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Ideas for Leaders #308

The Positive Effect of Negative Incentives

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Key Concept

New research shows that negative incentives — incentives that require individuals to perform in order to avoid a loss — are more motivating than positive incentives, which motivate individuals through a gain (for example, a bonus).

Idea Summary

The question of whether positive or negative incentives work better has long been a matter of debate in society. From biblical times to the very recent past, children were thought to be better motivated through negative incentives — known in the bible as the “rod” and two generations ago as “a good spanking” — than positive incentives.

The choices are less stark in the workplace, but researchers in a variety of disciplines (e.g. behavioural economics, social psychology, etc.) still disagree on the effectiveness of extrinsic motivating efforts. Kellogg Assistant Professor of Marketing Kelly Goldsmith and Yale Professor of Management and Marketing Ravi Dahr designed two experiments to test whether positive or negative incentives were more effective, followed by additional experiments to explore some of the reasoning behind the results.

The experiments were simple: participants were given a series of anagrams (such as ETKBAS) and asked to decipher them (BASKET). One or two of the anagrams were so difficult as to be undecipherable. The goal was to see how long the participants persisted in seeking the solutions. In the positively framed experiments, the participants received a small amount of cash for each solution. In the negatively framed experiments, the participants were given cash at the beginning of the experiment, and then lost a small sum for every unsolved problem.

The first experiment involved undergraduate students, the second a diverse group of working adults. The difference in ages between the two experiments was key as previous research has shown that people of different ages react differently to negative or positive stimuli — for example, attention to negative stimuli appears to decrease with age, and memory of positive stimuli increases with age.
The results of the experiments confirmed the expectations of the researchers. Based on the length of time that participants persevered in their search for solutions, negative incentives proved more motivating than positive incentives. When broken down by age, the results showed that younger people were more motivated by negative than positive incentives, while the opposite was true for people aged 35 or older.

In a third experiment, the researchers revealed a disconnect between what people think will motivate them and what actually drives their motivation. Specifically, most participants believed that positive incentives would be more motivating, when the opposite was true. One possible explanation for the mistaken prediction was the commonly accepted wisdom that people are more motivated when they enjoy what they are doing. The role of joy — or, at least, assumptions about joy — was confirmed by two final experiments in which participants assumed that positive incentives would be more enjoyable, and that more enjoyable incentives would be more motivating.  

Business Application

When applying the results of this research, managers should keep the context in mind: The research involved tiny sums of cash and just a few minutes of time. It’s possible that applying the results to annual salaries or bonuses might lead to different reactions. However, there are interesting implications that managers should explore — and that are already being explored by certain firms and industries.

The first implication is that positive incentives are not necessarily the most motivating. Today, firms rarely use negative incentives, basing their decisions on managers’ intuitions that people will not respond to negative incentives. However, the research shows, within its context, not only that negative incentives can be motivating, but also that our intuitions or biases about what works and does not work are often wrong. Therefore, based on this research, managers could begin designing some incentive programs that might seem counterintuitive, but especially if targeted toward younger employees, could lead to higher performance. Managers should also reconsider their one-size-fits-all motivation programs given the different responses to incentives based on age.

Some firms are already applying negative incentives. Law firms allocate bonuses as part of annual salaries but inform employees that the bonuses are lost if they do not meet a certain number of billable hours. Another example of negative incentives is the stipulation that health care coverage by certain companies is reduced if employees do not take certain health improvement steps. Despite our natural bias against negative incentives, this research suggests that these types of measures should be reconsidered.

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Authors

Institutions

Source

Idea conceived

  • September 2013

Idea posted

  • January 2014

DOI number

10.13007/308

Subject

Real Time Analytics