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You've all spent more time reflecting on how bonuses, KPIs and other incentives can motivate employees than I have.
Tonight we are engaging in interdisciplinary dialogue.
1. I share ideas from my area of expertise. 2. You take those ideas and think how they can be applied in your area of expertise.
This is a page from a report by Deloitte. It says here:
“The illustration below shows how the various components of compensation can be used to achieve specific objectives and drive desired behaviours”.
What Deloitte, and the rest of the business world, that advocate the use of financial incentives to get employees to do what they want, are assuming is that if we tweak the compensation package people will change their behavior in predictable ways.
Slide 3 – FAIL. Unfortunately there is an overwhelming body of evidence dating back over 40 years which shows that financial incentives just don’t work.
They fail in the real world, they also fail in experiments. A few years back, my colleague Colin Camerer reviewed the results of 74 studies which tested performance-based financial incentives. Now in controlled settings of an experiment, you’d expect to see an effect if there was one, even if it’s hard to detect in the real world because of everything else that’s going on.
He found nothing. Overall the 74 studies showed that performance based financial incentives had no effect on performance.
So the experiments don’t support the idea.
Managers don’t think they work either.
For example a survey of 150 mid-sized American firms in 2015 and found that only 20% of employers say merit pay is effective at driving higher levels of individual performance at their organization.
So the managers don’t think it works.
Moreover if you ask the employees, you find that money is not what they care about most.
In 2014, Boston Consulting group asked 200,000 people around the world. Here are the results.
Worse still, the national management survey in 2015 surveying over 70,000 employees found that 30% of managers who were ranked as underperforming still received their annual bonus.
So the experiments show they don’t work, managers don’t think they work and employees tell us they are motivated by a lot more than financial incentives.
So why on earth do people think they should work???
The answer is rational choice theory.
Hands up who studied economics at some point during their education?
This theory predicts that financial incentives are the best way to motivate employee behavior.
I want everyone to understand why it’s assumed that financial incentives will get employees to behave in the ways we want.
Rational choice theory is simply the idea that people make choices to make them happy.
It assumes people want to be as happy as possible, we can say they have a goal and that is to maximize their happiness.
If we know about the choices a person can make, and we know how happy each choice would make a person, we can predict which choice, or collection of choices would make a person the happiest.
So rational choice is that idea of modelling how a person can be the happiest.
So how does that lead to the idea that financial incentives work?
A common assumption in economics is that having more money makes a person happier. It’s a broadly sensible assumption.
If we assume money = happiness, then it follows that a rational employee will choose the most profitable behaviour. So we can design ‘compensation packages’ where an employee must adopt the desired behaviours to maximise their income.
Sounds plausible, but as I just explained, the evidence is absolutely clear: when it comes to compensation packages the theory’s predictions are wrong. And the reason the theory is wrong, is because humans don’t behave in the way it assumes.
I now want to move on from economics and think about what other disciplines have to say about behavior.
There are a whole range of disciplines that study decision making. My research touches on all of them.
I’m going to start by putting on my evolutionary biologist’s hat.
We are the product of natural selection. This means that our minds have been designed to direct us to behave in ways which increase our chances of surviving and reproducing.
How does that fact help us think about decision making?
Of the many uses, a relevant one for us tonight is it helps us understand how when we can expect rational choice models will be good tools to predict how people behave. Evolutionary theory predicts that in some circumstances, the best way is to achieve the goal of maximizing fitness is to behave like a rational actor would.
I’m telling you this, because I hope understanding when we should be rational is an idea that you can translate into your area of expertise.
A good example of a situation that is studied by biologists using rational choice theory is foraging.
Here is a blackbird foraging for worms.
In general, an economic approach to decision-making is going to be appropriate when decisions are:
Repeated, time to decide, can learn what works, instant reward
In these situations, natural selection is unable to hard wire the best possible choice.
Instead, the best option for natural selection is to endow the individual with the mental machinery so that enables it to fine tune its behaviour based on the choices it faces.
It’s a testament to what a fantastic machine our unconscious mind is that when the conditions are right, an animal’s choices do match the predictions of rational choice theory.
[Slide 8-click] - However, there are many decisions animals make where a rational choice framework is not a useful tool at all.
An example of a decision that cannot be studied using a rational choice framework is a swift deciding when to migrate.
More generally, the situations were we don’t expect natural selection will favour us to behave rationally are:
one off, stressed, uncertain world, delayed reward, social choice
In one-off choices where individuals cannot learn, natural selection “knows” better than the what the right choice is.
In these situations, animal use automatic behavioural rules, which are mostly hard-wired in our genes. They do not rationally weigh up options. They do not try to learn.
This applies to the swift, who only decides when to migrate a few times in its life. It cannot learn when the best time to leave is, instead it relies on hard-wired rules to “decide”.
If an animal is stressed, or getting cues it might be in danger, then an animal’s rational calculating brain takes a back seat. It takes time to learn and if we are stressed, we don’t have time.
If we are getting cues that the environment is changing, it means that the behaviours we have previously learned, may no longer be the best. Therefore we revert to more automatic behaviours.
Also social – if we are not making the choice alone, many other factors come in to play. In particular the fitness costs of making choices in a social setting are more complex, so the costs of learning may be outweighed by the costs of breaching social rules.
If the rewards are not instant, if they are variable or delayed, then it’s harder to learn what works, so natural selection favours hard-wired behavioural rules.
Now there is this wonderful richness of research on when, and how rational animals are, but unfortunately very little of the ideas which have been developed have been applied to humans….yet.
Tonight the conversation we are having really is cutting edge.
The human behavioural work is led instead by psychology, so we will leave evolutionary biology and think now about the contributions from psychology.
There is a huge diversity of work that falls under the umbrella of Psychology.
The bit I’m going to focus on is the field of research that has grown up since the 1970s in response to the dominance of rational choice as a model of human decision making.
Essentially, what this field does is run experiments to identify situations where people deviate from the predictions of rational choice theory. The big difference between psychology and animal behavior therefore is that economic rational choice is always the starting point.
And what we have is an ever growing list of ‘cognitive biases’, ‘effect’ and ‘heuristics’ to document these predictably irrational behaviors.
[Slide 9-click.] There are now hundreds of these ‘biases’ published. Here are a few.
Some relate to how we respond to social situations – like the bandwagon effect – where people do something because other people are doing it, regardless of our own beliefs.
Or the authority bias – where we are more likely to learn from socially prestigious leaders.
Some relate to how we remember information – the overconfidence bias – where we over-rate the accuracy of our own views.
And some relate to how we view resources – the IKEA effect – that we value products we helped create.
Loss aversion – that we value losses more than gains.
Given how much knowledge is out there about behaviour, I think we can do better than the traditional model of executive compensation.
Biology and psychology show us that you can use your money in far better ways to get desired behaviours.
Here are three ideas that come out of the behavioural sciences which strike me as particularly relevant when thinking about motivating employee behavior.
1. The difference between the actual monetary value of a reward and how a person perceives the value.
We have not evolved to remember reality perfectly.
It’s not surprising for example, that we value things we already own more than things we don’t. Psychologists call this loss aversion.
As a biologist, loss aversion makes sense to me – an animal knows the value of the resource it currently holds, and it already has control of that resource, so it’s a far more certain and therefore more valuable asset than a resource it doesn’t have.
2. How the timing of a message changes its impact.
There are two things here.
First, related to the point I just made, we value the present more than the future, so we need to give people rewards as soon as possible after they do the desired behaviour.
As a biologist, this makes sense too. The future is inherently uncertain, so the longer you have to wait to receive a reward, the more likely it is that reward will not be there.
The second, relates to the idea that we expect animals to change their behavior more rapidly when they are stressed, or when the world seems uncertain.
Again, as a biologist this makes sense - if things are not going well, it’s a cue that your current choices are not working, so you’ve got less to lose by trying something new.
3. We are social animals
Economic approaches neglect the importance of social environment and social interactions. We are evolved to be social animals, living in groups. Many of our behaviours are shaped by that. Culture is an extremely important driver of our behaviour. I’ve not discussed cultural evolution tonight - but there is a flourishing field of research which thinks how culture shapes behaviour.
It’s your job to translate these insights into your area of expertise - that’s how interdisciplinary dialogue works best. But to get you thinking, I’m stick my neck out and share a few ways these sorts of insights might be applied to incentivize employee behavior.
This is very much back of an envelope type ideas - I am not an expert at all on bonuses and KPIs…not something as an academic I’m very comfortable with. But here goes…
The use of behavioural insights is still very new and there are not that many studies which investigate how we should use insights, certainly not in the workplace.
But before I end, I’ll share a couple of examples which show that using behavioural insights really can change behaviour.
To date, these sorts of ideas have only extremely limited applications to business. The best source of evidence is government. Here are four examples of how behavioural insights have successfully changed behaviour:
The default effect – the idea that if you are uncertain about a choice, you tend to stick with the default option. This graph compares the percentage of the population who donate organs, depending on whether it’s something you opt in to or opt out of.
Timely praise – the idea that reminding a person that others are aware of their progress can keep people motivated. What particularly matters here is timing the praise when the person needs it most. This study was done with a local council running Maths and English classes for jobseekers.
Social conformism – if people are told what the social norm is, a bit like the default, they are more likely to go with that. This was used by the cooperative funeral services when asking people if they would like to leave money to charity in their will. The ‘passion ask’ was ‘Most people like to leave something for good causes in their will, would you like to as well?’.
Future discounting – this is the idea that we value the future less than the here and now. This was used to encourage savings. So employees were either told by a financial advisor to start saving more immediately, or a second group were invited to register for a savings scheme that wouldn’t start until the following year. The result is much higher savings rates.
A cautionary note, the effects seen in most of the policy trials government is doing are modest, and many studies found that effects were not long lasting, or no effect at all when we’d expect one.
I think this is in part because the field of behavioural insights really only draws on a narrow range of insights from the cognitive bias research. I think, and I hope, what we’re going to see over the next decade is the injection of ideas from the broader church of behavioural disciplines that I’ve mentioned today.
We also need to acknowledge that our behaviour is incredibly complex and the use of behavioural insights is not a magic bullet.
In the future, I hope that businesses gain the confidence to scrap financial incentives that are only supported by an inappropriate model of behaviour.
That business leaders understand that to achieve the desired behaviours they will need to treat employees as individuals, with different circumstances, different personalities and goals.
In parallel to that, I also think that behavioural insights offer some easy wins, in particular by understanding how people respond to information, employers can communicate the right information at the right time to motivate their employees to perform the desired behaviours.
The world I am most familiar with is very far from the world of business. Tutorials I give students at Oxford are normally on topics like ‘the importance of inter-group competition for meerkat sociality’ and ‘collective decision-making in honey bees’.
I am not an expert in KPIs and annual bonuses. I’m an expert in behavioural science.
Interdisciplinary dialogue succeeds when you learn ideas from an area that you don’t know much about and think how they can be applied in your back yard.
So I’ve finished sharing ideas, now it’s your turn to think how to apply these ideas in your world.
Dr Claire El Mouden on why KPIs and annual bonuses are a waste of time
WHY KPIS AND
ARE A WASTE OF
CLAIRE EL MOUDEN
Deloitte Seminar, 2013 ‘Motivating top management through well-structured pay’
Boston Consulting Group,
‘Decoding Global Talent’, 2014.
time to decide
can learn what works
Deloitte Seminar, 2013 ‘Motivating top management through well-structured pay’
PERCEIVED VALUE ≠ ACTUAL
WE ARE SOCIAL ANIMALS
MAKE INCENTIVES APPEAR
We are more bothered by losses than gains
‣ “you already have a bonus, just do X to keep it”.
We are attracted by big prizes
‣ instead of £5000 bonus, enter 50 employees into a lottery for £100,000
(costing you £2000/employee)
People value gifts more than cash
‣ instead of a £5000 bonus offer your employee and her boyfriend a 5*
long weekend in Barcelona (costing you £2000).
We discount the future
‣ Link financial incentives to short term goals
People are more likely to do a behaviour if the costs/benefits are
‣ Remind people when they have 24 hours left to do something.
People are receptive to change long-term behaviours when in
transition (e.g. new job, new office, new house)
‣ If you want to new policies that change the office culture to work,
switch desks or work schedules at the same time?
MAKE INCENTIVES SOCIAL
Reward employees with social prestige instead of money
‣ public praise (e.g. a plastic trophy)
‣ personal email from the CEO
‣ we copy socially prestigious individuals (so reward the right people).
Focus competition between groups not individuals, particularly in stressful
People conform to the (apparently) most common behaviour (careful not to
make ‘problem’ behaviours worse!)
‣ e.g. “Most employees complete their timesheets on time”
Share rewards with the family, not just the individual
DEFAULTS TIMELY PRAIS
SOCIAL CONFORMISMFUTURE DISCOU
Scrap annual bonuses and generic KPIs
Tailor incentives to an individual’s circumstances, personality and
Use behavioural insights to communicate the right information at
the right time to motivate employees