Incentives: The Executive Drug of Choice

In the UK at the moment, the Minister for Health, Wes Streeting, is promising extra cash to hospitals that cut their waiting lists faster. He has also offered General Practitioners a £20 ($25) bonus each time they consult a specialist to see if there is an alternative to a hospital appointment. Both initiatives are designed to eliminate at speed the gigantic waiting lists that have accrued since the Covid-19 pandemic.

He should be careful what he wishes for. You don’t have to be an economics wizard to see how easily such schemes could be gamed or how perverse their outcomes could be. The GPs could phone a specialist about every patient, accruing bigger bonuses without, necessarily, any improvement in patient treatment but with the added burden of wasting specialists’ time. And the notion that speeding up treatment could earn extra cash for a hospital should make any patient wary of being whisked through without the time, reflection and consultation good healthcare requires. If Streeting wants doctors to race, he may find he’s in a race to the bottom.

We would all like to think that healthcare professionals are motivated not by money but by an earnest desire to help people. We also know it isn’t nearly as simple as that. One eminent American physician whom I know well confided that of course money changes the way doctors think. Those who own financial stakes in testing labs order more tests. Colleagues working in surgical centres that they own will use cheaper materials than they will if they’re operating in a facility that isn’t theirs. “The old game was: diagnose well, communicate well, do the surgery well. The new game becomes: make money.” Nor did he count himself immune to such influence.

The problem isn’t that incentives don’t work, but that they do—just not quite the ways intended. When a retailer promised bonuses for every sale over $25, smart staff just discounted an extra item to push the total over the threshold. More income, but less profit. Whenever the incentives changed, this workforce took it as a personal challenge to find found cunning ways to game the new regime. If only that creativity had been harnessed for something genuinely productive….

Sales targets at WellsFargo Bank trashed its reputation, when employees, pressured to increase the number of products each customer acquired, found it easier to meet the new demands by giving clients more products—without asking for their consent. It is said that workers in a Soviet nail factory met their production weight target by manufacturing one single giant nail. The pleasure of incentives is often short lived; it becomes insatiable, always needing more. It’s what I think of as the de-moralization of work.

In much of the financial services industry, we are now coming up to Bonus Time, when traders and executives await their ‘number’: the size of their reward. In the Comments section of a Financial Times article on the current mood, many bankers complained that, with some bonuses deferred, they would have to stay longer to access their rewards—the implication being that they’d prefer to take the money and run. Others complained that single digit bonuses were ‘not exactly inflation crushing’ as though they were entitled to be spared the inflationary pain the rest of the world experiences. None of this is a recipe for engagement, drive or integrity.

Incentives backfire in other ways too; economists call these ‘perverse outcomes’. In many of the professional services firms I know, I’d estimate that around half the partners loathe the incentive schemes from which they profit. They can see that what makes them rich also actively constrains the flexibility of the firm’s structure, rewarding the least altruistic and putting the firms’ long term future at the mercy of those who profit from the present. These companies acknowledge their need for change, to become more flexible and more creative, but fear a backlash from the addicts whom they got hooked. Appealing to integrity, creativity or long-term vision holds little sway after you’ve embedded an addiction to reward. Talk about purpose all you like; it will fall on deaf ears if I will get promoted faster or make more money by doing what I am rewarded for. Incentives suppress the larger, longerambition, focusing the mind so intently on the year-end as to make executives blind to other needs and motives.

That economics had started to eat our minds has long been obvious but in recent decades the rise of behavioural economics have done so even more tenaciously. B.F. Skinner’s conception of all human activity as only ever a response to stimuli has profoundly changed the way most organizations conceptualize management and leadership. Instead of thinking deeply about motivation, identity and agency, now all that’s needed is the appropriate reward to nudge workers into the desired behaviour. In essence: programme the machines better. A more dessicated concept of leadership it is hard to imagine. And it seems ignorant or blind to the consequences.

The incentive game is rife in education too. The outcome? ‘I don’t need to know that, it isn’t on the test.’ Grades weren’t invented to stifle curiosity, but they do, especially when teachers and their schools are themselves graded by their pupils’ exam results. Plagiarism and the embrace of performance-enhancing drugs like Adderall and Ativan have driven similar perverse outcomes. What students don’t develop—initiative, delight, a growing sense of independent thinking and identity—are the costs. Today, CEOs complain that the bright, well credentialed people they hire don’t demonstrate the initiative and creativity that they hoped for and that a volatile and unpredictable world now requires.

Incentives overpower human development and relationships, those that are fueled by a rich language of subtlety, nuance and value. What’s left merely is transaction, executed in a degraded language which lacks insight, identity or meaning. In this context, expecting employees to speak out when they see something going wrong, or when they spot a great opportunity, becomes preposterous. Compensation becomes hush money.

This has consequences far beyond HR. Speaking recently to an expert on sustainability, we discussed how far companies might hold to their carbon goals now the political wind has changed. She thought those who’d been committed for decades would probably stick at it, but as for the rest, they would require incentives. Just like the professional services (and many investment) firms stuck in a business model that no longer serves them, we find ourselves trapped in markets that no longer serve us.

Why is it that I never paid anyone a bonus, nor did I ever work for a company that paid me one until I was in my fifties? Not because I was an angel. It just never occurred to me. The work was interesting enough, the pay good enough, the experience rich enough; we didn’t need to be bribed. When people under-performed, I assumed it was either because they were in the wrong job or had poor management, and one, the other or both usually turned out to be the case.

Sure, times have changed. But I’m left with two thoughts. I’m still persuaded that great work is possible, at scale, without cash incentives. It just takes more effort and skill on the part of leadership. Patience too perhaps. I also recognize that the companies I know today that eschew incentives are not the norm. Which means that change will be hard, but not implausible. It starts with appreciating that the humanity of the people who work with us is not a problem but an asset, unquantifiable perhaps but containing infinite creative and adaptable value.

Want to go further?

If you want to understand the context in which incentives aren’t needed, read the wonderful Dan Pink on intrinsic motivation, which is what incentives erode. Or watch his TED talk.

Or read about wacky experiments that show how thinking about money makes us more inclined to think about it and less inclined to think about people.

For the beauty of it

I’m a huge fan of Beth Gibbons and Portishead. But only recently did I learn that Gibbons had recorded Gorecki’s Third Symphony (also known as the Symphony of Sorrowful Songs.) Listen; it is tremendous. What a voice.

If you want to know more about Gorecki, nothing beats Tony Palmer’s brilliant documentary which features the equally stunning Dawn Upshaw. I think it’s only available on DVD/BluRay but it’s worth the effort.