Today, I am proud to introduce my new (and only) staff writer: Tim Fraticelli. I am sure that you will appreciate, as I do, how Tim addresses today’s financial issues with clarity and insight, always from a Christian perspective. Welcome aboard, Tim!
Recently I finished Drive by Daniel Pink, a book that attempts to reveal the “surprising truth about what motivates us.” In one of the main sections, Pink discusses financial motivators and really made me think about the impacts they can cause. For years we’ve been taught that employees will work hard to achieve the goals that businesses establish, especially if there is a motivating factor such as a financial reward. Whereas the negative side to linking goals with rewards has seemed to take a back seat to the ‘good’ that comes from setting goals with incentives, we should be cautious – especially regarding these three negative effects.
Financial incentives may…
1. Create a Sense of Entitlement
Unfortunately, a negative consequence of linking financial incentives to goals is that people may begin to feel entitled to receive the reward despite their performance. One of the best examples of this can be seen with giving a child an allowance. The problem with allowance comes when you link the reward to the task. Instead of doing the chore because it is the responsible thing to do as member of the family, a child can develop a sense of entitlement and hesitate to do anything he’s asked (or not asked) to do if he isn’t paid for it.
A better approach: Keep the allowance and chores separate. Your child will learn the difference between principles and payments. Providing an allowance can be a good thing, especially for teaching your child good money management skills. However, the behavior you’re encouraging must be considered before you link any reward to a task.
2. Encourage Greedy Behavior
Not only can some financial incentives weaken a person’s intrinsic motivation for achieving a task, it can unintentionally encourage greedy behavior. I work in the financial industry and see the impact that goals can have on financial sales representatives. The harmful effects of goals are enlarged even greater when a company focuses primarily on quarterly numbers, strict sales goals, and higher returns. These factors are important for businesses, but when you link financial incentives to these goals, you encourage a short-term mindset and greed can set in.
A better approach: To avoid a narrowed focus that can stem from employees thinking only ‘short-term,’ involve your employees in the goal setting process. Would you rather work towards a goal you helped create or one that was forced upon you? By simply asking your employees to share their opinions about the goals, you’re encouraging them to think creatively and to broaden their focus – not narrow it.
3. Lead to Dishonest Actions
Yes, we’ve seen too much of this in America lately – especially in the banking and home loan servicing industry. Honest decisions are compromised and blatantly ignored because of the financial incentives tied to ‘getting the job done.’ It’s plain to see that goals linked to lofty financial rewards can encourage cheating, dishonesty, and unethical behavior.
A better approach: Instead of making employee compensation rest heavily on goals and incentives, compensate them fairly from the start. No one wants to be put in an ethical dilemma that compromises honesty in order to put food on the table. When you pay a fair wage (as a salary or hourly) and rely less on financial incentives to bring the salary to the industry standard, you can eliminate a lot of the dishonest behavior.
These are just three negative effects that can be caused when financial incentives are tied to a goal. If you are in a position to make decisions about compensation in the workplace, I highly encourage you to read the book Drive. The ideas in the book helped shape my thoughts about today’s work/reward system and will make you think about ways to improve your system.
Financial rewards can work when used properly. Just remember that when you create incentives, the most important question to ask is: How will this incentive affect the behavior of those doing the work.
Have you worked in a place where financial incentives were a part of the job? Did you see a change in behavior because of it?
Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.
I am not anti monetary incentives, sometimes they work very well. I like setting goals and monitoring the progress in accomplishing those goals. In many ways, it is like giving a test to a student to confirm their understanding of the subject matter.
I agree that monetary incentives can work in certain situations. It’s interesting that you bring up students and tests – Would you agree that sometimes tests can elicit behavior that isn’t desired by the teacher? i.e. memorizing the answers and or not learning beyond the study guide.. No matter the test or incentive, you have to ask what behavior it encourages. If you can think through that question, I think it’s a good start when considering incentives in any area! Thanks for commenting!
Thanks Paul! We don’t have kids yet, but I think it’s a good idea to follow the non-carrot approach. The tricky balance is figuring out how to reward them without tying it to chores that should be done regardless of pay.