Reconciling Corporate Goals
Using Behavioral Economics to Create a Highly Effective Incentive Model
A conceptually well-developed incentive model free of conflicting goals, however, can still fail due to three obstacles associated with employee perception and behavior: Motivation (wanting), cognition (knowing), and behavior (being able). These obstacles can be overcome with behavioral economics measures:
It is assumed that people in organizations are also financially motivated, which is why incentive models are generally based on financial incentives. The timing of bonus payments is particularly relevant for effectiveness from the perspective of behavioral economics. People prefer small but immediate rewards more than larger future rewards (behavioral economics effects: “present bias” or “hyperbolic discounting”). It is better to pay out incentives in smaller amounts right after a successful sale or quantify them, rather than combining them into a non-specific bonus at the end of the year.
It is understandable that incentive models are based primarily on financial incentives because financial incentives can be better institutionalized in employment contracts and agreements than feedback or praise— and they are easier to objectify and thus fair. However, non-monetary incentives often have a stronger impact. An experiment in Intel’s semiconductor production workforce showed that a compliment from the supervisor and a pizza for the entire family had a stronger effect as an incentive for increased productivity than an extra 30 euros in salary. Most supervisors know that feedback and praise can be more motivating than money, but they often lack the time in their workday to provide regular feedback.
When designing incentive models, it is often underestimated whether the employees actually understand the system. Many sales employees do not know how the compensation model affects their salary. If a company underestimates expensive bonus components and overestimates less expensive ones, it undermines the efficiency of the incentive structure.
Therefore, managers should explain the incentive model well to their employees and regularly discuss the status of current achievements. In this sense, the incentive system should also be embedded in a broader feedback culture.
Employees must actually be given a chance to demonstrate the desired behavior. Bonuses must be achievable, and caps or maximum limits must not be reached too early. And subjectively, employees should also feel that their behavior makes a difference. Excessive complexity in the relationship between behavior and results and too much intervention through micromanagement by the supervisor will have the opposite effect.
The Path to Higher Sales Success
What should you do to optimize your incentive system?
The first step is to diagnose the status quo. This involves mapping incentives, employee behavior, employee goals, and company goals to uncover contradictions, misaligned incentives, and inefficiencies. In this context, there should also be a survey of the sales staff to understand the roles played by motivation, cognition, and behavior.
The second step is to design a better incentive system aligned with business objectives that employees can understand, engage with, and implement.
The third and most challenging step is implementation. People tend to view any change to the status quo as a loss rather than a gain (behavioral economics effect “loss aversion”). Therefore, adjustments must be made and communicated with a great deal of tact. It is essential not to give the impression that bonuses will become lower or more difficult to achieve, e.g., that the “pie to be distributed” will become smaller, but that the pie will be distributed better and more fairly. And that the employees also benefit along with the entire company.
Please contact us if you have noticed that your incentive system is blocked by some of the mentioned obstacles on the way to holistic sales success as well. We would be happy to help you analyze the specific levers in your organization and work with you on developing the path to implementing behavioral incentives.