Incentives have the superpower to drive change & alter behaviors to help drive revenue growth and create a lasting impact. Conversely, they can inflict equal damage if used improperly. They can sink a business to bankruptcy or smear its reputation.
But why are incentives so powerful? And how exactly do they end up having such a massive impact on businesses? Let’s find out!
How do incentives work?
An incentive persuades a person or an organization to change their behavior to drive the desired outcome. Incentives are classified into 2 broad categories:
Intrinsic incentives: An intrinsic incentive creates motivation from personal fulfillment, not external rewards. For example, a musician who loves playing the piano might practice for several hours daily to refine their skill.
Extrinsic incentives: An extrinsic incentive draws motivation from external sources. Extrinsic incentives can be further classified as monetary or non-monetary incentives.
Monetary incentives
These are the most common workplace incentives. As the name indicates, they’re financial rewards designed to incentivize the actions and behaviors that help achieve the results aligned with business goals. Examples include bonuses, gift cards, and stock options.
Non-monetary incentives
These incentives don’t have a financial component, yet they motivate people to perform their best. They form an effective reward system for exceptional performers. Examples include recognition, flexible work hours, and opportunities for professional development.
However, incentives have a flip side. Incentives essentially influence the way people behave. So, if you change them, the behavior changes in tandem, causing a bias, i.e., people with a vested interest tend to guide you toward their interest. Seeking desirable results, the human mind may turn to unethical actions, resulting in perverse incentives.
Perverse Incentives
A perverse incentive rewards people unintentionally for aggravating an issue, against its original design. The cobra effect, coined by economist Horst Siebert, is the most famous example of a perverse incentive.
Now that you know what makes incentives work, let’s explore how you can wield this double-edged sword. We’ve curated a few stories from the recent past where incentives left a significant mark. Let’s learn from these real-life tales!
5 unique stories where incentives made all the difference
FedEx: Shifting gears with shift-based incentives
FedEx is known across the globe for its speedy deliveries ⚡
Yet, at one point, it had dealt with a critical processing problem.
FedEx instructed its night shift employees to sort and load packages onto planes at a centralized airport, as the processing speed was crucial to making on-time deliveries. However, this did not curb the recurring delays.
Upon closer inspection, FedEx realized the mistake. It was paying hourly wages to the night shift staff, which might have caused them to stretch out tasks to maximize their hours, resulting in higher pay. This was a classic case of incentive misalignment, since workers weren’t rewarded for the desired outcome, i.e., faster package processing.
FedEx proposed two changes: first, the pay structure was changed from hourly wages to a fixed pay per shift completed; second, it provided the staff with an option to go home as soon as the planes were loaded.
And it worked! Workers were motivated to finish their shifts quickly and go home, thus achieving FedEx’s goal of rapid processing.
Uber: Hitting the brakes on rash driving practices
Uber has become one of the most successful & safest sources of transportation across the globe 🚖
However, there’s an untold story of how Uber made a crucial change in incentives.
In the early 2010s, Uber had devised aggressive incentives to combat the offline cab monopoly. It had rewarded drivers solely based on the number of rides completed.
This prompted drivers to indulge in taking shorter routes or engage in risky practices like rash driving, in order to maximize their daily incentive. As a result, customer complaints regarding safety issues skyrocketed. This hindered Uber from becoming the powerhouse it is today.
Uber realized that its drivers were wrongly incentivized. There was a swift revamp of the incentive program, which now included a scoring criteria based on factors like customer ratings, cancellation rates, & reports of safety concerns.
Once the new program had been implemented, everything fell into place. Rides had better quality, safety concerns declined, and both customers & drivers were happy.
Global Law Firm: Cracking the case of zero teamwork
A study by Ann P. Bartel, Brianna Cardiff-Hicks, and Kathryn Shaw (2017) examines an international law firm facing a multitasking problem, i.e., when the output of an individual’s performance omits the important contributions to the firm which are essential for its long-term growth.
Like most law firms, the senior lawyers were incentivized for their billable hours (the hours that are chargeable to the client). This was the most common method of compensation since billables are easier to track for each individual.
This approach enabled the firm in its early stages, when focus was prioritized on bringing in more clients to increase its market share. However, things got tricky when it entered the expansion phase & started hiring more associates.
Since senior leaders were incentivized solely for their billable hours, meager importance was given to leadership initiatives like developing the firm’s strategy, making presentations at roadshows, and mentoring the associates. This left the associates demoralized & with very little learning opportunities.
The firm decided to revise the incentives for senior lawyers in order to crack this case.
First, billable-related commissions were scaled down. Next, a new bonus was introduced that was based on the number of non-billable activities carried out by senior lawyers.
As a result, senior lawyers allocated more time on non-billable activities like developing strategic initiatives for the firm. Billable tasks went to the associates, leading to an increase in their share of revenue generation.
We looked at how incentives shaped behaviors and helped achieve business excellence in the three narratives above. Let us look at some examples where incentives missed the mark.
Xerox: Dealing with the cheaper copier crisis
If something doesn’t go according to plan, especially in business, check the incentives.
Xerox faced a similar problem. Its new machine had just hit the market and Joseph WIlson, the founder, was waiting with bated breath to review the sales numbers for the subsequent quarter.
He was in for quite a shock when he saw the actual numbers. Despite being technologically superior, the newer machine had been outsold by the older & inferior model. He decided to look into the reason behind this appalling state.
He discovered that Xerox hadn’t changed its incentive plans accordingly. The existing commission arrangement helped reps earn more money by selling the older machine when compared to the newer one. Thus, reps favored selling the inferior model over the new one.
Charlie Munger says, “Bad behavior is intensely habit-forming, when it’s rewarded.”
Global Financial Services Firm: Meeting targets with duplicitous accounts
Aggressive sales targets and unstructured incentives can cause a catastrophe.
Under huge pressure to meet steep sales goals, employees of a well-established multinational financial services firm created more than a million bank accounts and applied for over 560,000 credit cards on behalf of their customers – without their knowledge or consent. There were also certain instances where customers were charged for products or services that they hadn’t required.
When this malpractice was discovered and the firm was put under rigorous scrutiny, many ex-employees reported that the sales goals were impossible to meet and that they were encouraged to game the system.
This took an immense toll on the company’s reputation, which was once known for its strong customer service & ethical business practices.
Summary
Incentives have a crucial role in shaping the organization, as we observed in these 5 stories. They have the power to motivate employees to do the right thing, leading to an increase in revenue, customer satisfaction, and team morale.
On the other hand, if incentives are misaligned, they can hinder new product revenue growth or worse, damage your firm’s reputation.
Next time you’re designing incentives, remember that incentives:
✅ Must be aligned with the desired outcomes (FedEx)
✅ Should drive the right behaviors (Uber)
✅ Have the potential to boost motivation & enable teamwork (Global Law Firm)
✅ Can lead to inconsistent results if not defined properly (Xerox)
✅ Can cause fraudulence if goals are too aggressive (Global Financial Services Firm)
We hope you tap into the true power of incentives to unlock business success. Good luck!
