By reinforcing self-interest, even the best-intentioned financial incentives can hinder the cultivation of pro-social values that guide sustainable business transformation. More effective is a full spectrum approach that addresses the needs and values of the whole person.
In theory, it makes perfect sense. If you want to motivate people to produce more of something, simply offer them material rewards tied to specific outcomes. And in practice, pay for performance works pretty well for companies that are focused on optimizing one variable like sales, quarterly profit growth, cost savings, productivity, etc. – at least in the short-term.
But what about for companies whose definition of success goes beyond single bottom-line profit and productivity measures? Companies with a broader spectrum of success criteria that includes improving upon the social and environmental impacts of their products, services and business practices?
No matter how well designed, financial incentives amplify the importance of one priority over others and simultaneously give rise to opportunity costs that are insidious and difficult to measure.
A flawed premise about what motivates us
Neo-classical economic theory’s fundamental assumption is that people, as homo economicus, are rational optimizers that pursue their own self-interest. By offering them the right kind of carrot, you can link their interest to pursuing the larger interest of the organization.
Financial incentives are the most common motivational tools used by profit maximizing, single-bottom line companies that represent an institutionalized form of homo economicus. But for those companies that are redefining success based on triple bottom line (social, environmental, and economic) principles, financial incentives can actually do more harm than good.
“Homo Recipricans” in an interconnected world
The latest research by behavioral economists and neuroscientists is revealing a very different and more complex view of what motivates us. Studies have shown how introducing financial rewards can actually decrease cooperative and altruistic behavior. The percentage of people willing to voluntarily help someone is often higher than when they are offered payment to do the same task. For most, introducing money debased the activity. As financial incentives become larger and more widespread, it conditions us to expect payment for doing things that used to be considered normative and voluntary behaviors.
In his excellent book, Matthieu Ricard cites numerous scientific studies that confirm what wisdom traditions have known for centuries – that each of us has an inborn capacity for altruism that can be cultivated or denigrated. As homo recipricans, we are cooperative actors who are motivated to work with others to improve the conditions within which we all live and work. The fundamental insight being that everything is interconnected; our well-being and the well-being of others is mutually dependent. And the understanding of this reality underlies the basis for conducting business that creates shared value in environmentally and socially responsible ways.
This view more closely reflects life’s complexity, but it also calls for developing the ability to learn and act on the fly in ways that are situationally appropriate – what Barry Schwarz calls practical wisdom. Incentives, he argues in this TED Talk and his book, chip away at the more virtuous and altruistic motives that guide the practical wisdom we need to thrive in an increasingly complex world.
These opposing views about who we are as humans has manifested in a tug of war between two very different sets of business philosophies, goals, values, leadership approaches, and organizational cultures.
Who doesn’t feel this struggle within ourselves from time to time? We all want to live up to higher values while also making a good living, but the additional pull of financial incentives usually results in regressing to back to a more primitive homo economicus mode.
To relieve this tension, we often resort to a strategy of compartmentalizing. We follow a different set of norms in our personal lives than those in our business lives. Our personal lives provide us with the intrinsic rewards that we need, while our work provides us with extrinsic rewards.
But this sense of separation is stressful and unsustainable, and at odds with living a unified and integrated life in an interconnected world.
Full spectrum leadership and organizational culture
Triple bottom line companies meet extrinsic needs through compensation policies like employee ownership, profit sharing, and equitable pay. And their leaders embody and cultivate a culture that meets intrinsic needs in five key areas resulting in a higher level of job satisfaction and performance:
- Sense of completion
- Feedback from the job
- Contribution – making a difference
The most effective leaders are those that embody and cultivate what Richard Barrett calls a full spectrum approach that addresses seven levels of organizational consciousness and values.
Carrots are nutritious, but people are omnivores not rabbits. Sustainability is a whole systems approach to business which calls for incentives that correspond to the needs and values of the whole person.
If you’re interested measuring your current leadership team and corporate culture profile, and learning how to transform into a more effective values-based organization contact me here