors. This means there are multiple ways that an incentive can go awry. For example, if the relationship between cause and effect is complex, it may be difficult to pinpoint the behaviors that lead to the desired outcome. So the effectiveness of an incentive is generally related to the nature of the task.

In his excellent book, Drive, Dan Pink distinguishes between algorithmic tasks and heuristic tasks. With an algorithmic task, there is a recipe that you can follow to attain the goal. Employers can continually improve the step-by-step procedures in an algorithmic task, and following the formula will allow the employee to meet the objective. A checklist can help ensure that an individual effectively executes an algorithmic task.

Heuristic tasks have no set steps and require individuals to experiment in order to solve problems. Tasks in environments that are evolving and that require novelty are heuristic. Examples include setting corporate strategy, developing a new advertising campaign, or coaching a team. Crafting incentives is inherently more challenging for heuristic tasks because cause and effect are difficult to link.

…Goals encourage individuals to focus and narrow their attention. This creates a problem when people face important issues that are unrelated to the goal but that are relevant to the purpose.

…Goals can lead to unethical behavior. For example, imposing sales goals on employees without any concern for the process by which they meet those goals invites bad behavior.

Incentives reward luck instead of skill. Many activities have outcomes that are the product of skill and luck. (see can you lose on purpose: the role of skill and luck)

Continue Reading

Michael Mauboussin is the author of More More Than You Know: Finding Financial Wisdom in Unconventional Places and more recently, Think Twice: Harnessing the Power of Counterintuition.