Incentives

What are incentives?

Incentives are features of a situation, such as prospective rewards or penalties, that change the attractiveness of actions. Their intended effect and their observed effect are separate questions.

A field example

In Gneezy and Rustichini’s daycare study (2000), introducing a fine for late pickup increased late arrivals; removing it did not restore the previous level. The authors argued that a fine can change how an incomplete agreement is understood. That interpretation is plausible, but the study did not isolate a single psychological mechanism.

Broader evidence

Cerasoli and colleagues (2014) found that incentives and intrinsic motivation can both predict performance, with different relationships for quantity and quality. External rewards do not invariably undermine motivation.

What makes a useful incentive?

Specify the behavior you want and what earns the reward or incurs the penalty. A bonus for the number of cases closed, for example, may encourage a different response from a bonus that also depends on the quality of the work. Rewarding people for moving a single measure can make that measure stop tracking what it was meant to track, a pattern known as Goodhart’s law. Then compare actual results with a useful baseline.

The daycare study is a warning against assuming the intended effect will occur. It is not a rule that fines fail or that paying people destroys motivation. The size, conditions and meaning of an incentive all deserve attention. For a worked example of designing an incentive scheme for a team, see the guide.