People are motivated by intrinsic incentives (internal to the individual) and extrinsic incentives. But can adding a small extrinsic incentive eliminate the intrinsic incentive and cause a negative result? Let me explain with a few examples.
A 2000 study that took place in Israel examined 10 Israeli daycare centers, all of which had a problem with parents being late to pick up their children. Each center had a policy that children must be picked up by 4 p.m. Parents who were late caused the children anxiety and forced the staff to stay late.
In the first four weeks of this 20-week study, researchers measured the number of late arrivals and, on average, found eight late pickups per week per center. After week four, a fine of $2.50 for every 10-minute delay was introduced at six of the 10 centers and added to the monthly daycare enrollment fee of $380.
In the four centers that did not change the policy (the control group), the number of late pickups stayed the same. However, in the centers that added the fine, the number of late pickups increased steadily for four weeks and stabilized at 18 per week – more than double the original number. When the fine was discontinued at the end of the study, the number of late pickups remained at this high level. The addition of the small fine (small extrinsic incentive) removed or reduced the intrinsic incentive not only while the fine was in place, but also after the fine was removed!
In a second study, a group of students were separated into groups and asked to answer questions from a college admission test. Subjects in the first group were not offered money for each correct answer, the second group was given 2.5 cents for every correct answer and the third group was awarded 25 cents for each correct answer.
The results showed the first group that received no money answered 28 of 50 questions correctly. The second group that received a small amount of money (2.5 cents) did not perform as well as the first group and answered 23 questions correctly. When the higher incentive level was introduced (25 cents) in the third group, the results exceeded both of the other two groups at 35 questions correct. Adding a small extrinsic incentive for the middle group actually reduced or eliminated the intrinsic incentive exhibited in the first group, which received no financial reward during the study.
Both cases show that placing a small extrinsic award on achieving a goal or performance level may actually be less effective than relying on the intrinsic reward, organizational culture or your manager to make something happen.
How can you avoid this happening with your sales incentive plan?
- First, limit the number of metrics in the plan to three and keep the minimum weight of all metrics at 15 percent. This ensures salespeople will remain focused on the key outcomes and that all of these have meaningful enough weight to deserve their attention.
- Second, invest in and rely on your first line managers – who have the most important role in the sales organization. Depend on them to implement company initiatives, drive its culture and institute and reinforce important behaviors in salespeople.
- Third, establish and reinforce your organizational culture by not including everything you want the salespeople to do in the incentive plan. Doing so treats them like vending machines – every outcome you desire requires an incentive input. The base salary has expectations attached, and the culture you have established at your organization should count for something. As stated before, your first line managers are critical in driving this culture.
For an expanded version of behavioral economics and its relationship to sales compensation, visit the WorldatWork website for a recording of our webinar from April 30 or attend the conference session on May 21 at the WorldatWork Total Rewards Conference.