Incentive Theory of Motivation: Definition, Examples, and How It Works

Incentive Theory

30 people from my team stared at me. As their manager, I had nothing to motivate them.

Our day-to-day work didn’t make any logical sense to my team. The company designed the incentive theory to deceive the stockholders. The results of the incentive made the company’s growth look faster than it actually was.

The incentives drove the team to do things that weren’t in the best interest of the client. Over time, our team’s morale declined as the wrong incentives made us unproductive.

A decade later, the company got a class lawsuit and forced to chang their incentives.

How Does Incentive Theory of Motivation Works

Every day, we make 100 plus decisions in our personal life, work, and social settings. Our teachers, bosses, friends, or even our parents never talked about the importance of incentive theoryMost of our decisions in the day depend on incentives. Let’s look at an example as a great motivator to use the right incentives.

FedEx is a $40 billion-dollar company. In their earlier years, they were on the brink of shutting down. FedEx couldn’t find a way for their night shift to prepare the packages for morning delivery.

FedEx tried overtime, they tried better pay, discipline — Nothing worked.

Until they experimented with pay per shift. Once the employees loaded all the packages, they could go home. They loaded the packages on time. The new incentives worked for this particular behavior.

Successful people and companies understand incentives and use different incentives in different situationsThe right incentives are a major external factor in productivity.

The 2 Types of Incentives: Which One Do You Use?

Incentive theory says that we are driven by pleasure and rewards, or to avoid pain and punishment. They come in two types: intrinsic and extrinsic:

Intrinsic Incentives

Intrinsic incentives attribution involves internal drives like pleasure, freedom, or mastery. These incentives are hard-wired in all of us. These are non-monetary incentives. According to instinct theory, all organisms are born with innate biological tendencies that help them survive.

We love sugar because our biology wants us to reserve fat. The innate internal desire is the taste.

Sex feels amazing because we need to procreate. The innate incentive is a pleasure. This example shows how nature uses positive incentives to enhance our intrinsic motivation.

Extrinsic Incentives

Extrinsic incentives attribution involves external rewards or avoidance of punishment. Some examples are salary, grades, promotion, or applause.

We show up to work, our extrinsic motivation is salary. When we get paid every two weeks, the incentives are used for positive reinforcement.

When Frank Sinatra died, he left a clause in his will. If anyone contests the will, they are disqualified. It meant the inheritors had to accept his will.

Sinatra set up the incentive value to avoid will disputes. This example shows us how to use negative incentives to drive the desired outcome.

How Do You Develop Incentive Theory That Leads to Results?

To further understand incentive theory, let’s look at a video game example.

The Super Mario video game follows Mario’s adventures. His adventure is to rescue the princess. The game rewards him with the ability to throw fireballs and turn into a giant Mario. Any misstep and he is dead.

The game shifts the player’s behavior to avoid pain and follow pleasure.

The right way to develop incentive thinking is to observe human behavior. If you manage a team, parent a child, or want to improve a skill, spend a lot of time thinking about incentives. It will pay off in the long run.

What incentives are behind any behavior? Start with your own life.

  • Personal life: I meditate daily [BEHAVIOR] to stay emotionally healthy [REWARD].
  • The world around me: CNN labels everything as breaking news [BEHAVIOR] to get better ratings [REWARD].
  • The society: People follow traffic rules [BEHAVIOR] to avoid traffic tickets [PUNISHMENT AVOIDANCE]

“Never, ever, think about something else when you should be thinking about the power of incentives.” Charlie Munger

The Right Way to Use Incentive Theory

A consistent follow-through to anything depends on incentives.

Grandma’s rule states eat your carrots before dessert and do your homework and you can watch television.

And what did you do as a child? You ate your carrots and did your homework. Outside incentives worked.

You can develop incentive theory for anything:

  • Incentives to wake up earlier: Wake up at 6 am or donate $60 to the charity you hate.
  • Incentives to get your kids to read more: One hour of reading before watching TV.
  • Incentives to boost employee performance: Profit share with the employees.

Make incentives a win-win for everyone involved. You want to be fair in incentive value or the other person will eventually figure out.

Tip: You can always borrow an incentive theory from successful people or companies. They likely went through many trials and errors to find their right incentives for different situations.

Example: Japan’s Brilliant Display of Using the Right Incentive Theory

Japan figured out employees want to become wealthy so they can get a certain social status. Japanese employees look to have a better title or pick their own projects.

Japanese companies skip the raise and give them status directly. This is a great example of using non-monetary incentives to drive a particular behavior.

It turned out a status upgrade fulfills the need to make more money. It also leads to better morale and retention.

Sometimes the solution to a behavior problem is to revisit incentives. A good incentive theory of motivation makes sure external rewards align with the desired outcome.

Warning: Poor Incentive Theory Can Backfire

Incentives can be a motivator but the best of intentions can blow up.

Example: How the Wrong Incentive Theory Failed in Mexico City

In 1989, Mexico City faced a brutal smog challenge. They banned the public to use their car for one day of the week based on their license plate. They hoped to have 1/7th of the cars off the road.

Good intention and a decent incentive theory of motivation, but it backfired.

Most people bought a second car to drive on the seventh day. Mexico City now had about 14% more cars in the city. The second cars were old beat-up cars so the net pollution got higher with these cars.

People will game incentives. Most of the gaming happens on the subconscious level. This is the reason to think through the incentives.

Use the Right External Incentives to Reinforcer Productivity

You only have limited time to accomplish things, so use incentives in your favor.

Over the next few days, give yourself the time to observe the outside incentives around you. You will spot where the incentives work or need improvement.

Imagine your life using incentives to have a motivated behaviors to skyrocket your productivity at work and personal life. Motivate yourself and others around you by creating the right incentives.

Success will follow by having the right incentives over the long-term.

The answer to your breakthrough might be six inches between your ears: Thinking in incentives.


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