I was recently reading about incentives and their effect on performance. The hypothesis: is there a straight-line relationship between the incentive and performance? That is, will performance improvements keep up with increased incentives [No] or will there be, at some point, diminishing returns [Yes]? You noticed I put the results in brackets. Not surprising, is it?
The results show that once an incentive reaches a certain modest point, the performance increase does not match the increased reward. Another result is a rich incentive can cause poor performance. Read Dan Ariely’s The Upside of Irrationality to see the testing which led to this conclusion. An incentive, if too important or influential, can become the goal itself. Stress is introduced and stress can cause all sorts of complications. A little stress is manageable and can result in enhanced performance. A lot of stress will have the opposite effect and can cause serious illness.
We have incentive plans at Lazer Grant. How are yours, and are they working? I would love to hear your views.
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