Incentives Are Overdone

We read a lot about situations where incentives lead to “bad” or less than ideal behavior (my current favorite example is every morning on my way to work, the exit to the subway is only two people wide — there is a huge line at the bottom as one or two people ignore the “NO ENTRY” sign and trickle in anyway). But I think we overemphasize the importance of incentives — paying people only gets you so much

I see this a lot at work. We design compensation plans for call center associates, and after you add 5–7 elements, any additional elements are too small a piece of the pie to matter that much. Good incentives are notoriously hard to design. That said, at some point, you need to depend on something other than compensation to get people to behave the way you want to. That’s where culture and environment come in. If you want people to do more than the bare minimum at their job, you need to give them a reason to do it. An environment where they have to try hard not to do it is one way, a strong culture that puts emphasis on a behavior regardless of the actual benefits (think of Yelp, Amazon, and Wikipedia users, all of which create content like reviews for free, while allowing the companies to profit off them) is another.

Don’t get me wrong, getting pay for performance right is important — but it’s not the end all be all we often make it out to be.

Editor's Note 5/17/2021

Incentives are extremely powerful. A more nuanced title would be something like: incentive design is overdone.