Do financial incentives really boost performance?

by John Hilton13 Oct 2016
Employers typically use financial incentives for staff motivation, attraction and retention. 

However, this structure can often promote the wrong type of behaviour, said Professor Marylène Gagné, head of management and organisations at the University of Western Australia (UWA) Business School.

“If you look at economic studies looking at it from the perspective of the organisation level, you do see increases in organisational performance in the range of 4-9% when organisations provide incentives paid to employees,” said Gagné.

“But this effect is quite limited. For example, incentives have an effect on performance quantity but not so much on performance quality.

“In manufacturing settings, incentive systems have been shown to have the same effect as goal setting … and providing them with positive feedback when they perform well.”

Firms should question the reason behind providing these financial incentives and having to measure performance – especially when results were the same as simply setting goals or providing good feedback, she said.

In fact, Gagné said it has been shown through lab studies, field studies and meta-analytic findings that incentives only work for very simple and boring tasks.

“When tasks are genuinely interesting … so they require complex problem solving [and/or] lots of creativity, you can actually worsen that type of performance through the use of incentives,” said Gagné.

The simple tasks that were shown to be strengthened by financial incentives included fruit picking and rat catching.

“So you wonder with the type of work that we do today which is much more knowledge based and much more complex, how appropriate it actually is to use financial incentives,” said Gagné.

Other side effects of financial incentives include decreasing people’s enjoyment of their work and decreasing work effort, she added.

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