We all use incentives, and business is just an example. We use incentives when we reward our children for good behavior, when we help and support of friends, when we encourage employees or volunteers in our organizations and even when we reward ourselves for our own accomplishments.

In this article I will discuss four guidelines about when incentives work, when they don’t backfire and when they don’t undermine our behavior.

  1. Incentives work when they establish social norms;
  2. Incentives work when they expose us to a good outcome, in business or in personal life;
  3. Incentives work when internal motivation is absent, and
  4. Incentives are better at encouraging good performance than at shaping our decisions.

1. Incentives work when they establish social norms

We’ve all seen the pro-conservation messages in hotel rooms, things like ‘help save the environment by reusing your towels”, those messages work best when they say something that suggests a social norm, something like “80% of guests in this hotel were willing to reuse their towel!”. This is not only polite, is also great for business.

Other incentives like small taxes on disposable plastic bags have had mixed success, often it’s because reduced consumption one area is offset by increased consumption in another, but they have been most successful when they establish a social norm. People now see the prosocial behavior as what good people do rather than as the outcome of an economic transaction.

2. Incentives work when they expose us to a good outcome, in business or in personal life

Suppose you want to encourage your kids to eat more vegetables. They hate broccoli, they won’t even try carrots and they push away any plate with a green bean aboard. Could an incentive help? Absolutely! Researchers created a randomized trial in which they varied whether or not kids were paid for eating the vegetables.

The kids who were paid were more likely to try their vegetables and they ate them whenever they were paid for eating and guess what happened? The kids started liking the vegetables and they ate more vegetables after the payments ended. The incentive broke down their initial resistance to the vegetables and then they developed a taste for those vegetables over repeated exposures.

3. Incentives work when internal motivation is absent

People that pay for any business to work are willing to pay money to ride their bikes, to read novels or to work in their gardens. Many people find those all interesting tasks, but people must be paid to work as a bicycle courier to proofread magazine articles or to clear other people’s gardens.

These tasks aren’t interesting or personally relevant and so incentives are critical. One solution for this problem is to provide minimal cost incentives, shaping behavior by providing positive feedback or by noting milestones rather than by giving money. Many online sites have adopted this approach in what is known as gamification, converting otherwise boring tasks indicates.

4. Incentives are better at encouraging good performance than at shaping our decisions

From the many examples I provided you might think that incentives always undermine internal motivation. Well, that’s not always true. Incentives work very well in many situations for example people work harder and for longer periods of time when they can earn more money.

That’s a core principle of labor economics and it’s easily observed the worker’s willingness to work overtime for a higher rate of pay, but research indicates that incentives are less good and motivating people to engage in an action when they have free choice.

Is reward undermining inevitable

Now, think back to what’s common to these examples: donating blood, children drawing on easels, playing a stopwatch game and supporting a nuclear storage site. In all these cases there is a free choice to take one action or another, and what economic incentives can undermine is our motivation for specific choices for better or for worse.

So, is reward undermining inevitable? No! Take the example of  research on this phenomenon blood donation. I told you that paying people for donating blood actually decreases her willingness to do so and that’s true, donation rates can go down.

But, that reward undermining can be counteracted by giving potential donors an additional option: if they wish they can donate their payment to charity. When people are given that option donation rates rise again. To be sure a donation to charity, is still an incentive, it’s just the right incentive to encourage the right behavior.