In business, money does matter, but perhaps not as much as you think.

Countless studies and findings have countered the myth that the best way to boost productivity is by way of monetary incentives. As always, context proves to matter. Yet still, many organizations are structured with financial incentives that aim to serve as extrinsic motivators.

In actuality, extrinsic motivation can reap the opposite effects that one may hope for (examples of this to come). Oftentimes, extrinsic motivation becomes a way to manipulate behavior rather than inspire desired outcomes.

With a focus on the finances, leaders often disregard what’s really important: answers that address employees’ needs, deepest desires, purpose and identity, all of which greatly drive people to to work at their highest levels. This is partially because businesses spend a lot of time studying how monetary fluctuations will affect performance rather than studying what type of motivational factor is optimal given the situation. Yet, the truth is that when people are operating at their fullest potential, it is often correlated with boosting the business’ bottom line.

To achieve the goal of leading an innovative, collaborative and adaptive workforce, intrinsic motivation is key.

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What Does Extrinsic Motivation Entail?

Extrinsic motivation can be thought of as, “Behavior that is driven by external rewards such as money, fame, grades, and praise.” External motivation can be seen in action in various settings, including schools, athletics, healthcare and business, to name a few examples.

It’s helpful to first understand that using a motivating factor of more money is grounded in assumptions. In economics, there’s the idea of the “Principal-Agent Problem.” This theory aims to depict how one individual is tasked with the responsibility for a group in exchange for pay. This could be a manager who leads a team to benefit stakeholders’ interests or an employee who performs job duties for a salary.

Although the disciplines of operations research, economics and mathematics have solved problems to determine optimal levels of inputs and outputs, this comes at a cost, literally and figuratively. Most salient is the fact there’s the failure to realize that these solvable problems may not be properly representative of reality. For starters, these solutions are based on assumptions about how the world works and how people behave.

The theory of the “Principal-Agent'' and using money as a motivator inherently assumes that the agent is solely economically-driven and completely rational. As we know, assumptions are often disproved by empirical findings and facts. Also, even if money is a motivating factor, it’s more often than not going to produce temporary results, not long-term fixed behaviors. On top of this sits the fact that earning more money has an upper limit on its effect on one’s emotional well-being. In 2010, research led by Daniel Kahneman and Angus Deaton found that once people earned more than $75,000, their daily levels of emotional well-being didn’t continue to improve with more money. While the actual figure is likely to be higher today because of inflation and such, the conclusion still remains.

Furthermore, in being able to define employees’ optimal levels of productivity, there exist gaps. For example, how do you measure whether or not an employee is operating at their highest level (or reaching their own personal flow state)? What is considered optimum? And, if there has been any deviation, how can you then pinpoint what caused it to occur?

Before we offer a solution to overcome such assumptions, let’s see how extrinsic motivation can cause royal disaster by looking at a real-world example.

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Bonuses: A Bugged Approach

GM’s brand Green Giant was experiencing a serious problem with their frozen peas product– they were being packed with frozen bug parts. Managers hoped to solve this predicament with the extrinsic motivator of offering a bonus to any employees who found insect parts in the peas.

Seems like it would work, doesn’t it?

Unfortunately, when money is involved, people may justify unethical actions and unintended consequences may occur.

Employees began to bring insect parts from home, claiming that they “found” them to earn more money. This is also a clear example of what’s called the “cobra effect,” or the fact that offering rewards for solving problems could end up backfiring.

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More Money, More Problems?

It pays (no pun intended) to understand how managing teams and organizations with purely financial incentives can be detrimental and produce less than optimal outcomes.

Punishments and rewards (the carrot and stick) are as closely related to one another as love is to hate. They work under the same set of principles. They rest on the notion that “If you do this, then this will happen,” which rarely produces a sustainable system to operate within.

Just like punishments can hurt morale, lead to a risk-averse attitude and even increase the chances of turnover (since it contributes to greater wage gaps), rewards can have harmful effects on creativity, collaboration and communication.

Consider the following:

• Collaboration: If employees are conditioned to work in an effort to reap rewards, then you may be creating a zero sum environment, in which competition evolves. This is because for one employee to win, another must lose. When one employee believes that they have to outperform another, you are rewarding competition and minimizing the quest for collaboration.
• Creativity: If you’re telling someone to work for the purpose of getting more money, rather than providing value, they could be incentivized to stick solely to what’s being asked of them. If you measure an employee’s productivity on key performance indicators (KPIs), then they will narrowly focus on producing results with regard to those specified metrics. This lessens the likelihood of creative thinking to occur, problem-solving capabilities to expand and the risk of any individual’s desire to achieve greatness.
• Communication: Working on the basis of rewards means that employees may not speak up when an issue arises because they don’t want to be punished or “lose out” on getting their reward. This has detrimental effects on trust and transparency.

Additionally, it’s common for workplaces that focus solely on financial incentives to exist with a tunnel vision of sorts: Rather than exploring the various reasons why outcomes may be falling short, they’ll simply focus on boosting rewards to try to shape behaviors.

All the while, they could be missing bigger issues. Some examples of bigger issues may be that there’s a lack of necessary resources, employees feel powerless or there’s a narrow focus on the short-term rather than long-term goals.

To showcase how this can happen, let’s consider one of Q’s own case studies: One of our clients was assessing the effectiveness of their customer support agents by measuring their average call time and number of calls. However, this focused measure on quantity incentivized shorter call times, which ended up escalating most of the calls to a second tier of customer support and creating a backlog. In turn, the business was driving customer satisfaction into the ground. Goodhart’s law states that, “When a measure becomes a target, it ceases to be a good measure.” By measuring the number of calls rather than the effectiveness of resolving customers’ issues, employees weren’t directed to care about the main objective.  

“I” on the Prize: The Case for Intrinsic Motivation

New York Times bestselling author Daniel Pink addresses what could be the holy grail of optimizing employee performance and productivity– intrinsic motivation.

In his book Drive: The Surprising Truth About What Motivates Us, he argues that the best type of motivation is driven by:

• Autonomy
• Mastery
• Purpose

When you grant your team with the power to choose what they do and how they do it, provide them with the necessary resources to grow, and ensure that they realize the role they play in the greater scheme of things, you can do away with extrinsic, short-term and conditional engagement.

Even though intrinsic motivation comes from within, it’s up to business leaders to foster an environment in which it can come to the surface and be practiced. While financial incentives may have an upper and quantifiable limit, intrinsic motivation is essentially limitless because it’s directed by feelings of interest and enjoyment. It is intrinsic motivation that allows people to operate in flow states, achieve their purpose and find meaning in their work.

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Tying it Together

As with any type of problem or behavior, context is paramount. It would be foolish to say that extrinsic motivators like financial incentives never work. Because they can and do. The aforementioned is true if and only if they are properly designed and applied in a scenario that calls for them.

However, if you’re seeking a sustainable way to secure results, then focus your energy on breeding an environment that fosters intrinsic motivation. And, remember to err on the side of caution when implementing extrinsic motivators in any setting to avoid the cobra effect.

Looking to apply motivation to direct specific behaviors? Our team of experts at Q Behavioral Thinking can help your business accomplish its goals and/or overcome its challenges.

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