Wednesday, November 16, 2011

People don't respond to money but to comparisons with others' money

People are not rational, and managers who offer incentives based on the false belief that their employees are rational will waste money and effort. In a recent Harvard Business School’s Working Knowledge Newsletter, The Most Powerful Workplace Motivator by Carmen Nobel (October 31, 2011) we see new research demonstrating that most of us are motivated not by money itself but by the comparison of how much money we earn compared to our peers. And not by how we perform against a standard but in how we perform relative to our peers’ performance.

Professor Ian Larkin, author of the study quoted by Nobel, observes salespeople giving up the opportunity to earn $30,000 in commissions to earn a gold star on their name tag (and a few other goodies that nowhere near add up to the lost commission) and scholars downloading their own research papers multiple times to ensure they aren’t out-downloaded by peers. There was no extrinsic reward – no tenure, awards, or outside recognition – associated with a higher download count. Just a public number that they and their peers can see.

This puts most managers in a tough position: if we share with employees how they are doing relative to their peers, we create competition, which will limit sharing of critical information and resources. I observed this first-hand when working at a multi-national retailer, whose corporate president thought he would encourage hard work by needling division presidents about how the other divisions were doing that week: "I see sportcoats are selling well in Joe's division; what's going on here?" While I'm sure this lit a fire in that president's belly and boosted sportcoat sales the next week, it led to infighting, failure to capitalize on inter-division synergies, and judgment errors on product focus.

It's best to encourage our employees to see themselves as competing with an external, rather than internal, competitor -- if we can get the data. How much more powerful it would be to say, "hey, competitor X has 10% turnover; why is ours 14%?" Or, "we pay 5% more than competitor X and offer a better work environment."

How are you using performance comparisons to lead to improved performance? How does your company use comparisons?