The first time I received a Christmas bonus, I was elated. I expected it the next year. That’s human nature. But it’s more than that. It’s the nature of financial incentives to morph motivation. That’s a challenge for companies with a purpose beyond profitability and personal gain. But it’s not insurmountable. My favorite auto shop has reframed financial remuneration. It’s why so many cars are serviced there.
A company with a purpose beyond profitability understands the difference between purpose and mission. Mission is tactical—what a company does, such as providing goods and making a profit. Starbuck’s is selling coffee. Purpose is transcendent—why a company exists, such as “restoring business” or “do no evil.” Starbuck’s is experiencing “the third place.” Companies need both. The challenge in Corporate America is getting colleagues to take purpose seriously. Financial incentives undermine this effort. It’s their nature.
“Study after study has shown that intrinsic interest in a task—the sense that something is worth doing for its own sake—typically declines when someone is given an external reason for doing it,” Alfie Kohn notes. Kohn is the author of several books, including Punished by Rewards. He cites findings from research indicating financial incentives—bonuses, commissions, and options—undercut workers’ motivation to take a company’s purpose seriously. They pull people toward mission and profits and away from purpose.
Kohn notes there is not a single controlled study that “has shown a long-term improvement in the quality of work as a result of any reward system.” In fact, scores of studies conducted in real workplaces have demonstrated how rewards tend to be powerfully counterproductive. When a manufacturing firm took Kohn’s idea seriously, the incentive system that had been in place for years was removed. It was expected that the welders’ production would slump with the incentives off the table, since it is assumed that financial incentives motivate. This did happen at first. But then their production rose and eventually reached a level as high as or higher than before. Why?
We are wired to work for a higher purpose. In a study conducted by Edward Deci, 90 participants were told to press a computer key every time a dot appeared on the screen. The researchers admitted it was a boring task but told the first group it would be useful for others. A second group was told the task “will be for your own good.” The third group was only given instructions without explanation. The first group did the task better than the other two because it was framed as having a higher purpose.
Colleagues can figure out what really matters in a business. When they hear corporate leadership say: “At the end of that day, we gotta make money,” it becomes clear that the bottom line is profits, not purpose. “At the end of the day” is another way of saying what matters most in this company. But there’s another way to see what most matters.
Jack Welch said there is a defining moment that determines whether a company takes it’s purpose seriously. Welch was the Chairman and CEO of GE from 1981 to 2001. He said every company has colleagues who don’t embrace the purpose and aren’t hitting the numbers. They’re not in the right work. Others do embrace the purpose but aren’t hitting the numbers. Help them. Others embrace the purpose and are hitting the numbers. That’s a no-brainer. But here’s the defining moment: What does a company do when a colleague doesn’t embrace the purpose but is hitting the numbers?
The reality is that, in most cases, high earners who only pay lip service to the company’s purpose keep their job. Others then look around and notice that the colleague wasn’t fired even though they aren’t serious about the company culture. “Ah… I see. That’s what matters here.” This is not to say workers aren’t worthy of their wages. The problem is the nature of financial incentives—they morph motivation toward profits over purpose. This, in turn, yields larger occupational differentials in earnings, affecting even more public-spirited pursuits such as the Rhodes Scholarships.
Two weeks ago, 32 young Americans were awarded Rhodes Scholarships. For more than a century Rhodes scholars overwhelmingly chose paths in scholarship, teaching, writing, medicine, science, law, the military and public service. Business attracted relatively few (three out of 320 scholars in the 1970s). In the 1980s, however, the pattern of career choices began to change. Rhodes scholars headed to Wall Street.
According to Elliot Gerson, American secretary of the Rhodes Trust and executive vice president of the Aspen Institute, this “break in an almost century-old pattern coincided with great increases in occupational earnings differentials, which have continued to grow, seemingly exponentially.”1 In the 1970s, the differentials in earnings between business leaders and doctors or lawyers were generally two- to fivefold. Between business leaders and professors, scientists and public servants, the differentials in earnings were five- to tenfold. Today, they have become a hundredfold or far more.
The Rhodes Trust has never suggested that business was an unfit profession. But even “for a few of those most deeply committed to other, more public-spirited pursuits, the lure of such rewards, especially as they are reasonably attainable for people of such high abilities, became much harder to resist,” Gerson concludes. The problem isn’t that incentives don’t work—it’s that they work too well, for good or evil. After Sarbanes-Oxley, paying CEOs with options has proven to motivate their behavior—they cheat more. Paying teachers according to test scores does work—too many teach to the test and cheat students. PricewaterhouseCoopers has conducted a biennial survey of economic crime for the past ten years. Based on over 3,000 responses from firms in 54 countries, they found a “worrying” link between cases of fraud and financial incentives. In firms linking more than half of pay to performance, 36 percent reported frauds, compared with just 20 percent of firms that use no incentives.
You can’t change the nature of financial incentives. But companies can change the system for how colleagues are compensated. In my little town, there is an auto repair shop that the locals trust. I asked the owner for the secret of his success. Andy said it was removing financial incentives and paying his mechanics a salary. There is no longer any incentive to rush repairs or recommend unnecessary ones. Mechanics are paid to do good work, which is essentially the company’s purpose. Andy understands the nature of financial incentives. And, by the way, his shop has been very profitable for over 20 years.
1 Elliot Gerson, “From Oxford to Wall Street, Washington Post, November 21, 2009.