Why Are Your Financial Incentives Failing?

April 20, 2015 - 7 minute read - Posted by

So you want to improve performance in your organization? Traditionally, the approach taken would be to incentivize your employees with bonuses, commission, or merit increases. The carrot and stick approach has always been at the forefront of motivational practice. However, the old ways of enticing people with a carrot are becoming far less effective in motivating and improving performance. A simple example can illustrate the need for organizations to re-evaluate how they motivate their employees.

“The Candle Problem” is a famous study originally conducted by Professor Duncker in 1945. Professor Duncker came up with the Candle Problem in order to understand how individuals solve complex problems. Individuals begin by being placed in a room with a table against a wall. On the table is a box filled with thumbtacks, some matches, and a candle. Participants are given the objective to attach the candle to the wall so wax won’t drip on the table or the floor.

The Candle Problem

Many who attempt to solve this problem try a variety of different methods to try and stick the candle to the wall, all of which eventually fail. One example of these failed attempts is to light a match and melt some of the wax on the side of the candle in order to stick it to the wall using the wet wax. Very creative but doomed to fail. By only using the perceived fixed functionalities of the items provided participants will never generate a viable solution. The real solution is to look beyond the fixed functionality of the box as being a container for the tacks – empty the box of tacks and use the box as a platform to hold the candle. Finding solutions to complex problems requires us to think creatively.

Solution to The Candle Problem

Solution to The Candle Problem

The difficulty in finding this solution lies in being able to look beyond the perceived fixed functionality of the box as a container for the tacks, and use it as a platform instead. Professor Duncker realized and demonstrated this point by redoing the experiment, but with the tacks already emptied out of the box. The Candle Problem for Dummies was born. As a result of altering the placement of items at the onset of the experiment, almost all participants found the solution with ease.

The Candle Problem for Dummies

The Candle Problem for Dummies

Sam Glucksberg, a professor of psychology, redid The Candle Problem experiment in 1962, but this time added a monetary reward into the mix. Glucksberg was trying to discover if financial incentives would have any impact on how fast individuals completed the Candle Problem. He split the participants into two groups, one with monetary incentives and one without. He timed how fast the two groups could complete the problem under both the original Candle Problem and the Candle Problem for Dummies. The results were astounding!

For the original Candle Problem the non-incentivized group performed better than the incentivized group. However, when completing the Candle Problem for Dummies the incentivized group outperformed the non-incentivized group by a landslide. Glucksberg found that adding a monetary reward caused stress for the participants. Adding stress to performance-based outcomes can shut down the creative thinking and problem solving areas in the brain, negatively impacting an individuals ability to solve more complex problems. In order for incentives to have a positive effect on performance, the problem needs to be simplified with a clear path towards the objective.

The negative impact of performance-based incentives is a very robust finding in social sciences that is largely ignored by business. Studies from both the US Federal Bank Reserve and the London School of Economics found that financial incentives can have a negative impact on overall performance.

Financial incentives are effective for simple, straightforward tasks, which have a clear objective or destination. But, if we are trying to promote creative thinking and problem solving, financial incentives tend to do more harm then good.

Money is important, as many of us realize that without sufficient pay we would not accept certain job offers or we may leave a job that we enjoy because we feel undervalued. Money is a satisfier not a motivator, it is not what drives us to do our best work on a daily basis. Daniel Pink, a thought leader in intrinsic and extrinsic motivation, suggests that the solution is to get money out of our minds. Pay people well but don’t tie it to their work output. In his book “Drive: The Surprising Truth About What Motivates Us”, he argues that the intrinsic motivation we get from autonomy, mastery, and purpose are far more effective than the carrot and stick approach of the early 20th century.

People today are dealing far more with problems and tasks that resemble the original Candle Problem rather than the simple, dull tasks, which resemble the Candle Problem for Dummies. It’s about time that we start recognizing this fact and adopt better practices to motivate and improve performance.

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