Intuitively, one might assume that monetary incentives are the most effective reward system. People like money, so monetary rewards should increase effort and maximize productivity. Despite this common assumption, research shows that higher rewards don't always lead to more effort and employee engagement. Paradoxically, some studies have found the opposite can happen, a phenomenon known as "incentive reversal."
What exactly is incentive reversal?
Although the term may sound distant and complex, the truth is that incentive reversal is a very common experience in a society that loves to use extrinsic, monetary rewards. Many people think that money and cash bonuses will result in increased employee motivation and engagement, but the reality of how these programs affect staff morale can range significantly depending on the context.
Incentive reversal takes place when some team members wait to see how much fellow coworkers increase their effort before trying for the reward themselves. Then, they can put forth minimal effort and still earn the monetary reward. However, the employees who started off with greater effort will recognize that others are shirking their responsibilities and start putting in less effort themselves.
When it comes to employee recognition programs, this is likely to happen due to the emotional nature of appreciation as well as the perception that giving recognition is optional. Companies who use recognition systems that feed into monetary rewards (i.e. gift cards) often see a decrease in use over time. Some employees will wait to see how much effort they need to put in to earn the rewards, and then do the minimum to earn them. This discourages the folks who were authentically giving each other recognition from participating in such a program. Companies may then try to lower the amount of effort required to earn the reward in an attempt to incentivize employees to participate, which in turn creates even more incentive reversal.
The Alternative to Monetary Rewards
So if financial rewards aren’t the answer for boosting employee engagement, then what is? There are two alternate elements to focus on fostering:
- A sense of appreciation and
- Connections between people
Feeling appreciated and strong human connections are both strongly linked with happiness according to the world’s longest-running study on human happiness, Harvard's Grant and Gleuck study. 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.
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 how a lack of human connection (aka loneliness) is highly correlated with negative health outcomes like alcoholism and depression. This is exactly why many of us were encouraged to engage with the student sitting alone at recess. The positive benefits of strong relationships are undeniable at every life stage, including at work.
When employees appreciate one another through an authentic recognition program with no ties to compensation, they will build stronger relationships with coworkers, leading to increased happiness and overall career engagement.
Non-Cash Rewards in Action
In Dan Ariely’s book Payoff: The Hidden Logic That Shapes Our Motivations, Ariely discusses a variation on the concept of incentive reversal. Specifically, he looked at employees working for an Intel factory in Israel. When one group of employees was promised a cash reward if they reached a certain production goal, they 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. Ariely also looked at a group who was offered a pizza party at the end of the week and another group who simply received compliments. It was only the group who got “Well done!” and other positive texts from their boss who had sustained high performance throughout the week.
Feeling appreciated by and connected to coworkers will help employees feel happier, which then positively affects motivation, engagement, and ultimately, output. Of course, companies must also pay their people a fair wage. However, when it comes to accessing the best employees have to offer, financial rewards can make it harder to incentivize emotionally-driven behavior.
A genuine sense of community is created by the social reward of appreciation, not monetary rewards disguised as recognition. This sense of community or company culture explains why some offices are primarily occupied by employees who do just enough to get by while others are filled with enthusiastic, engaged employees ready to put in discretionary effort and innovate.