One Last Time – Financial Rewards Improve Performance

There is solid evidence from a number of major reviews of the research over 30 years that financial rewards can be expected to trigger improved performance.  That is widely accepted and a core practice in pay systems throughout the world.  And yet every so often a contrarian publishes a book or article and disciples respond.  The most recent is Daniel Pink and his bestselling book, Drive ( 2009).  The favorable reviews for the book, its sales and continuing references confirm his argument is credible to many.

Prior to Pink’s book, this was a heated but largely inconsequential academic debate.  His book provides new ammunition to those who oppose pay for performance.  However – and this is a key – they are relying on virtually non-existent evidence.

The foundation of Pink’s criticism of pay for performance is the research of Edward Deci, a professor of psychology at the University of Rochester.  He has published extensively on intrinsic motivation for four decades.  His self-determination theory (“SDT”) is widely accepted and contends people have innate psychological needs that are the basis for self-motivation and personality integration.  He identified three needs that, if satisfied, support healthy function and growth: Competence, Relatedness, and Autonomy.  (Dan Pink decided he preferred autonomy, mastery and purpose – but maybe its semantics.)

The issue here is that Deci contends extrinsic rewards, apparently of any type, that “decrease perceived self-determination . . . will undermine intrinsic motivation . . .”  The problem is that his research has focused largely on students asked to complete simple tasks.  Pink’s opening chapter focuses on an early Deci experiment where students rearranged blocks – with their performance rewarded with what today is equivalent to $6.

In a 2001 Deci article on the impact of rewards in education, he cites other research studies that condemn additional “external factors” including evaluations, deadlines, competition, and externally imposed goals.  Those factors are “controlling” and therefore also undermine intrinsic motivation.

In the same article he discusses performance feedback — ‘verbal rewards’.  Here the nature of the feedback – positive vs. negative – and the ‘context’ are the issues.  “. . . [I]f a teacher uses an interpersonal style intended to make students do what she or he wants them to do”, then Deci contends its controlling.  It is impossible to think of supervision where that is not true.  Actually it is impossible to think of a teacher – or a parent — who would not evaluate, impose deadlines, encourage competition or impose goals.

Beyond that, however, the contention that a year-end salary increase or bonus is going to reduce employee motivation is implausible for several reasons.

  • First, the issue for employers, both private and public, is performance and specifically changes in performance.  When they contemplate a change in pay policy, they need to know what to expect?  The research on intrinsic motivation is largely silent on what to expect when an employer switches to pay for performance in a work setting.  Will every employee react positively?  Of course not.  However, the research is solid – it will trigger improved performance.
  • Second, there continue to be many jobs that trigger little or no intrinsic satisfaction.  Moreover, virtually all employees have routine tasks that are devoid of intrinsic satisfaction.  With boring, dirty, or physically exhausting jobs, financial rewards may well be the primary source of motivation.
  • Third, in organizations employees to some degree self-select their careers and jobs and are presumably attracted to the nature of the work.  They also know something about their employer’s policies and the work environment.  When they become dissatisfied, they change employers or careers.  That’s far different from student experiments.
  • Finally, the student experiments occur in an artificial setting, with the rewards immediately following task completion.  In business, financial rewards are granted typically at year-end.  It’s a huge leap to argue the prospect of a bonus in December diminishes intrinsic satisfaction in April or May.  There are many occupations where financial rewards are common – sales is one – but incumbents love their work

Lawyers, physicians, consultants as well as professional athletes are all paid for their performance.  Even the critics in academia progress to higher salaries and are promoted based on performance.  With few exceptions they enjoy high levels of intrinsic motivation.

The periodic articles on the “best places to work” in Fortune and other journals highlight companies where people love their jobs.  Those companies are highly successful, have low turnover and have their choice of well qualified applicants.  Pay for performance is a common policy in all those companies.

A half century ago Deci’s conclusions were no doubt valid.  In that era incentives, primarily piece rate production incentives, were, to use his words, “controlling to the extent that people feel pressured to think, feel or behave in particular ways.”  There are still far too many managers who rely on an overly-controlling supervisory style but the focus now is on fully utilizing employee capabilities.  That management style is now counterproductive in our knowledge organizations.

This is not to argue Deci’s research is irrelevant to compensation management.  To the contrary, his focus on competence (or mastery) is compatible with competency-based pay.  His focus on autonomy is consistent with empowerment.  Furthermore, my experience suggests Deci’s Relatedness along with Pink’s Purpose are inter-related to the desire to feel their efforts are important to their organization’s success. The work environment and reward policy should and can reinforce those basic human needs.

Well managed reward practices are integral to increasing, not decreasing, intrinsic motivation.  That was the subject of a recent WorldatWork Journal article by Gerry Ledford, Barry Gerhart, and Meiyu Fang.

Employers who believe Pink and other critics are correct should simply change their policies, replacing their pay for performance practices with a step-increase salary system similar to those in government.  If the critics are correct, intrinsic motivation should immediately increase along with improved performance.  But I’ll bet it won’t.

© 2016 Howard Risher. All rights reserved. This article may not be reproduced without express written consent from Howard Risher.

About the Author

Howard Risher is a private consultant who focuses on pay and performance. His career extends over 40 years and includes years managing consulting practices for two national firms. He recently became the editor of the journal Compensation and Benefits Review. He has written four books, including Aligning Pay and Results. He has an MBA and Ph.D from the Wharton School of the University of Pennsylvania.

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