Last updated 28 Jul 2016
Mountains of research have been thrown at the problem of employee motivation, and specifically, how it’s affected by pay. Why haven’t we fixed this yet?
If I gave you $50 to read to the end of this post, would you do it?
Putting aside your scepticism about if and how I’d actually pay you, or verify that you actually made it all the way through, did that statement make it just slightly more likely that you’d read this?
Chances are, it did. And if I offered this for the next article I write, you’d still feel inclined to read it. And possibly the next. And the one after that.
What if I gave you a raise?
Perhaps there isn’t a doubt that money motivates: economists build models around the assumption of homo economicus, the rational utility (and income) maximising agent. Yet, how much does this actually correlate with performance and motivation?
Money = Motivation = Performance?
Let’s look at the top end of the scale.
From the 1930s to the mid-1970s, median CEO compensation was relatively stagnant at $1m per year. In the 1980s, this suddenly went up to $2m, then $4m in the 1990s, and $9m in 2005. In 2015, this had risen so much that the average S&P500 CEO was paid 216 times more than the median employees in their company.
Two hundred and sixteen.
Are CEOs suddenly performing much better than their ancestors? Back in the 1920s, the average lifespan of an S&P500 company was 67 years; in 2012 this has fallen to 15 years. Prof Richard Foster of Yale University goes so far as to suggest that by 2020, 75% of the S&P 500 would be companies unknown to us today.
Either something is wrong with the traditional way of thinking about pay, or we’re collectively saying that we should be paying more for our leaders to run companies to the ground faster.
Solving the mystery of motivation
One of the reasons this is such a challenging topic is because it cuts across multiple disciplines. Teasing apart the relevant motivational triggers is not easy.
We can look at aggregate data (like that above) to develop a macro view, but it’s not very helpful when thinking about what to do with the people in our team.
Over the last decade or so, behavioural economists have stepped up to the plate. When Prof Daniel Kahneman, one of my personal heroes, won the Nobel Prize in Economics in 2002, it signalled a new détente between the rival fields of psychology and economics.
It was the dawn of a new era of looking at economics through the mess that is the human mind, and attempting to make sense of human decisions.
Psychology meets economics
A person who has thought hard about the compensation problem is Prof Dan Ariely, author of the bestselling book Predictably Irrational (pro tip: if you haven’t already read it, do). He is the James B Duke Professor of Psychology and Behavioral Economics at Duke University and has run multiple experiments on human motivation and psychology.
He found that money does indeed motivate: for very simple tasks (like reading to the end of this blog post). In such cases, more money does lead to higher motivation, and possibly better performance.
He explains why this is not the case for any kind of knowledge work in an interview. If you need to be creative, thoughtful, use your memory or any cognitive capacity, this relationship between money and motivation breaks down.
In his words: “The intuitive way to understand this is: Imagine I told you I’d give you $100,000 to be funny in the next 10 minutes. How much of your next 10 minutes will you be able to be funny? Or will you basically panic because you’re not making it?”
If I’d give you $100,000 to be funny in the next 10 minutes,how much of your next 10 minutes will you be able to be funny? @EngageRocketco
Prof Ariely wasn’t the first to arrive at this conclusion. Pioneering work was done in the 1970s by Edward Deci, a psychologist at Rochester University in New York. He drew the distinction between intrinsic and extrinsic motivation through his experiments.
In one of them, students offered cash prizes to solve puzzles were less likely to continue working on them after payments had been made, compared to students who were offered no money. Overemphasis on financial reward actually undermines autonomy and therefore intrinsic motivation.
He says “this [negative effect of money on motivation] matters hugely. You need high-quality performance from bankers. You need thinkers, problem solvers, people who can be creative and using money to motivate them will not get you that.”
Big money makes big screw-ups (sometimes)
Most of these experiments were done with token sums of money and university students. Prof Ariely and his team wanted to go further and test whether huge compensation (like that given to our S&P500 CEO friends) could in fact overcome this effect. Would this focus the mind more and motivate people to perform?
His team recruited villagers in India to play games of memory, creativity and motor skills. They were split into three different groups and offered 4, 40 or 400 rupees per successful game. For perspective, 400 rupees was equivalent to the amount spent by the average person living in rural India in 5 months.
They found that those in the group offered 400 rupees performed worst, earning an average of only 20% of the maximum possible, compared to around 36% for those in the low and medium reward groups. This was true even for games involving non-cognitive activity. Instead of enhancing the positive relationship between pay and performance for simple tasks, an enormous pay package actually inverted this to a negative relationship.
Interestingly, there was no significant difference in performance in most of the games between the low and medium reward groups, despite the medium rewards being 10x the low rewards. We will come back to this point later.
Neuroscience gets into the fray…why not?
One key challenge in measuring motivation has been the limitations of psychological tests and surveys. Thankfully, it has become easier (sort of) to use brain imaging technologies to directly study thoughts and feelings.
The University of Cambridge in the UK used brain scanning to isolate the negative relationship between pay and performance in the brain. In the study published in the journal Psychological Sciences participants played a computer game in which they had to race against the clock in a simple 2D maze to catch a prey. Meanwhile, their brains were scanned by an MRI machine. They were told they would win either 50p or £5 if they succeeded within the time limit.
Performance was worse when the larger bonus was on offer. That’s not a surprise by now, but this may be. This effect was associated with increased activity in the brain regions involved in motivation. There is a psychological and physiological negative impact of big bonuses on motivation.
There is a psychological and physiological negative impact of big bonuses on motivation. @EngageRocketco
Finally, Kou Murayama from the University of California, Los Angeles, ran a study with Kenji Matsumoto of Tamagawa University in Tokyo to apply MRI technology to Edward Deci’s insight. In a paper published in the Proceedings of National Academy of Sciences, they found that money could motivate people to work, while at the same time decreasing their intrinsic motivation. Does the highly paid but bored bankers and lawyers phenomenon ring any bells?
What they found was that in the first round of an incentive offered for an activity, MRI scans indicated increased activity in the area of the brain tied to motivation if there was increased incentives. However, the second time around saw significantly diminished activity in those areas.
Offering you $50 to read my next blog post will be far less motivating than the first time.
So how do we use money to motivate?
While all of this research is very compelling, it’s still really hard to shake the intuition that money motivates.
There’s a good reason for this. It does…but we need to know how it does.
First, know where money matters more
Profs Kahneman and Deaton famously found that beyond $75,000 per year, income doesn’t make people happier. It may be a stretch, but it’s possible that the motivating effect of money becomes more transient past that magical figure.
When pay is a hygiene issue, and it determines whether or not someone is able to support her family, you can expect that it would serve as a more intense motivational lever. Paying a fair wage that takes money off the table as an existential concern should address this sufficiently. (This need not be $75,000, as Kahneman and Deaton’s study pertains to the contemporary United States.)
This also suggests that for most of the employees that we do lead, the above effects of pay on motivation hold. Paying someone 10x as much may not make any difference at all to his performance. If that’s the case, we need to rethink traditional compensation models that benchmark salaries, at least when it comes to using money as a motivational lever.
Next, beware the hedonic treadmill
“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”
– Abraham Lincoln
A parallel insight applies to paying out bonuses. Murayama and Matsumoto found medical proof for the concept of the hedonic (not hedonistic!) treadmill. People adapt to higher pay, particularly if the adjustments are to the base, and the impact on motivation is temporary.
Murayama and Matsumoto’s findings apply even to bonuses – consistently giving out 12-month bonuses will set expectations in the future for similar sized payouts, and dampen motivation accordingly.
Instead, consider rewarding staff with experiences. These provide the variety necessary to create temporary motivational jolts, creating solid team memories, and the additional benefit of being possibly less costly.
A CEO of a Singaporean company shared that he rewards his staff for a period of hard work with a trip to the spa. In his words, “the surprise was well received and gained more mileage that if it was a $250 ang pow”.
Finally, recognise the Easterlin Paradox of talent
The Easterlin Paradox highlights that within a country, research finds that more money doesn’t lead to greater happiness, yet multiple studies find a linear relationship between GDP per capita and national happiness.
Extending this as a metaphor for talent, you may find that within a company differences in pay don’t drive performance and motivation differences much, yet between companies you find that people with high talent are generally more drawn towards companies that pay a higher median income.
Google is, on average, more able to attract quality talent than a smaller company for example. Even Lazlo Bock, head of People Operations at Google, admits that they haven’t completely cracked the code on using pay to drive performance. What is admirable about them is their process of experimentation, which has at least fleshed out what doesn’t work.
What about that $50?
If you made it all the way here, it’s likely that you did so irrespective of the bribe. While money is an important factor in motivation, the effects it actually has on motivation are sometimes not well understood. Other factors like autonomy, recognition, social influences, the feeling of mastery, a connection with a larger purpose, among others, contribute at least as much to human motivation, and can be applied with very limited cost.
For now, you can pat yourself on the back for taking the first steps towards intelligently using money as a motivator.
Author: Chee Tung
CheeTung is the CEO of EngageRocket, an HR tech startup that analyses employee feedback in real-time to advise you on how to build a better culture, one team at a time.