Mad About Incentives Meets Science Behind Incentives, Part I June 30, 2009 A Look at the incentive industry from the perspectives of real-world experience and behavioral sciences
By Ley Borlo and Joshua Klapow
I have long been intrigued by the science behind employee motivation. Behavioral theorists like Abraham Maslow, Frederick Herzberg, and B.F. Skinner—and more recently Dr. Aubrey Daniels and fellow Incentive columnist Dr. Joshua Klapow—helped shape my understanding of this complex subject. While my knowledge of this science is, at the very best, superficial, I nonetheless use it daily to convince clients of what I offer in my business.
However, the sales types in the incentive industry (including yours truly) have a way of bending and twisting the behavioral sciences. I thought it might be fun to lay out some discussion topics based on my experiences in the industry and see what Dr. Klapow, associate professor of public health at the University of Alabama at Birmingham and chief behavioral scientist at ChipRewards Inc., has to say. The following is the first of several collaborative articles between he and I on a variety of industry subjects. We hope you find them informative. And if you are running or designing incentive programs and have questions that you’d like answered from a behavioral science perspective, please let us know.
Mad About Incentives: Is cash not a good motivator?
Let’s start with an easy one: Cash doesn’t motivate as well as non-monetary awards. We’ve said it for years. I’ve heard and written just about every reason why non-cash is a better incentive than cash. I believe it, and I’ve seen evidence of it, but we also know that cash is by far the most used incentive. Everyone knows folks want cash; it has surely motivated my performance over the years. But well-conceived incentive compensation plans do drive performance, and companies use them to achieve results. I’ve reviewed Dr. Klapow’s recent article that speaks to primary and secondary reinforcers in human motivation and can understand their difference.
However, the question does persist: When do you use cash as an incentive and when should you use non-monetary awards?
Science Behind Incentives
Let’s set the “theoretical record” straight. Cash is a powerful secondary reinforcer. It is innately tied to our perceptions of reward and frankly is a universal motivator. However, “cash” or “money” is not a sufficiently defined entity. Cash is great if and only if there is enough to be perceived as meaningful to an individual.
That is where we run into a big problem. What is “enough” for me may not be “enough” for you. When we design cash-based incentive programs, we predetermine the amount of cash given to an individual. If our predetermination is accurate and the amount is meaningful, we are fine. However, if an individual feels the payoff is not worth the effort, then it doesn’t work. The bottom line is—be it cash, points, or whatever award—the amount must be perceived by the employee as worth his or her effort.
So monetary rewards, like points, are fine as long as an individual can amass enough. Produce a program where individuals can collect meaningful amounts of cash and you are fine.
Mad About Incentives: Is there a way to determine how much is enough?
In 1992 the American Compensation Association, in conjunction with the White House Conference on Productivity, conducted an extensive research project, surveying over 8 million employees across 1,600 organizations. It showed that cash and non-cash had the same effect on productivity. However, it showed that $3 in cash was required to affect the same result as $1 in non-cash awards.
So let’s assume that a client is formulating a budget for an incentive program. How much budget per person as a percentage of his or her income is “meaningful”? I realize this is a very subjective question, but in today’s corporate environment, we have to deal with concrete budgets and returns on those budgets. Do you have a scientific approach to this answer?
Science Behind Incentives
This is where the worlds of accounting and behavioral science may clash. In behavioral science, we think about behavior change in terms of probability of change. There is rarely a situation where we can predict change with 100 percent accuracy. As a result we look at influences on behavior in terms of relative strength and influence. The greater the amount of incentive as a percentage of income, the more powerful the incentive.
That said, it is absolutely essential that the value of the incentive be examined in the context of the desired behavior. Different behaviors have different levels of complexity and require different efforts. Without a doubt one must first examine how challenging and how complex it is to affect the behavior, and then how frequent and how long the behavior must occur. That sets the stage for determining the potency of the incentive.
It is a dangerous approach to simply create an incentive as a percentage of income and use that regardless of the behavior sought. This approach runs the risk of both underestimating the incentive amount for complex behaviors and overestimating the amount for simple behaviors. As a general rule, one must identify the target behavior; characterize its complexity, frequency, and duration; and use this information to determine the incentive value.
Ley Borlo is a partner at Incentives Inc., www.incentivesinc.com, a full-service incentive company. In over 35 years in the industry, he has achieved success in sales, sales management, and corporate management with a leading incentive company. He founded Incentives Midwest LLC, a consultancy to educate companies on the vagaries of the award side of the business. He writes a bimonthly column for Incentive on the incentive industry from the perspective of someone who has purchased, sold, and managed those who have sold full-service incentive programs. Other topics he has written on the industry can be found on his blog, www.yourbabysugly.com
Joshua Klapow, Ph.D., is associate professor of public health at the University of Alabama at Birmingham and chief behavioral scientist at ChipRewards Inc, www.chiprewards.com. He is also the author of Living Smart: 5 Essential Skills to Change Your Health Habits Forever. For questions or comments, visit www.drjoshk.com or e-mail him at jklapow@uab.edu.
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