Managing Business Risk

Managing Business Risk

Tuesday, 20 November 2012 15:15

The power of incentives

US psychologist Barry Schwartz refers to an experiment in Switzerland in the 1990s when the government planned to run a referendum on where to dump nuclear wastes.


Psychologists asked the well-informed citizens if they agreed to a nuclear waste dump in their community: Around 50% said yes, despite their understanding that it was dangerous and it would impact their property values; but they also knew it had to go somewhere and they felt responsible.


Then psychologists added a financial incentive to the same question. If we give you six weeks’ pay each year, do you agree to have a nuclear waste dump in your community? Only 25% said yes.


One would expect that by adding a financial incentive more people would say yes.


Instead, what seemed to happen is that the incentive shifted people’s focus (irrationally) away from the social responsibility and towards the financial incentive. And six weeks’ pay seems not “worth it” for most residents.


What Schwartz argued is that incentives can change the focus from “what are my responsibilities?” to “what serves my interests?”



What does this mean to your business?


Incentives, both for clients and employees, may backfire.


Take, for instance, the incentive bonus and consider how would an employee react or feel if they receive a lower bonus than last year? This is despite it being well known that bonuses are discretionary and subject to many factors outside the direct control and performance of the employee, such as overall company performance.


What about the reaction of an employee who receives a higher bonus than last year, but less than his colleagues?


And what about the clients who now expect the usual al a carte Christmas dinner invitation, only to learn you do not have these events anymore?


From experience, these types of incentives can in fact have the exact opposite (albeit irrational) impact on employees’ moral.


By the way, if your solution is to try to discourage employees from disclosing their bonuses to their colleagues, don’t then ask them to be open and trusting!



What can be done?


There is no one answer that fits all. And to find the right incentive that has the desired impact on your enterprise and work culture, you must keep the following in mind:


1. Money is not everything


Incentives and rewards should not only be financial. For instance, it is common for many employees to value recognition and work-life balance far more than financial rewards.


Do not shift this focus by a financial reward.


2. Money does not always talk


Your clients do not always want a “discount” as a “compensation” for a hiccup in your product or service; and sometimes only a phone call to apologise or follow up is what they would appreciate.


3. Surprise, surprise


After you meet your client’s expectations, always surprise them with more. This is one of the most effective tools to achieve client satisfaction. But only if this surprise does not become an expectation!


This says it all: Perspective is everything.

Walid helps you to step outside your business and watch it practically run itself.

He can show exactly what you need to do (and how to do it) so that you have plenty of time everyday to think about your next strategies and how to execute them.

After all, if you do not have the time to brainstorm about your strategy, then you are not driving your business. Your business is driving you!


Go to: and download his recent exclusive report "Hands Off: What you need to know if you want your business to grow and practically run itself."

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