Incentives: The Truth About Giving Praise

An incentive is anything which can persuade a person, group, or organization to alter their behavior. An incentive pushes an individual to do something to produce a desired outcome. A disincentive, on the other hand, discourages certain behavior.

Incentives are powerful tools to influence people. They are used at the individual, organizational, governmental, and societal level. Any type of incentive is employed to increase investment—of time, effort, or money—toward a particular cause.

Incentives are mainly split into two groups: intrinsic and extrinsic. An intrinsic incentive is when somebody is motivated to act without seeking external reward or facing external pressure. Extrinsic incentives include every external reward or punishment—pay, recognition, awards, fame. A dancer who practices for multiple hours per day without any external reward is operating on an intrinsic incentive. A dancer who only does it for the pay after their performance is operating on an external incentive.

Both types are fundamental in motivating desired behavior. Monetary incentives are perhaps the most common one of all, seen in the workplace. Salaries, paid leave, profit sharing, bonuses, stock options, paid vacation time, are examples of monetary incentives. Some are performance-based, paid based on an employee’s productivity over a certain time frame. Others are commision-based, paid in direct correlation to performance. Still others are encouragement-centered, such as extra pay for overtime or work beyond the firm’s expectations. Monetary incentives are crucial for the productivity of businesses and individuals. They directly affect the effort and performance of employees.

Non-monetary incentives can be as or more impactful in affecting behavior. They refer to any rewards that are not directly related to financial compensation. Some are extra holidays, recognition, praise, fame, opportunity for growth or development, gifts, family benefits, more interesting projects to work on. By providing personal fulfillment, autonomy, status, or other non-financial elements for an employee, the firm ensures they feel appreciated for their efforts and thus strikes a win-win: the employer does not invest any more financial resources whilst the employee feels and performs better.

The benefits of using incentives: well-designed, they inspire effort, perseverance, and persistence; they can encourage good and discourage unwanted actions; they help align individuals with large-scale objectives; they strengthen habits and patterns needed for achievement. The potential risks of incentives: poorly designed, they can result in unintended or harmful behaviors; excessive use can lower intrinsic motivation; they might be abused to promote short-term gain over long-term progress; perceived unfairness in incentive use can breed resentment.

Real-life applications of incentives:

• Work: the use of bonuses, benefits, promotions, and recognition to foster employee performance;

• Parenting: rewarding good and penalizing bad behavior to encourage positive habits in children;

• Education: grades, scholarships, and praise can incentivize students to work toward academic goals;

• Sales: discounts, loyalty points, and exclusive deals can incentivize consumers to buy into products;

• Social media: likes, shares, and reposts act as incentives for users to be engaged on platforms;

• Policy: tax, subsidies, and other legal vehicles are used to encourage savings, investments, and law adherence;

• Relationships: small gestures and tokens of appreciation work to strengthen bonds;

• Personal: celebrating progress and other small incentives can motivate skill-building, learning, and other personal development pursuits.

How you might properly employ incentives as a mental model: (1) recognize the importance of both extrinsic and intrinsic incentives and don’t rely too much on either; (2) design tailored incentives for the audience whose behavior you are trying to affect; (3) ensure the incentives do not sacrifice the long-term objectives; (4) use rewards sparingly to avoid undermining intrinsic drive.

Incentives are central concepts to understanding the behavior of people and markets. Supply and demand are dependant on incentives—higher wages attract more workers, lower prices increase demand. Similarly, organizations depend on incentives—salary, paid leave, bonuses—to align employees with business goals. Incentives are often framed as carrots—or rewards—and sticks—or penalties. Finding the balance of carrots and sticks is crucial to motivate someone towards any given action. “You catch more flies with honey than vinegar.” and “What gets rewarded gets repeated.” reveal key concepts: positive incentives should be prioritized over negative ones.

Questions to reflect on:

1. How do incentives shape your behavior in personal projects?

2. In what ways can aligning incentives across teams result in more collaborative outcomes?

3. What are the potential risks of relying on extrinsic rewards?

4. How can incentives be structured to encourage sustainable long-term behavior instead of short-term gain?

5. In what situations might a lack of proper incentives result in decreased performance and/or engagement?

Quotes that capture the core idea of incentives:

1. "People work for money, but go the extra mile for recognition." - Doug Conant.

2. "Incentives are the cornerstone of a thriving organization; they set the stage for what is rewarded and, in turn, what is valued." - Unknown author.

3. "The art of leadership is not to give all the answers, but to create an environment where people are inspired to look for them." - Unknown author.

Example use cases:

1. Employee performance: designing bonus structures that reward both individual achievement and collaborative effort ensures that team goals are met while valuing personal contributions.

2. Customer loyalty: implementing rewards programs that offer regular customers points or discounts for purchases can turn occasional buyers into long-term brand advocates.

3. Product: creating innovation challenges for departments in your business to submit creative, unheard-of solutions can foster a culture of breakthrough ideation.

4. Marketing: structuring referral incentives that motivate current customers to introduce new clients can expand market reach and perhaps even turn into a positive feedback loop.