Financial Incentives Can Backfire

Susan Hall
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We've been hearing that wide swaths of the work force are fed up after continually being asked to "do more with less" during the recession and getting paltry raises in return. That has companies looking for the right recognition programs to improve worker retention and has led to some cynicism that recognition programs are just a way companies avoid giving raises.


However, a piece at Knowledge@Wharton argues that companies rely too heavily on financial incentives and that they can defeat the purpose. It cites three risks. Financial incentives can:

  • encourage unethical behavior. The article cites the case of Green Giant, a unit of General Mills. It had a problem with insect parts being packaged with frozen peas. When it tried giving a bonus to workers who found insect parts, workers began bringing insect parts from home to "find."
  • create pay inequality that reduces performance and increases turnover. Workers measure their success in part in relation to that of their peers. Those making less in the same job can feel frustration, jealousy, envy, disappointment and resentment-and be more likely to leave.
  • decrease intrinsic interest in the work. It cites research that when people start working for bonuses, the actual work becomes less "fun" and more "work."


What to do? The article says financial incentives should be:

  • used primarily for tasks that are uninteresting to most employees.
  • delivered in small doses so that they do not undermine intrinsic motivation.
  • supplemented with major initiatives to support intrinsic motivation.


Instead, it recommends activities that foster intrinsic motivation. In this post, blogger Marko Mrdjenovic describes intrinsic motivation this way:

We are motivated by the fact that we're getting something done and by the feeling we get ourselves when we're done. We're not in it so someone can tell us we did a good job. We don't really care. A friend of mine once said: "It's for me. If somebody else likes it-great." We like to think that the more we get into the subject, the better we'll be at it and the better the result. ...

The Wharton article points to four traits to foster:

  • Autonomy-the freedom to choose what to do and when, where and how to do it.
  • Mastery-the chance to develop specialized knowledge, skills and expertise.
  • Purpose-the ability to contribute to a meaningful effort or cause. Pam Strohmeyer, a recruiter for accounting firm Rehmann, here says that's especially important to today's college students.
  • Connection-the feeling of belonging and being valued by others. The article says financial incentives are particularly damaging to community by creating dissatisfaction among the have-nots. It says personal, genuine expressions of gratitude are more helpful in building relationships between workers and managers.

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