How Do Incentives Shape Behavior: Understanding the Psychology Impact of Incentives

How do incentives influence behavior? Do incentives really work to improve productivity and help with fostering better relationships between employers and employees? What is the psychology behind incentive programs and desired employee behavior? If you are someone wondering about these questions, this blog will help you navigate through the process.

Incentives act like a reward system and are used by employers and business owners to reward the right behavior and to motivate sales people to work in a specific manner, which is termed as the behavior reinforcement.

In this blog, we will explore positive reinforcement for expected behavior using the most common reward technique - Incentives. We also cover how incentives affect employee psychology, using incentives to align employee and company goals and the role of incentives in upskilling, extensive and continuous learning. 

Understanding the psychology of incentives

A renowned psychologist Charlie Munger writes about incentives and its power for employee management in his book where he talks about incentive as the ultimate tool that is often ignored by top management, but is the only that holds the key to the right management.

According to most psychologists who study sales and economical factors that contribute employee performance, incentives have always been the key driver for growth and productivity of the company. 

There are many types of incentives that employers can look into such as cash incentives, bonuses, reward points, discount schemes, benefits programs and so many more. No matter what kind of incentive you choose for your employees, it is important to align the type of the incentive to the goal that is to be achieved - which is the right behavior from the employees. 

Powerful incentives have helped employees have a keen sense of achievement and establish reinforcement of good behavior, in this case good performance, adhering to goals or achieving targets and contributing to overall growth. Reinforcement behavior and incentives have been linked by several studies showing a good incentive can reinforce the right employee behavior.  

Incentives and behavior modification

Most psychologists agree that incentives help in molding and shaping the right behavior in humans and therefore helps with conditioning the employees when used in companies.

This helps in aligning the employee with the goals and objectives of the company and thereby, appraising or rewarding employees in a way that the right behavior is appreciated and recognized. Using a positive reinforcement technique such as a cash incentive, a bonus, a gift card or any other type of incentive for the employee is known to have a positive effect on the employee mindset.

An example of an incentive system by employers that triggered the right behavior by the use of reward systems was seen in the case of Southwest Airlines, the employees are automatically enrolled in the SWAG platform that helps employees collect reward points with good performance, meeting targets, helping others in projects, appreciating fellow employees etc. Using the points collected, they can encash it at the SWAG shop for gift cards, cash bonuses, tickets for movies, concerts and for dining or travel expenses. 

Using this platform, the employer has successfully created an environment of productivity, positive work behavior, support and employee engagement all with a single incentive program.

Incentives and goal setting

The goal theory suggests having a clear goal which is defined and cut out for each employee by the employer to create a work environment that is clear and attainable so that employees feel challenged and satisfied when they attain the said goals.

These goals must align to the overall goals and objectives of the business or company so that every individual in the business contributes directly to the overall attainment of the company's goal and objectives. 

When the goals of an employee are linked with incentives, employees are motivated to do better, achieve targets, exceed them and contribute in other ways such as helping teammates, improve client relationships, contribute to the society etc. Several research suggests that the incentive works as an operant conditioning, which pulls employees into a good behavior pattern attracted by incentives offered by the employer. These incentives can be of various forms:

• Bonus
• Allowance for travel, food etc
• Sales commissions
• Employee stock options
• Retirement and fringe benefits

A great case study to quote here is that of Bain and Company, a consulting firm that has been one of the best places to work at for 14 consecutive years. The company offers many incentives and flexible programs to accommodate employees and allows them to stay productive by offering performance bonuses, sign on bonuses and performance linked monetary rewards.

They focus on employee wellness and allows employees to choose the location and job where they can be most productive. This has helped in modifying employee behavior that has made them choose to come to work and stay productive at all times. 

The role of incentives in economics 

Rewards and incentives is a powerful tool that drives the economy and shapes consumer behavior just as it shapes employee behavior. It acts as a driving force for the right behavior from the consumer by means of driving sales through discounts. Many different benefits are offered by the government and the various companies to drive economic growth and shaping consumer behavior such as:

• Tax incentives and rebates from employers and government
• Subsidies on the usage of power and land for agriculture and farming
• Financial incentives that include stock options, discounts, sales incentive etc

Apart from these larger measures, other smaller incentives from companies to drive sales:

• Bulk discounts
• Non monetary offers (buy one get one etc)
• Gift vouchers and discount coupons

These offers help drive better sales, create better relationships with customers, provide exemplary offers that develop brand loyalty etc. Money motivation in the form of incentive and surcharge is driving the economy and is shaping consumer behavior globally. 

Incentives and employee performance

Employee motivation, productivity and incentives are strongly interlinked. Many research suggest that incentives and punishment work like the carrot and the stick approach.

When an employer wants to inculcate positive behavior such as better attendance, achievement of targets, exceeding targets, contributing in other projects, helping out with social causes etc, they are rewarded with an incentive. This helps in motivating employees and making them even more productive by offering them a reward for a good job done. 

In the same manner a punishment for not achieving a particular deadline or meeting targets or absence at work is negatively rewarded with a punishment or a fine. This is the ‘stick’ end of the deal and is in practice at most companies.

It helps in shedding reinforcing the right behavior although it is debatable in the current era. Research proves that where only punishment exists without rewards or incentives, it can cause stigma at the workplace. 

A good example of how rewarding employees has helped with better job satisfaction and thus proving that the carrot effect is effective is in the case of Google. Google offers one of the best employee friendly, incentivized wellness programs in the industry and helps with better job satisfaction to the point that it has been rated the best place to work for several years. 

• employee motivation and productivity through incentives
• different types of workplace incentives (e.g., bonuses, promotions)
• employee recognition and its impact on job satisfaction

The psychology of delayed gratification

There is a famous research that links delayed gratification, self control and better productivity as human beings in every area of life which is known as the Marshmallow experiment. A study found that those who waited patiently and got their work done received rewards at a delayed time which helped them stay focussed, undistracted and be more productive.

This experiment rings closer to the fact that employees who waited patiently for their rewards got their job done better, were more productive and exhibited signs of higher satisfaction for the delayed gratification received by them. 

When employers reward employees right then and there for the positive and excellent work done by employees, it can take away the element of surprise, result in smaller rewards and can be time and money consuming for the employer.

On the other hand, when employees were rewarded between longer periods of time such as bi-annually or quarterly, they displayed signs of delayed gratification which was instrumental in driving better productivity and focus at work. 

Research suggests that employees who displayed signs of grit and perseverance had better performance, job satisfaction and better growth as employees in the long term. 

The neuroscience of incentives

Incentives have a profound effect on the brain and the dopamine level of human beings. Incentives are nothing but rewards. As per the popular research by Skinner and the book on Biology of humans at their best and worst, humans have a varied reaction to rewards and recognition that is showered on them that helps in building positive behavior.

When translated to the workplace, this research indicates that incentives create a positive effect on performance by increasing the dopamine level, which directly links to happiness, excitement and satisfaction. 

A research conducted on employees reveals that there are many forms of showing appreciation to employees that increase their biometric reactions such as dilated pupils, higher release of dopamine and improved cognitive function. There are many ways to appreciate employees and the experiment included the 4 most common methods:

• The big show with CEO appreciation in front of all employees
• The small show with the manager appreciating in front of peers and team members
• The peer to peer appreciation in a small setting Or
•  The private show between CEO and employee with a personal appreciation message

Of all these 4 methods, the research suggests that employees were most happy and inclined towards the small show which means intermittent appreciation from manager in front of coworkers and team members and with reward and recognition that are most suitable. 

• how the brain responds to incentives and rewards
• the release of dopamine and its role in motivation
• neuroeconomic studies on incentive-driven decision-making

Incentives in education and learning 

Incentives work as an operant conditioning method and helps reinforce positive behavior in employees. This proven fact can be used to the employer advantage to improve the education and learning opportunities of employees as well which helps in boosting productivity and upskilling employees to further enhance the workforce and improve turnover and revenue.

Incentives can be a powerful tool to achieve this simply by introducing incentivized learning systems. Employees can provide various opportunities to expand the horizons of employees by providing:

• Free support to upskill
• Take up new courses
• Enroll for training
• Certificate programs that help in improving the skills and educational qualifications. 

This directly helps in boosting the overall productivity of the workplace, helps in training future managers, pass on the learnings to new employees and adapt a culture of learning and development while at the job.

Programs that support this such as incentives linked to new training, taking up teaching opportunities or mentorship for new employees, training of employees in projects, etc can be an excellent way to promote engagement. 

One of the best examples of this is HP - a company that has a culture of learning and development that offers numerous opportunities to engage such as taking up cooking classes from Michelin star chefs, home learning support for employees' children, taking up charitable causes and creating a network of versatile and competent employees. 

Conclusion

Although the human brain and human behavior is constantly evolving and changing with the times, it is important to note that basic ideologies relating to reward and recognition remain the same.

Humans are wired to receive positivity in any form and rewards and recognitions are one of the key ways of positivity and moral reinforcement for employees when at a workplace. Using incentives and a dynamic, ‘one size does not fill all’ approach, employers can work towards a better, positive and productive workforce for their companies. 

With a comprehensive view on incentives, modern companies are now able to improve employee engagement, employee satisfaction and overall productivity at work. It is important to keep the incentive structure open and flexible so that employers can use a dynamic approach that helps in promoting positivity to employees.