The Psychology of Effective Incentive Plans
By James T. Stodd, SPHR, SHRM-SCP
August 1, 2016
When it comes to making our variable pay programs effective, dramatic improvements can be made by applying some core principles from the psychology of motivation. Much of the research and related theory dates back many years to the pioneering work of psychologist Clark Hull and his colleagues who, like many other psychologists, were studying the behavior of lower level mammals with the hope of discovering principles of motivation that apply equally to human beings. In the course of completing their work, Hull and his colleagues discovered that a physiological excitement actually occurs when engaging in goal-oriented behavior where a valued reward is anticipated. This “anticipatory response” was observed to be the physical manifestation of an internal “drive” at work, which in and of itself serves to further increase levels of excitement, speed and agility. In addition, they found that when the “pathway to success” is fairly well-known, and/or where there is a high expectation that progress toward the goal is being made, the level of drive actually increases as the subject works toward their goal.
Fast forward through many more years of additional research and conceptual refinement, and we’ll find that the work of Hull and other psychologists like him laid the foundation for a whole set of well-defined psychological principles known as Expectancy-Value Theory. So, what do these principles teach us that can be applied to humans in a business world? Well, here are some of those principles applied to variable compensation plans:
1. Incentives work best when the prize (i.e., reward) for achieving the goal is both “known” and “valued”. In the business world the “prize” is usually money. However, that need not always be the case since other types of rewards may work equally well, or even better, in some cultures or with some individuals that place creative achievement, recognition, mission fulfillment, or being of service to others ahead of money. What is important in motivating performance is that the reward be “valued” by the participant, and “known” to the participant in advance.
2. The more we believe that our efforts will result in achieving a goal and in winning the associated prize, the greater the anticipatory response (i.e., the “incentive”), and the more motivating the situation. In short, for an incentive program to be truly motivating, people need to believe that engaging in certain behaviors, individually or collectively, will lead them to goal attainment and winning the prize. Granted, in our business world knowing the best “pathway to success” can be relatively elusive. That says loads about building risk-tolerant cultures that promote creative application, experimentation, ongoing learning and problem-solving, as well as building effective work processes, supporting technologies and systems, cross-functional teams, education & training programs, and all the other things that contribute to goal attainment.
3. Well designed variable pay programs make use of ample feedback systems. Again, Hull and his colleagues found that when cues were available, the process of advancing toward the goal actually increased the drive, speed and agility of their subjects; that is, the closer they got, the more excited they became. Likewise, we should build into our variable pay programs ample opportunity for people to receive feedback on their approach, efforts, and progress so they understand where they are relative to the goal. For example, the United Way, one of the most effective fund-raising organizations in the world, has found the simple posting and updating of
their contribution “thermometer” to be a very effective approach for motivating contributions and leading people toward goal attainment.
4. When the goal is achieved, the anticipated reward needs to be there. As such, employers need to be sure they are only offering rewards they are capable and willing to provide when the goal has been achieved. Failure to deliver in a way consistent with the expectations that have been created is simply a “downer” that will significantly detract from future motivation.
One final conclusion that can be drawn from these principles is that well-designed incentive plans are likely to be much more successful in motivating and directing goal-oriented behavior than the all too common “discretionary bonus” program. Those discretionary plans generally lack any specificity regarding the desired goal, the rewards associated with the goal, the behavior necessary to attain the reward, or otherwise give any meaningful guidance regarding the pathway to success. Rather, everything is pretty much after-the-fact, completely subject to “discretion” rather than pre-stated definition, and arguably subject to subjectivity and some “bias”, none of which is very motivating.
Rather, for variable pay programs to be truly motivating, employers need to establish structured plans designed around desired outcomes, incorporate related metrics, and specify clearly the rewards associated with goal attainment. In addition, employers need to communicate amply and often about how their variable pay plans work, as well as the tools, technologies, methods and resources available to assist participants on the pathway to success. Finally, employers should make use of the “anticipatory response” by providing ample communication regarding the progress people are actually making toward achieving those goals, as well as the stated rewards.
© James T. Stodd, 2016