Do Financial Rewards Work to Motivate Staff?

Transcript

Karen Kirton  00:00

Press record. There we go.

Lachy Gray  00:06

All righty. Three, two. In this episode we're talking about rewards and rewards as a form of motivation at work. And they can take many forms that can be financial, such as salary raise or bonus, ESOP or employee share option program, profit share, or they could be non financial rewards. Such as annual leave team celebration, promotion, recognition, praise and so on. So in this episode, we're going to focus on financial rewards, and we'll tackle non financial awards in a future episode. And it is a fact that we humans respond very strongly to rewards if you just think of pokie machines, they have been specifically designed to maximize our desire to play them. How by paying out randomly, the cases engaged, since we don't know when the next payout will be. And there's so many different ways to reward staff, how do we choose what's best for our business? And how will we know if what we have in place is working and we've got lots to dive into today. To kick us off current is there a memorable reward from your career that you'd like to share whether because it was effective or it actually had the opposite effect?

Karen Kirton  01:31

Interesting question. And I'm actually not extrinsically motivated. So financial rewards don't actually help me to want to achieve things I just don't find them important at all, and when I think back, I was given stock options once and I didn't really understand what that meant at the time. I was I was pretty young as well, except that I kind of got this idea okay. My boss obviously wants to keep me in the long term. But to be honest, she could have just said that without actually providing me with the options, which ended up being worth absolutely $0. Anyway. And I have received incentives over the years but I would just say it just became being paid extra money for what I was already doing, which is what I always say other people it ends up with as well. And if anything, it then became a demotivator if the money wasn't paid or wasn't paid at 100%, because you get accustomed to having this money every September or December or whatever it is. Which of course leads us back to the question so do financial rewards, even work and there's plenty of research in this area and at best, I would say that it's inconclusive. Are you motivated by financial rewards?

Lachy Gray  02:51

Yeah, I don't think so. Like to a certain point. I want to be is compensated fairly for the work I'm doing and I was I actually think it's more it's more so compared to my peers and colleagues. It's almost like keeping up with the Joneses, I think. So, no, and this is something that I've learned though, because I think going into the workforce the way that most compensation is structured, and a lot of people talk about it, you would assume that we're all motivated by financial rewards, but I don't think that's true either. And, you know, from the digging in the research I've done yeah, they suggest inconclusive or are as you say ineffective can actually be a demotivator. So I think it's interesting if we talk about why. So some of the points are, so rewards can encourage temporary compliance. So it can encourage a particular behavior for a short period of time. But when that reward runs out, or we don't achieve the target and we don't get the reward, then we just go back to our old behaviors. So it's not necessarily encouraging long term behavior change. And money is said to be a threshold motivator, and that motivates us to a point and then it plateaus. So I was thinking back in my previous role, when we receive a salary raise, be super excited to receive and I thought, Oh, when I get that salary raise then I'll be able to afford this extra staff. And you kind of get the raise and then you might buy some staff. And a few months later, you become adapted to the new base salary and life's to sort of come back to how it was so I didn't really feel that any, any better off. And the thing is, well, the rewards can encourage poor behavior. So I think we've seen this a bit as news in last few years, especially in the banking industry, with financial advisors charging dead clients for financial advice, because they're incentivized to do so they're receiving financial reward. And I think actually, that's one reason why most banks moved away from vertical integration had to split all their businesses. You know, financial advice and insurance and banking. So, have you seen financial rewards work successfully? Karen?

Karen Kirton  05:31

Not often. Originally, I was thinking No, no, I'm gonna say not often because they do sometimes work but yeah, I have seen lots and lots of different programs. And they can get really complex because particularly when businesses bring in external expert consultants in and they put all these components into the program to try and keep the reward only for Outstanding Performance and you know, all these checks and balances that they have to go through and it just becomes so onerous to administrate. But at the end of the day, as people we always consider our performance above average, even though statistically that's impossible. That's just what we do. And our managers don't want to demotivate us so they just find us ways to pay us the money. You know, and I've seen plenty of examples of this where programs have been built. So you know, the, you get 70% of the payment if you receive 100% And you get 90% of the payment if you receive 110% and all that happens over time is that everybody performs at 120% so they can get the 100% payment. So you know those kinds of programs, I just find them a complete waste of money. Where they can be useful is if you have sales targets for individual salespeople. So you know, even this has its problems. So if for example, it's really clear that I'm a salesperson, if I sell X I get why because on the whole salespeople are motivated by money. But where it becomes tough is that if I feel I can't sell X because the marketing team haven't done Q so that I get angry at them because they're preventing me from getting x. And then maybe the company strategy changes and they don't want me to sell X anymore, but I'm still going to because that's what gives me the money. So even though it sounds really simple, it actually becomes really complex and it does need incredibly careful planning and perhaps also because I'm not motivated by rewards, and I haven't seen the program's work well. I'm not a huge advocate. However, they are expected in certain roles and industries, which means if you don't have things can be really hard to attract and retain the right people in your business.

Lachy Gray  07:49

And sales is always the the team or the roles that's held up, isn't it? There's so typically commission based, but I do think there is a push slightly away from that, or at the very least a conversation as to why like why are they the role that's motivated by money and no one else is, which is mean they're just they're humans like the rest of us. I think as you say, if you're trying to motivate individual people to do very specific things then perhaps but most salespeople are in a team and that team is a part of along with other teams as part of an organization. So yeah, I think it it can go go bad. And you mentioned it in extrinsic motivation a few times. So let's just let's just touch on that so psychologists talk about extrinsic and intrinsic motivators. So, extrinsic motivation is when you do an activity to obtain a reward or outcome or avoid a punishment. So, external motivation, intrinsic motivations when you do something for its own sake, because you enjoy it. You feel like you're learning you're growing, you're not necessarily looking for an external reward. So, interestingly, most rewards in the workplace are extrinsic. So if you do this, then you'll achieve that if you hit sales targets, you'll get a 2% bonus. And the same is true for punishment. So if you don't use your allocated budget for the financial year, you will lose whatever you don't spend. So, both will motivate and they will focus attention and behaviors on specific activities, but they can come at a cost. So we continue on with our sales example and say we've got a sales target for the quarter. It can encourage us to do whatever it takes to hit the budget. So yeah, your sales team might discount, discount, discount, discount, or take on customers who aren't a great fit to hit the target. So there's that initial upsides of the salesperson but to your point, is a potentially longer term downside, the rest of the business, or the other ludicrous situation where the salesperson hits their budget early because they got a cat on their commission. They actually incentivized to stop working. So interesting is lays well not receiving a reward that we expected to receive is indistinguishable from being punished. Like it's the same effect. And if it's a really desirable reward, and something we've worked really hard for and really excited about and we don't get it, we get really demoralized. And there's actually a Harvard Business Review article called Why incentive plans cannot work. That gives some more detail to these effects. Have you seen examples? Like these, Karen?

Karen Kirton  10:53

Yeah, and I read that article as well. And we will link it with this episode because it does go through lots of different research. Not very balanced. Obviously, the name of the article is why they don't work. So it does give you a clue about what they why they don't work. But yeah, I've absolutely seen that and I think what happens from my experience is that a business owner will say, Well, I only want to pay out X amount and I you know, I want to cap that commission. But what they're missing is but if they keep achieving those targets, and you keep getting the revenue in then actually, if you keep it uncapped, it doesn't really matter as long as you've designed it correctly and your accountant agrees your revenue will keep going up, and it'll pay for that uncapped nature of that commission. And I think this is why we do talk about sales with commissions because it's a bit easier, like you know, they're getting revenue in so it makes it easier as a business owner to think well, they're gonna pay for it. They're gonna pay for themselves. Whereas if I'm trying to incentivize a marketing manager, although yes, they're helping with that sales process and they're getting the leads in the door, it's harder to draw that direct line. So that's where you end up with well if you have so many social media posts or likes or engagements, but it's hard to quantify did that actually give us any leads or not? And I found lots of research about why incentive programs don't work. So I thought I need to go and find some things that actually give us some hope. And one was from 2010, which was a meta analysis, which meant they looked at a lot of different research and was across 145 US organizations. And they concluded that incentive programs can increase performance by as much as 44% when they're selected implemented and monitored correctly. And importantly, they found that well structured programs attract and retain great people. And although employees and execs highly value the programs 98% complained about the implementation. Wow. Yeah, so I think our experiences when incentive programs don't not working. They're pretty common. Another was a 2013 study and the researchers did actually give some practical advice in this one. So they said firstly, got to define and measure performance. accurately, very easy sentence very hard to do. No. Secondly, make rewards contingent on the performance. Again, really tricky, because you've got a lot of bias in there from the employee and the manager in terms of saying well did that person perform or not? Thirdly, rewarding employees in a timely manner. So if we're just giving an incentive once a year, I can bet you anything. If the cut off for the incentive is in July, people are working their butts off in main chain to get those goals done. And the rest of the year they're ignoring that incentive plan. I know because I used to do that as well. So number four, maintaining justice in the reward system, and you talked about this before Locky like it's about that equity. So, you know, do I feel I'm working as hard as the next person and that we're getting equal rewards for that. And finally, using monetary and non monetary rewards and you know, Herein lies the issue, because most organizations just don't have the skills and expertise to design, monitor and implement a scheme effectively and even large corporations really struggle with this.

Lachy Gray  14:35

Yeah, so interesting. The implementation is so tricky. I was thinking it's probably managers and leaders and I guess, HR who are designing these systems, or these incentive programs, are they the best people to be doing it? I mean, where we're talking about human behavior, and there's really powerful out there if we do it incorrectly. So it makes sense to get the right expertise in the room. And I guess, understand, what are we what are the behaviors that we're trying to encourage? And then how can we actually yeah, I guess, measure them and then and incentivize them. So another way that we can think about this is we mentioned before, extrinsic versus intrinsic. So we can try to incorporate more intrinsic rewards into our workplace, which is when we do an activity or the enjoyment of it, not necessarily for the reward. And good news, it's not too difficult. So Jason Fox, who is an author of a book on workplace motivation, called Game changer, he's also really interesting keynote speaker. He calls himself a wizard is a real character, and he comes at things from quite left field. I'd encourage you to check him out. He encouraged us to move from if you do this, then you'll get this kind of extrinsic, contingent based reward system to a now that you've done this. Here's this reward that's non contingent. So for example, rather than saying, well, thanks for working last weekend, and here's a $100 voucher, and me as employee as well. I work 16 hours over the weekend and divide by 100 bucks, you value my time at $6.25 per hour. Thanks. We recognize that with a day off or time to work on a personal project, conference tickets or a dinner voucher. So Fox says the rewards don't have to be expensive. Instead, they're powerful when the unexpected, and they show you really thought about it. So we think back to the pokie machine example again, at the start we're actually using tapping into the same underlying motivation scheme, which is that it's variable and it's unexpected, but here we're trying to use it for good. And we've actually tried to practice it, ya know. So in the past, we've organized home cooked meals to believe delivered to Jana has been working really hard. We've organized the dinner voucher at a restaurant that we knew the other one to go to. So they're small, I guess in the scheme of things, but they seem to have an outsize impact.

Karen Kirton  17:28

Yeah, it's that personalization and the meaningfulness of something that I think has the most impact and recently I broke my foot I've got four fractures about two points, because I'm an overachiever. And one of my clients actually sent me a did a lady's voucher. Yes, it is. Yeah. Which was amazing. And it was completely unexpected and it was so thoughtful, and I was just like blown away by it and then in our next episode, we've got a guest on Maria and I did a roundtable with her and her clients. And about a week after I did that, you know, she sent me a hamper, in the mail, or by courier, I guess, to say thank you. And my husband has looked at me and he said, You have the best clients? Because I think, yeah, it was just so unexpected, especially because we don't have that employee relationship. You know, I'm a supplier to them. There was no reason for them to do that. But you know, that would mean more to me, then them paying me money to jump on that roundtable or do those things? So, yeah, and I think when I have done sessions with employees around rewards and recognition, the things that people talk about that they remember being their best rewards were things that were the most personal and meaningful to them because someone had actually thought about it and thought about it. And I think all those things are really great ideas and they work really well to recognize people and it's so important to do that regularly. When when we're going back to, you know, financial rewards, you know, for certain roles, I think there is still room to provide an incentive program or a bonus but it just needs to be really well thought through. It needs to be checked by an accountant. I think sometimes people forget. It sounds really basic, but you just want to make sure that it's affordable and that it doesn't do things that you don't think it's going to do so what I mean by that is that, you know, if you have at scaling up, for example, that your accountant can actually model it and say, yes, that will still be affordable for the business. And if you hire another, you know, 20 people into that role, for example, it's still going to be affordable for the business. And the other part of it is using an appropriate HR partner to actually say, Well, is this even going to work? So what behaviors are we encouraging? And perhaps there are behaviors that we will inadvertently encourage through this program that we shouldn't be so so that's worth looking at? As long as you're also looking at clear criteria for who's on the scheme and why and how the targets are set and payments are made because in many organizations, some people are on a scheme and some people aren't. And there may be great reasons for that, but it's SOS discontent because people know they find out and, you know, that's can become a real cultural issue for the business as well.

Lachy Gray  20:32

Yeah, it's got to be fair, doesn't it? And it's such a good point. The design of any program is so important to get right isn't it because especially if you're financially rewarding people, and then you decide at some point that you want to reduce it or take it away

Karen Kirton  20:53

the trouble don't Good luck. Once you've got it,

Lachy Gray  21:00

yeah. So it's locked in, right. I mean, once it's in, it's in. Yeah. So I guess if we talk about some takeaways, I think we've, it's important to go back and ask well, what behaviors are we trying to encourage? And we can look at how we're doing that now. And understanding the split between extrinsic which most probably are, and intrinsic and what, how do we feel about that balance? And what could that balance look like in the future? I think being mindful of unintended consequences. So yeah, as you say, like putting something in place that isn't fair, and benefits some employees over others, or it just isn't sustainable. For the business if if we grow and I think getting help to design the best program for our business, because they're all going to be different. And we can include stuff in that as well like what what's important to them and I always find this interesting that I think financial, what of course, it's important to be compensated fairly. But then yeah, above a certain point, it is not the main motivator. So to understand that and include that in the mix to help us design the best reward program for our individual business. What would you add to that can

Karen Kirton  22:35

Yeah, and I think it is also having a look at the roles that you're trying to hire at the moment and you know, it's everyone's that I'm talking to is having a lot of trouble with hiring people right now. So you know, if you don't have an incentive scheme, that the market people are expecting it, then it is something that you need to put on to to the agenda. So even though we've talked about, you know, there are issues with these schemes. At the other day, sometimes you might actually lose really great people if you don't have them in place as well.

Lachy Gray  23:05

So links to articles and anything else we've discussed will be over on our websites amplify hr.com Today, you and jana.com Today, you just follow the links to the podcast section. If you've received value from this episode, we would love it if you could leave a rating or review over at Apple podcasts.

Karen Kirton  23:25

And coming up with the next episode, we have a guest which is Maria Pat Oceti from digital armor, and we're going to be discussing how we can leverage technology to scale and grow our businesses.

Lachy Gray  23:37

Yeah, that podcast episode is coming up in two weeks from now. So click the subscribe button, and you'll get notified when it's available. Any final thoughts, Karen?

Karen Kirton  23:47

I think if people are wondering whether to go ahead with financial rewards or not, maybe hold the thought until the episode where we talk about non financial rewards as well. And that might give some some more tips.

Lachy Gray  24:03

Good idea. Thanks so much for joining us and we'll see you next time on the Make It Work podcast.