This post looks under the hood at the challenging topic of incentives. First it offers a definition of what incentives are. Then it looks at the psychology-based theoretical foundation of incentives, and summarizes a list of common incentives offered to employees. Finally, it looks at the impact of incentives as a consideration in strategy and project management.
Incentivizing Definition: What Is It, And What Are The Challenges?
The term “incentivizing” refers to the action or process of providing incentives or motivations to encourage certain behaviors, actions, or outcomes. It involves the use of rewards, benefits, or stimuli that are intended to inspire, motivate, or prompt individuals or groups to take specific actions, achieve particular goals, or exhibit desired behaviors.
I would synthesize a definition of “incentivizing” as follows:
“Incentivizing is putting a motivational framework in place that gets people to do what you want them to do.”
Incentivizing aims to influence and stimulate individuals’ or entities’ behavior by offering rewards or incentives that are perceived as valuable, attractive, or beneficial. These incentives can be monetary or non-monetary and are often tailored to meet the needs, preferences, and motivations of the target audience in order to increase their willingness to engage in the desired activities or behaviors.
The difficulty with incentives is that they have a very questionable track record of bringing good results. This was substantiated in Goodhart’s Law, named for British economist Charles Goodhart, who expressed the core idea and dilemma:
“Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”
This idea is often restated more simply as:
“When a measure becomes a target, it ceases to be a good measure.”
This underscores the difficulty of incentives – the effort to use logical systems to get people to do what you want them to do…but getting undesired results.
Lets take a brief step back and look at some of the foundational theories behind incentives.
Psychology-based Theories Behind Incentives
Several psychology-based theories underpin the concept of incentives, explaining why and how they influence behavior. Here are some of the main theories:
- Behavioral Economics – Prospect Theory: Daniel Kahneman and Amos Tversky suggested that people make decisions based on perceived gains and losses rather than final outcomes. Incentives are framed to emphasize potential gains – an incremental approach – to encourage desired behavior.
- Behavioral Economics – Loss Aversion: People tend to prefer avoiding losses over acquiring equivalent gains. Incentives can be designed to limit losses or perceived risks, potentially combined with desired gains, motivating individuals to act in a particular way.
- Operant Conditioning – Reinforcement Theory: B.F. Skinner suggested that behavior is influenced by consequences, where incentives provide positive reinforcement. The incentives increase the likelihood of a behavior being repeated.
- Operant Conditioning – Punishment: Incentives similarly can be used to avoid negative consequences, which discourages certain behaviors. Note that punishment as an incentive is controversial as it can have potential negative effects.
- Expectancy Theory: People take actions based on their belief in their ability to achieve a desired outcome (expectancy), the value of the outcome (valence), and the belief that the outcome will lead to desired rewards (instrumentality). Incentives provide the instrumentality.
- Self-Determination and Cognitive Evaluation Theory: This theory focuses on intrinsic motivation (engaging in an activity for its inherent satisfaction) or extrinsic rewards. Intrinsic and extrinsic motivation effect each other; extrinsic motivation can even negatively effect intrinsic if overused or perceived as controlling.
- Goal-Setting Theory: Incentives can be aligned with goal-setting, motivating individuals by setting clear objectives and providing rewards upon achievement. Application of goal-setting theory matches specific, challenging, and achievable goals with appropriate incentives.
- Social Exchange Theory: Views relationships and interactions as exchanges of resources. Incentives are seen as rewards or resources that are exchanged within social contexts. Behavior is influenced by the perceived fairness and value of the exchange.
Understanding these theories provides a framework to help design effective incentive systems that consider various psychological factors, motivations, and behaviors of individuals.
Primary Approaches to Incentivizing Employees
There are various approaches and strategies used by organizations to incentivize employees. These approaches and strategies aim to motivate them, boost morale, increase productivity, and foster a positive work environment.
Here are the primary approaches for incentivizing employees:
- Monetary Incentives – Salary Increases and Bonuses: Providing raises, bonuses, or profit-sharing based on individual, team, or combined performance can motivate employees to work toward achieving specific goals.
- Monetary Incentives – Commissions: Commissions, commonly used in sales roles, offer a percentage of sales as an incentive for employees to increase sales to drive increased revenue.
- Non-Monetary Incentives – Recognition and Awards: Acknowledging employees’ accomplishments through awards, certificates, or public recognition can be highly motivating and boost morale.
- Non-Monetary Incentives – Career Development Opportunities: Offering training, mentorship programs, career advancement paths, or skill development opportunities can incentivize employees by demonstrating a commitment to their professional growth.
- Performance-Based Incentives – Performance Reviews and Feedback: Regular feedback and performance evaluations helps employees understand their strengths and areas for improvement in alignment with the organization. And they help link their performance to incentives.
- Performance-Based Incentives – Performance-Based Promotions: Promotions or advancements based on merit and exceptional performance serve as a strong incentive for employees to excel in their roles.
- Flexible Work Arrangements – Telecommuting or Remote Work: Flexible work schedules or remote work options can incentivize employees with better work-life balance and increased autonomy.
- Flexible Work Arrangements – Flexible Hours: Flexible start and end times or compressed workweeks can be an attractive incentive for employees seeking greater control over their schedules.
- Employee Benefits – Healthcare and Wellness Programs: Healthcare coverage, wellness programs, gym memberships, or mental health support demonstrates care for employees’ well-being and serves as a valuable incentive.
- Employee Benefits – Paid Time Off and Vacation Days: Competitive vacation policies, paid time off, or additional holidays can incentivize employees by offering time for rest and relaxation.
- Team-Based Incentives – Team Goals and Rewards: Collective targets and rewards for team achievements can foster collaboration, teamwork, and a sense of shared accomplishment.
- Team-Based Incentives – Profit Sharing: Profit sharing and bonuses based on overall company performance can incentivize employees to work together towards the company’s success.
- Workplace Environment and Culture – Employee Perks: Free or subsidized meals, on-site daycare, or recreational facilities contributes to a positive workplace culture, making the work environment more appealing.
- Workplace Environment and Culture – Employee Engagement Initiatives: Involving employees in decisions, soliciting feedback, and implementing suggestions can incentivize by making employees feel part of the process.
Incentivizing is usually a matter of mixing and matching a combination of approaches that map well to the organization’s culture. The idea is to optimize employee preferences and specific objectives all in support of the culture. Ultimately, the objective is to maximize their impact on motivation and performance.
Impact of Incentives on Strategy
Incentives get at the heart of what is required to optimally motivate employees to implement the strategy most effectively. It gets to the organization/implementation side of strategy.
There are various frameworks that can help to accomplish this implementation side of strategy. In addition to incentives, some other related frameworks covered in this blog include:
- The McKinsey 7S Framework Model – Skills, staff, and style – essentially competencies – are among the 7 elements of this framework. These all need to be synchronized with the appropriate incentive structure.
- The Nadler Tushman Congruence Model – This model frames the transformation of inputs into outputs through synchronized – or congruent – processes around work, culture, structure, and people. These are all closely to incentives within the organization.
- Objectives and Key Results (OKR) – OKR’s provide a great framework for implementing, in a practical, hands-on approach. It links competencies and measurable results – a perfect foundation for implementing incentives.
Thinking about these frameworks related to incentives underscores the importance of alignment with culture.
Good strategy without strong implementation has no value. Incentives provide one element to bridge between strategy and implementation.
Impact of Incentives on Project Management
Projects are implemented in alignment with strategy, and the applications of incentives on the team should be aligned with that. As a project manager, you are managing a segment of the business. Your approach needs to align with the broader approach within the organization and should support the organizational culture.
It is also important to be cognizant of the incentives of outsourced organizations. Are they sufficiently aligned with your organization for compatibility on the project? This is a consideration for outsourcing services.
Often, projects also support the human resources function within the organization. If you are managing such projects, you will at times be called upon to present tradeoffs with incentives – perhaps balancing risks and rewards, and helping the HR pros to make choices based on strategic.
Conclusion and Further Resources
This post has looked under the hood at the challenging topic of incentives. First it offered a definition of what incentives are. Then it looked at the psychology-based theoretical foundation of incentives, and summarized a list of common incentives offered to employees. Finally, it looked at the impact of incentives as a consideration in strategy and project management.
I recommend the following video from The Family Business institute about incentivizing with a compelling message: