What are the right incentives to get colleagues to return to working from the office at least part-time? Organizations around the US are wrestling with that, some deploying the carrot of free food and others the stick of poor performance ratings.
It’s not a question Uri Gneezy specifically addresses in his new book Mixed Signals: How Incentives Really Work. But there’s extensive discussion of tactics that organizations could surely experiment with—such as conditional cash bonuses that are later taken away if the person doesn’t follow through on the desired behavior.
The cash-bonus approach capitalizes on loss aversion, whereby losing something they already possess can loom larger in people’s minds than an equal gain. For example, Chicago teachers who received an $8,000 bonus at the beginning of the year that would be clawed back if their students’ performance didn’t improve had significantly more success than their peers working toward a performance-related bonus at the end of the year.
“Simply put, people work harder to protect what is already ‘theirs,’” writes Gneezy, a professor of economics and strategic management at the Rady School of Management at the University of California, San Diego. (p. 114)
As the book’s title suggests, Gneezy observes that organizations often say they value one thing, but inadvertently wind up incentivizing the opposite. He advises how to navigate common tradeoffs so that incentives and goals are aligned:
- Quantity vs. quality—There are numerous examples of how incentivizing people just for the quantity of something can backfire, such as the Union Pacific Railroad Company in the 1800s laying unnecessary track because it was paid by the mile. Introducing additional incentive dimensions can help. Ride-share drivers are paid by the trip, but also incentivized to provide quality service by the ratings passengers give them.
- Punishing failure vs. encouraging innovation—“What separates successful companies from unsuccessful ones is often how they deal with failures and how they manage when promising ideas fall flat,” writes Gneezy. (p. 62) A Merck research and development head paid bonuses to scientists who stopped failed projects early. Tata Group introduced a “Dare to Try” award for the best failed innovation.
- Short-term vs. long-term—Executives are often incentivized through bonuses, stock options, and public perception to pursue short-term share gains at the expense of long-term company performance. Potential remedies include stock vesting periods as long as a decade and extend a CEO’s guaranteed tenure to their executive interest with how the business fares longer-term.
- Teamwork vs. individual success—Team incentives can hurt performance by encouraging individuals to ride on the efforts of others, while individual incentives can result in internal competition at the expense of the group’s results. Premier League soccer bonuses that pay significantly more for goals than assists can lead players to take shots they’re unlikely to make rather than pass the ball. Major League Soccer contracts, in contrast, offer the same bonus for a goal or an assist. “Consider using both individual and team incentives,” Gneezy suggests. “Pay a bonus to the entire team for winning a game and a bonus to everyone who scores a goal.” (p. 89)
In addition, things that might seem like an incentive—paying for blood donations, for example—can reduce some people’s motivation to perform the desired action. In the blood-donation example, such pay can undermine the powerful positive “self-signal” a donor gets for helping others by reframing it as a financial transaction. Alternatively, experiments have shown that small gifts such as “Blood Service pens” can increase donations, boosting the self and social signals. “After all, it is nice to be reminded every time she picks up her pen just how good of a person she is,” Gneezy explains. (p. 39)
Some other notable takeaways:
- We effectively have different “mental accounts” for things we spend on. Gneezy and fellow researchers found that a $450 discount on the purchase of a car, for example, was less motivating to consumers than a bonus of $250 in prepaid gas cards. The $450 didn’t feel significant relative to the car’s price while the $250 did when imagining the experience of multiple trips to buy gas.
- When negotiating the sale of something, the seller should set an asking price that is “aggressive but reasonable” to anchor the buyer’s expectations at that high level. Gneezy advises that with real estate, setting the asking price at up to 20% above the expected selling price can have this effect without risking potential buyers just walking away.
- Researchers found that higher pay led students to work harder, but they didn’t work harder for higher payments to charity. “We are generally insensitive about the magnitude of charitable contribution and care more about the fact that we contributed,” Gneezy writes. “On the other hand, self-benefiting incentive designs are better when the reward is large, because while small monetary rewards can crowd out our motivation, we are very responsive to large amounts of money.” (p. 126)
- If you want to develop regular exercise habits, work out with a friend or commit to a personal trainer. Researchers found such a commitment to someone else increases the likelihood you’ll stick with it. Also, research study participants who put up their own money—which would go to charity if they didn’t stick to their exercise schedule—had greater success in following through.
To be sure:
- Many of the key points in Mixed Signals are common knowledge or extensively covered elsewhere. One example of making an obvious point: “If you want to motivate long-term success, don’t incentivize (only) short-term success.” (p. 77)
- Gneezy anchors a key point about teamwork in chapter seven around the inaccurate premise that Argentina star Lionel Messi “hasn’t won a major tournament with his national team.” (p. 79) Soccer fans know that Messi’s performance was critical to Argentina’s World Cup championship win over France last year.
- The book would have been even more useful if Gneezy applied his understanding of incentives to contemporary leadership challenges such as implementing hybrid work practices or compensation amid a tight labor market and inflation.
Memorable facts and anecdotes:
- Toyota Prius sales took off after it was redesigned to have its distinctive look, which helped drivers signal to themselves and others that they cared about the environment. Honda’s CEO later acknowledged that “releasing a Civic Hybrid with little visual differentiation from more plebeian Civics was a mistake.” (p. 29)
- Diners in a pay-what-you-want restaurant voluntarily spent more when making their payment anonymously rather than handing it to a waiter. “Being observed by others reduces the value of self-signaling,” explains Gneezy. (p. 34)
- Then-teammates Alexis Sánchez and Paul Pogma of Manchester United had a dispute on the field in Oct. 2019 over who would take a penalty kick—both received bonuses of at least £50,000 for every goal they scored.
- Twice as many parents showed up late for day-care pickup after a $3 fine was introduced. “The fine allowed them to arrive late while avoiding the feeling of guilt” for delaying day-care staff from leaving, writes Gneezy. (p. 96)
- Food chain Pret a Manger paid vouchers at promotion and training milestones that employees were required to give to colleagues who helped them. In this case, the social benefits of a small bonus likely outweighed the effects of allowing people to pocket the vouchers themselves.
- Scores of US students on a standardized test similar to the PISA global education rankings rose dramatically when researchers paid them for each correct answer, suggesting US students had less intrinsic cultural motivation to perform well on the PISA test than students in other leading countries.
- Smokers who had to pay a refundable deposit to be part of a smoking cessation program had significantly higher success rates.
- Exercise can improve students’ grades. “Incentivizing physical activity caused a positive change in lifestyle habits (improved diet, longer sleep time, etc), which ultimately improved academic performance,” Gneezy writes. (p. 204)
The bottom line is that Mixed Signals is a thought-provoking tour through research about what influences our behavior. It would be even more useful if it directly addressed more of the most pressing work and management questions of our day.