Benefits and Compensation, Talent

How Employee Incentive Programs Can Benefit from Behavioral Economics

When James Brewer stepped into his role as U.S. Director of Reward and Recognition at pharmaceutical company Eli Lilly in 2011, it was going through a transformation. He was tasked with coming up with a new incentive plan for employees—particularly its sales reps—that aligned with the company’s new corporate strategy, Brewer explained to an audience at WorldatWork’s Total Rewards 2017 conference in Washington D.C.  Monday. In other words, he needed to be able to motivate and engage employees in a way that fit with the company’s new direction—that was now both customer and team-focused.incentives

Having been intrigued by articles about behavioral science, he reached out to Kurt Nelson, PhD, President of The Lantern Group, a “communication and behavior change company.”  Nelson introduced him to the concept of the “Four Drive Model of Employee Motivation”—a motivational theory created by two Harvard professors in 2002.

The four drivers are identified as follows:

  • Acquire and Achieve—We are driven to acquire things, resources, or money (which is still a powerful motivator Nelson said. Noting there may be diminishing returns, as employee pay increases, employees continue to increase performance—people making $150k are still motivated by a cash bonus, he noted.)
  • Bond and Belong—In short, this is the social component of work. We like to feel we are part of a group; we want to create positive relationships with our boss, peers, customers, etc. and “fit in.”
  • Create and Challenge—We are driven to create and improve. We want to be challenged—it’s a very powerful motivator, Nelson said
  • Define and Defend—We are driven to defend ideas and our “tribe.” An organization—like a family—can be a tribe if it aligns with your purpose or objectives (like a volunteer organization—people join because there’s a mission or larger purpose), Nelson explained.

(You can learn more about the four drives from many sources, including The Lantern Group.)

If a company satisfies any one of these drives for its employees, Nelson explained, research shows it will result in a 3% improvement in employee performance.  If they satisfy all four drives, however, “it’s exponentially higher” Nelson said—a 36% improvement in performance.

Brewer and Nelson worked together to create an incentive program with many facets in order to help satisfy all four of the drives.   They noted that no one incentive program is right for everyone, and that it must align with your organization’s strategy in order to properly motivate and impact your workforce.

For example, Eli Lilly turned to team-based incentives (vs. their traditional individual incentives) to support their new team-focused strategy.  Likewise, to align with their new customer focus, they surveyed customers for their level of satisfaction with their sales employees—and factored it into incentive pay.

However, regardless of what incentive plan you have or implement, Nelson discussed some concepts of behavioral economics that could potentially benefit anyone responsible for total rewards within their organization.  Here are a few of them.

Hedonic motivation. This was a key part of Eli Lilly’s new incentive plan.  Hedonic, or luxurious, awards are things we wouldn’t generally buy for ourselves and are often more motivating than cash.  Not only are these types of rewards the kind an employee can be proud of or give him bragging rights—e.g. “I won that!”—but there is no “indulgence guilt” that would have come from spending their own cash on a luxury item.

Brewer and Nelson agreed that noncash rewards provide a different kind of motivation, also a reward that better satisfies the “drives” above—not only does it help satisfy the Acquire and Achieve drive (accomplished by cash rewards), but the Bond and Belong and Create and Challenge drives too.

Perceived fairness. Nelson explained that people are highly influenced by a sense of fairness or lack thereof and that employers should ensure that incentive programs are fair, since employee perceptions impact behavior and attitude.

Framing. In terms of communication of an incentive program, Nelson explained that how you talk about something impacts the way people perceive it—such as a loss or gain.  He used the example of people responding more strongly to a monetary “penalty” for registering for an event “late” than an equal “discount” for registering “early” (93% vs. 67%).  The result is the same—e.g., $50 saved, or not—but the way the communication was framed made a difference in how it was perceived.

Social proof (the bandwagon effect). People are more likely to take action or behave in a specific manner if they see others doing the same thing, Nelson noted.  Eli Lilly used numbers and testimonials in their communications with employees on the incentive program they chose to drive social proof.

For more information on these and other behavioral science concepts, visit The Lantern Group.

Chris CeplenskiChris Ceplenski is Managing Editor, News. He has managed several BLR products related to employment law and human resources including newsletters, manuals and websites. He has authored hundreds of articles that have appeared on and produced dynamic content such as podcasts, videos, infographics, and slideshows. Prior to joining BLR in 1999, he worked as an editor for a book producer and literary agency and as a college writing instructor. He received his B.A. from Eastern Connecticut State University and an M.A. in English from Clarion University of Pennsylvania.

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