The problem with financial incentives

Workplace benefit perksWhen the financial crisis hit in 2007 and with the recent scandals in PPI insurances; it became apparent that there was a serious issue with the incentive programmes financial institutions were using. CEOs and sales people were getting big bonuses for achieving short-term performance goal, but this ultimately proved disastrous. Not only for the financial and banking industry but for all of us.

Incentives, both financial and non-financial, motivate people to improve their performance, increase productivity and demonstrate key behaviours. As Sara Rynes of the University of Iowa and her colleagues discovered, on average, individual financial incentives improve employee performance and productivity by 42% to 49%.


The problems

Financial incentives will always have their place, after all, who wouldn’t like a pay rise as a reward for their performance over the past year, but they do come at a cost. The unintended consequence of the financial incentives offered in the banking industry was that it encouraged behaviours that put the sale before the customer, and the customer ended up paying for things they did not need.

Similarly, in 2014, we found out that Tesco had overstated their profits by £250m (about a quarter of its profits) due to “accelerated recognition of commercial income and delayed accrual of costs”. In addition to potentially breaching of the Groceries Supply Code of Practice by deducting cash from suppliers’ trading accounts in advance of the payment date or delaying payments by extending payment dates without notice.

Financial incentives can improve performance and productivity but it can also lead to achieving the targets to earn the incentives through unethical behaviour.


What can we do about it?

Employee motivation has changed, the carrot and the stick no longer works in all cases and as we have shown it can sometimes do more harm than good. Experiments indicate that contingent motivators, such as a cash reward, only work in some circumstances.

Wharton management professors Adam Grant and Jitendra Singh argue that it is time to cut back on money as a leading motivational force in business. Instead, they say, employers should pay greater attention to intrinsic motivation.

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Intrinsic motivation is based on three elements: autonomy, mastery and purpose.

• Autonomy: the urge to direct our own lives.
• Mastery: the desire to get better and better at something that matters.
• Purpose: the yearning to do what we do in the service of something larger than ourselves.


But what does developing intrinsic motivation mean in the workplace?

It means developing roles for employees that:
great job• Provide opportunities to do work that matters to the individual and contributes to the objectives of the organisation
• Provide opportunities for employees to develop new skills and knowledge
• Gives employees need to have the freedom, and trust of management, to make decisions relating to their role
• Enable employees to build meaningful working relationships with colleagues

There’s also an additional element, I believe. A sense of connection: a sense of belonging and being valued and appreciated. Studies show that a significant factor in high employee turnover rates is the relationships employees have with supervisors, co-workers and customers. Employee recognition, peer to peer recognition and social recognition programmes ensure that employees feel valued for their efforts.

Human motivation is much more complex than we perhaps understand, even now. But excessive reliance on financial incentives will eventually undermine the very reasons that an incentive programme was put in place.

John Sylvester

John is responsible for the motivation division of p&mm ltd and a Director on the board of the IPM. Specialising in developing, implementing and directing many large scale staff motivation, recognition and employee communications programmes.
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