IMPACT OF FINANCIAL INCENTIVES ON

MOTIVATION AND PERFORMANCE

 Financial rewards
• Extrinsic motivator
– tangible and visible to others
– distributed by other people (or agents)
• “Money is probably the most widely used
incentive” (Pinder, 2011, p. 396)
• Often used to inspire workers to achieve at
higher levels or to reach new goals, as
additional payoffs are contingent on improved
performance.
 However…
• Working in low paying jobs, even if change
would be possible (or switching from high
paying jobs to low-paying ones)
• Voluntary work
• 17% of people who won lottery stay in full-
time work (Smith & Razzell, 1975)
• Etc.
 Intrinsic Motivation
• Internally generated
• Intrinsic rewards:
– feelings of responsibility, achievement,
accomplishment, that something was learned from an
experience, feelings of being challenged or
competitive, or that something was an engaging task
or goal.
– sense of mastery and competence, through the use
of skills, by a sense of control and self-determination
(autonomy to choose how the work is done) (Deci,
1980)
– Performing meaningful work
 What motivates employees?
• A survey of 550 employees across multiple industries
• Ranking the top five factors that motivate them in
their jobs (Wiley, 1997)
• Top motivational factor employees cared about was
“good wages,” with “interesting work” coming in at
fifth place.

• Other research suggests that the most important

values across generations are intrinsic ones
– However, dropping for younger workers (Twenge, Campbell,
Hoffman, & Lance, 2010).
 Baby Boomers (born 1946-1964)
Generation X (born 1965 – 1981)
Generation Me (Millennials, GenY, nGen) (1982 – approx. 1999)
 Labor Theory (Smith & Walker, 1993)
Subjects respond to increased incentive by
expending more cognitive effort.

Premises:
1. mental effort is like physical effort - people dislike
both, and will do more of both if you pay them
more;
2. effort improves performance.
DANIEL PINK – THE PUZZLE OF
MOTIVATION
“We very quickly found out that nothing had an
effect on people like money – not naked bodies,
nor corpses. It got people riled up. Like food
provides motivation for dogs, money provides it
for people.” Brian Knutson
 Neurological effects of money
• Activation of nucleus
accumbens („the pleasure
center”) in the anticipation
of rewards (but not
punishments)
(Knutson, Adams, Fong, Hommer, 2001)

• NAc is implicated in the

elicitation of motivated
behavior (phasic dopamine
release accompanies
approach toward appetitive cues)
 Neurological effects of money
• Brain decodes the value of money and increases the
muscular force, even without awareness (Pessiglione et al.,
2007)
– Presentation of coins (1 pound or 1 pence) for the duration
of 17, 50, or 100 ms
– Information for participants – the stronger the grip, the
more money they will receive
– Even with subliminal exposition, hand-grip force was
higher for pounds than for pennies.
– Accompanied activation of several regions in the basal
forebrain, associated with emotional and motivational
functions.
 Neurological effects of money
• Monitoring brain activity of people playing a computer
game (Mobbs et al., 2009)
– 38 trials
– Before every trial information whether they can win 5 pounds or
50 pence
• In which condition did they do better?
 Neurological effects of money
• In high gain condition 64% of trials were successful

• In small gain condition – 74%

• Midbrain activity (related to reward motivation) was

significantly greater in the high-payoff condition than
in the low-payoff condition
– higher activity was related to
worse performance
 Potential explanations
• Activated regions (e.g. ventral midbrain, striatum)
related to dopamine release
• Dopamine is implicated in:
– increased motivational vigor (Dalley et al., 2007; Schultz,
2007; Wise, 2004)
– increased sensitivity to positive outcomes,
– impaired performance (Frank, Seeberger, & O’Reilly,
2004; Murphy, Arnsten, Goldman-Rakic, & Roth, 1996).

• Incentive-based motivation could result in

increased attentional narrowing (Easterbrook, 1959) or
actions without foresight (Robbins, 2002).
Neural correlates of monetary choices
(Kuhnen & Knutson, 2005)

• Investing task involving choice of risky (e.g.,

stocks) or riskless (e.g., a bond) alternatives
• Nucleus Accumbens activation preceded
switching to risk-seeking strategies
– anticipated gain outweigh anticipated loss,
• Insula activation preceded switching to risk-
averse strategies
– Insula – self-awareness, involved in experiencing pain,
emotions, love, enjoyment (music, wine…)
– anticipated loss outweigh anticipated gain
If we are internally motivated to work, can we
add external motivator and the motivation
would grow even further?
 Undermining effect (Deci, 1971)

• The presentation of incentives (external

motivators) on an initially enjoyable task
(internal motivator) reduces subsequent intrinsic
motivation for the task.

• “Crowding out” - providing extrinsic incentives

can undermine intrinsic motivation for
performing that behavior (Gagné & Forest, 2008; cf. Frey
& Osterloh, 2005)
 Undermining effect
• Many meta-analyses generally support the
premises of the undermining effect (Cameron,
Banko, & Pierce,2001; Cameron & Pierce, 1994; Eisenberger &
Cameron, 1996; Deci et al., 1999, 2001; Eisenberger, Pierce, &
Cameron, 1999; Rummel & Feinberg, 1988; S. H. Tang & Hall, 1995;
Wiersma, 1992)

• But, not all tasks are are intrinsically

enjoyable from the outset – difficult to base
on intrinsic motivation
 Undermining effect
• Not true for all sorts of tasks and all rewards
• Some incentives don’t lead to undermining effect
– receipt of the incentive on a completion-contingent
or performance-contingent incentive would impart a
competence-boosting message (information about
one’s performance), also boosting intrinsic
motivation.

• Controlling incentives (to get this reward you have to

complete the task) reduce but supporting incentives
enhance intrinsic motivation (Meta-analysis by Deci et
al., 1999).
DOES MONEY BRING US
HAPPINESS?
Sources of happiness
 Higher GDP is Associated with higher Life
Satisfaction (123 countries, Deaton, 2008)

Correlations 0.5 – 0.7 between average per capita income and well-being across nations
 Easterlin Paradox (1974, 2013)

The contrast between the positive cross sectional/short term relation and the long term nil
relation.
No significant relationship between the rate of improvement in life satisfaction and
the growth rate of GDP per capita in:
- 17 developed countries ( USA, Canada, Australia, developed countries of Europe)
- 9 developing countries (4 countries in Asia, 4 in Latin America, 1 in Sub-Saharan Africa)
- 11 transition countries (central and eastern Europe)
 Explanations of the paradox
• Relative income (social comparison)
– Changes in relative income have much larger effect on
happiness than changes in absolute income (30 countries;
Earlier, Ball, & Chernova, 2008)
– Rank-income hypothesis (only one individual might be the
highest earner; Boyce, Brown, & Moore, 2010)
– Income gap widening (Oishi et al;., 2011)
• Hedonic Adaptation
– Habituation (Clark, Friijters, & Shields, 2008)
• Other aspects – as GDP goes up so can environmental
degradation, crime, unemployment (controlling for
these factors lowers the GDP – happiness relationship)
 Explanations of the paradox
• As income grows rising earnings become less
important for life satisfaction
– increased importance of career-progression, use of time,
health, work-family balance, lifestyle (Zuzanek, 2013)
• Frustrated achievers (Becchetti & Rossetti, 2009)
– Improvement in income accompanied by reduced life
satisfaction
– Pursuing money deteriorates health and relationships
– Third of the population
• Country effects
– People in poorer countries made happier by money than
people in richer countries
 Are these questions different?
• “How satisfied are you with your life?”

• “Please imagine a ladder with steps numbered from zero at

the bottom to ten at the top. Suppose we say that the top
of the ladder represents the best possible life for you and
the bottom of the ladder represents the worst possible life
for you. If the top step is 10 and the bottom step is 0, on
which step of the ladder do you feel you personally stand at
the present time?” (The “Cantril Ladder”)

• “How happy are you these days?”

• What emotions you experienced yesterday?

 Money and happiness
(Kahneman & Deaton, 2010)

• Emotional well-being - the frequency and intensity of

experiences of joy, stress, sadness, anger, and affection that make
one’s life pleasant or unpleasant– emotional aspect
• Life evaluation – thoughts that people have about their life
when they think about it – cognitive aspect
• 450 000 responses (Gallup-Healthways Well-being Index)
• Income positively related to live evaluation
• Emotional well-being increases up to approx. $75 000
per year, with no further increase above it
– Small income = smaller ability to cope with difficulties (divorce,
sickness, loneliness)
• Money can buy life satisfaction (evaluation), but not
always happiness
Blue = reporting worry and sadness
Ladder = life evaluation

(Kahneman & Deaton, 2010)

 Other studies
• Satiation for life satisfaction (as assessed by Cantril Ladder)
occur—on average, at $95,000—with considerable
variation by country (Jebb et al, 2018) .

• Meta-analyses - the average correlation between income

and life satisfaction is typically between 0.17 and 0.21 (Lucas
& Dyrenforth, 2006; Lucas & Schimmack, 2009).

• Positive and negative mood demonstrate diminishing utility

of income

• Results for life satisfaction are mixed

– latest research also suggesting similar diminishing utility at
higher levels of income
Experience-stretching Hypothesis
(Gilbert, 2006)

• Experiencing the best things in life may

mitigate the delight one experiences in
response to the more mundane joys of life,
such as sunny days, cold beers, and chocolate bars
• Scarcity may increase savouring
– Ability to savour promotes happiness (Bryant, 1989,
2003; Bryant, Smart, & King, 2005; Meehan, Durlak, & Bryant, 1993;
Quoidbach, 2009; Tugade & Fredrickson, 2007)
– e.g. College seniors derived greater happiness
from the final weeks of college when they were
led to feel that graduation was impending,
suggesting that (Kurtz, 2008)
 Wealth and Savoring (Quoidbach et al., 2010)
• A significant negative correlation (r = -.21)
between income and self-reported savoring
ability

• Compared to the control group, participants

assigned to the money prime condition exhibited
significantly lower savoring scores

• Compared to those in the control condition,

participants in the money prime condition spent
less time eating the chocolate and displayed less
enjoyment.
WHAT SHOULD WE SPEND OUR MONEY ON,
SO THAT WE EXPERIENCE THE GREATEST BOOST
IN HAPPINESS?
 Money spent on others
(Dunn, Aknin, Norton, 2008)

• People given 5 or 20 dollars

• Have to spend the money until 5pm on the
same day
• Half was asked to spend them on themselves,
half – on others
• Happiness measured in the evening (phone
call)
• Higher happiness among those who spent
money on others (irrespective of the amount)
 How charitable giving
increases happiness?
• To many economists, charitable giving is surprising
- money is a good, so why are people willing to
give it away?

• Explanations?
– “pure altruism” motive - satisfaction from increases in
a public good
– “warm glow” - the sense of agency associated with the
act of voluntary giving.
 Giving and brain activity
(Harbaugh, Mayr, & Burghart, 2007)

• 19 females scanned using fMRI decided how to share real

money between themselves and the food bank (dictator game,
$100)
– Voluntary choice (charity-like)
– Mandatory transfers (tax-like)

• Activation of similar areas of the ventral striatum (reward

center) increased with the monetary payoff to both the
subject and to the charity.

• Subjects with larger activation responses to money for

themselves were less likely to give to the charity, and
subjects with larger activation responses to money for the
charity were more likely to give.
 Giving and brain activity
(Harbaugh, Mayr, & Burghart, 2007)

• Altruists gave money nearly

twice as often as egoists
(58% versus 31%)

• Reported satisfaction ratings

were about 10% higher for
voluntary than for the mandatory
transfers

• Monetary payoffs to oneself, observing a charity get

money, and a warm-glow effect related to free
choice—all activate similar neural substrates.
 Wealth, Time, and Happiness
• Surveys of approx. 4 000 participants (Quoidbach et al.,
2010)

• People who spent money to outsource disliked

tasks in a typical month reported greater life
satisfaction (d=0.24).

• This effect was largely unchanged after

controlling for key demographic variables,
– household income, age, gender, number of hours
worked per week, marital status, and the number of
children living at home.
 Wealth, Time, and Happiness
• Participants provided with $40 to spend on each of
two weekends (Whillans, Dunn, et al., 2017).
– On one weekend, participants were to spend this money
on a time-saving purchase, in “any way that would save
time.”
– On another weekend, to control for the experience of receiving and
spending a windfall, the same individuals were asked to spend
their $40 payment on a material purchase for themselves.

• People reported higher positive affect (d=0.33) and

lower negative affect (d=0.30) on the day they made a
time-saving purchase compared to the day they made
a material purchase.
 Consumption and happiness
• Greater happiness when using money to
purchase experiences, as opposed to material
goods (Van Boven & Gilovich, 2003; see Gilovich & Kumar, 2015).
• Before consumption, waiting for material goods
tends to increase frustration, whereas waiting for
experiences increases the positive feeling of
anticipation (Kumar, Killingsworth, & Gilovich, 2014).
• During consumption, experiences spur more
intense positive emotions than material goods,
– although material things offer more frequent doses of
positive emotion (Weidman & Dunn, 2016).
 Consumption and happiness
• After consumption,
– experiences tend to provide more lasting pleasure (e.g.,
Weidman & Dunn, 2016)
– become more tightly linked to people’s identities than
material goods (Carter & Gilovich, 2012; Keinan & Kivetz, 2011).
• Experiential (vs. material) purchases are less
susceptible to (negative) social comparison
– people can clearly assess whether their neighbor’s
television is larger, but find it harder to assess
whether their neighbor’s experience in Paris was
superior (Carter & Gilovich, 2010).
 Effects depend on SES
• Higher SES individuals gain more happiness
from experiential purchases,

• Lower SES individuals show no difference or

even greater benefit from material purchases
(Lee, Hall, & Wood, 2018).
 The top five regrets of dying
(Ware, 2012)

1. I wish I'd had the courage to live a life true to

myself, not the life others expected of me.
2. I wish I hadn't worked so hard.
3. I wish I'd had the courage to express my
feelings.
4. I wish I had stayed in touch with my friends.
5. I wish that I had let myself be happier.