Does Monetary Incentive Improve Performance? What Does it Really Take to Motivate a Sales Force? 0

When money becomes associated with work, the work can become dull, tedious and painful. If traditional cash bonuses don’t really work, then what does?

It’s an age-old question; something we grapple with many a time. Should we give a monetary incentive to improve performance and does it really release effort? There have been many explanations and a variety of research articles on this topic. Can we draw some parallel from the phenomenon of cognitive dissonance?

This article explores:

  • Cognitive dissonance and rewards
  • Cognitive dissonance – Over Justification and Internal Justification
  • Sales and Incentives
  • A final nail in the coffin: Monetary or Non-Monetary Rewards?

The other day I was listening to a podcast from Yale University on Cognitive Dissonance Internal and Over Justification Phenomenon and found it extremely interesting in the way it is linked to rewards. Cognitive dissonance as a concept is applicable to various fields and all the more applicable to organisational psychology.

What is Cognitive Dissonance?

The basic concept of the cognitive dissonance theory is that we seek consistency within our beliefs, values, emotions and attitudes. Hence, the simultaneous relationship among them need to be in harmony, otherwise, we have a cognitive dissonance which results in discomfort. The state of discomfort is what drives our motivation to adapt our cognition in a way that the source of the dissonance becomes harmonious allowing us to regain a state of comfort.

Well, the above definition might be a little difficult to comprehend without an example; let’s actually take an example of a psychological experiment done by Festinger and Carlsmith (1959) at Stanford University.

The experiment involves two groups. Both the groups are given a ridiculously boring task of moving spools in a box for 30 minutes and moving some pegs around for 30 minutes.
Experimenter gave one group 1$ each and another group 20$ each to the task (Both are significant amounts at that time and 20$ would be approx. 167$ today with inflation). Experimenter influenced the individuals in the group who were given 1$ by saying how the task was interesting and shared some snippets of great learning. The group got convinced by the words of the experimenter. Post this, they were told to go and meet the other group who was given 20$ each and tell them that they found it interesting and great. Well, now comes the interesting part! When individuals from the group which were given 1$ each for the task met those who were given 20$; those who were given 20$ said that it was extremely boring and the group which was given 20$ for the task gave it a poor rating.

Above is an interesting play of cognitive dissonance. Psychologists are interested in the way we deal with two thoughts that contradict each other – and how we deal with this contradiction. Initially, you thought it was boring but you got convinced eventually when someone tells you nice stuff about the task which you just did. Then someone pays you 1$ to go and tell another group that it is interesting. You don’t lie and you are honest because you don’t want to sell your conscience and honesty for 1$ sum of money. Your mind reconciles to the fact that the task was not bad and it was interesting and would want to do the task again.

While someone who was given 20$ thinks it’s a great sum of money and infact obnoxious and this justifies telling the world that task was boring while they did the task as they were given a significant amount of money. Here 20$ does not in any way motivate people to think the task is interesting and wanting to do it again.

“While rewards play an important role one needs to keep cognitive dissonance in mind while designing a rewards program. Over Justification and Internal Justification have their role to play in cognitive dissonance and one should be totally cognizant of this fact.”

Over Justification Phenomenon:

Over-justification occurs when we view our behaviour as caused by the situation, leading us to discount the extent to which our behaviour was actually caused by our own interest in it.

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Mark Lepper and his colleagues (Lepper, Greene, & Nisbett, 1973) studied the over-justification phenomenon by leading some children to think that they engaged in an activity for a reward rather than because they simply enjoyed it.

Group of children was given markers to play around. The experimenter randomly assigned to one of three experimental groups. They started playing with the markers and observations were noted. After some time they were given further instructions:

Group 1: Was told they would receive a significant reward after they play
Group 2: Was not told anything but got a reward
Group 3: Was not told anything and given no reward

After they were given rewards they were sent back into the same room. It was observed that Group 1 was least active now and Group 3 was most active (though no reward). Why?

Group 1 started linking their playing with reward and was no longer that interested in the activity. Group 3 was still continuing to play with the same fervor. Group 2 activity was in between the two. In group 1, the reward was probably perceived as an attempt of getting someone to get you to do something and not as a great motivator.

Same is true even when parents would indicate that you would be given a bicycle or something precious for coming first in class. However, recognition, pat on the back, praise of accomplishment is more effective and increases our liking of the activity and improves our performance significantly. The same goes for the grown-ups: money becomes associated with work and work can be dull, tedious and painful. So when we get paid for something we automatically assume that the task is dull, tedious and painful—even when it isn’t.

“Over-justification occurs when we view our behaviour as caused by the situation, leading us to discount the extent to which our behaviour was actually caused by our own interest in it.”

This is why play can become work when we get paid. The person who previously enjoyed painting pictures, weaving baskets, playing the cello or even writing blog posts, suddenly finds the task tedious once money has become involved.

Internal Justification:

Volunteers tend to be extremely dedicated to the cause that they work for, relative to the employees of the organization who get paid for doing good for the society. Volunteers don’t get paid well for the kind of efforts they put in. They justify their work by strongly believing in the work that they do.

The behaviour of dedicating time and effort not for financial reward needs to be justified, so attitude is strengthened to justify the behaviour.

What to do with the force?

Infact many companies do have a very high base salary and 10%-15% variable pay depending upon the company’s topline, bottomline but scheme varies for the sales force. Is this really the optimum strategy Researchers studying sales force compensation have for long now been guided by the principal-agent theory. This theory, from the field of economics, describes the problem that results from conflicting interests between a principal (a company) and an agent (an employee). To ensure employees don’t slack of; most schemes have stock options and incentives etc.

“The basic concept of the cognitive dissonance theory is that we seek consistency within our beliefs, values, emotions and attitudes. Hence, the simultaneous relationship among them need to be in harmony, otherwise, we have a cognitive dissonance which results in discomfort. The state of discomfort is what drives our motivation to adapt our cognition in a way that the source of the dissonance becomes harmonious allowing us to regain a state of comfort.”

Salespeople were paid by commission for centuries. Why?

  • Easy to measure the short-term output of a salesperson
  • Traditionally sales had little supervision
  • Studies show typical sales person takes high risk and hence high appetite.
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Dung 1980s, Rajiv Lal and several co-authors researched a lot of firms and understood that incentives should be designed according to Industry sales cycles. For Instance, selling planes of Boeing might require several years of talking before a deal fructifies while a door-door salesperson might be able to book revenue every hour.

In the late 1980s, there was another research article by economists Bengt Holmstrom and Paul Milgrom. In their theoretical paper, which relies on a lot of assumptions, they found that formula of straight-line commissions (in which salespeople earn commissions at the same rate no matter how much they sell) is generally the optimal way to pay sales representatives.

It could also be beneficial to have individual incentive plans, for instance, quarterly, annually, depending upon territory, depending upon whether someone has accrued it by luck( for instance sales accruing through external factors like a sudden population increase in a new area increasing sales in Walmart). However, administering this would be really difficult and also it is possible that employees share data with each other leading to further disruption.

How should you design the plan?

  1. Keep it simple. Have a good base pay
  2. A balance between the base pay and variable should be optimum also keeping in mind the industry.
  3. Don’t keep upper cap- Misra and Nair UCLA 2011 studied an optical fiber company and understood that keeping a cap for top performer actually hurts the company and removing it improved the revenues significantly.
  4. Payout periods depending upon industry could be a week to a year. However, shorter payout periods kept low performers engaged. Top students will do fine in a course in which the entire grade is determined by a final exam, but lower-performing students need frequent quizzes and tests during the semester to motivate them.
  5. It is important to have non-monetary contests or recognition programs.

Why are non-monetary rewards important?

  1. It creates an everlasting memory- Cash will be used to purchase something which will disappear into a memory void.
  2. You end up spending cash on necessities which need not be satisfying- Removes the guilt of choosing something indulgent.
  3. Money lacks braggability rights- You always would brag about the exclusive trip to Switzerland with your family which you received for topping the charts.

Inference- Monetary incentive might not actually create an everlasting impression. However, the type of non-monetary incentive you are providing then becomes extremely important.

“Recognition, pat on the back, praise of accomplishment is more effective and increases our liking of the activity and improves our performance significantly. The same goes for the grown-ups: money becomes associated with work and work can be dull, tedious and painful. So when we get paid for something we automatically assume that the task is dull, tedious and painful—even when it isn’t.”

While rewards play an important role one needs to keep cognitive dissonance in mind while designing a rewards program. Over Justification and Internal Justification have their role to play in cognitive dissonance and one should be totally cognizant of this fact.

One should consider several facets while designing a sales force plan. The non-monetary rewards program is very important if not more than the monetary aspect of the sales incentive.

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