Why financial incentives fall short in driving employees

IN the old Westerns, the standard option for resolving disputes was to reach for your gun in a duel. Reaching for financial incentives to solve most problems is the corporate equivalent - another fatal attraction.

There is an unhealthy tendency among leaders to look for a silver bullet, to oversimplify business problems and to establish linear cause-and-effect relationships. In many large companies, financial incentives are the default option adopted by CEOs and boards to solve most issues. It is much overused, and the bullet often misses its mark. Why? The answers lie in the field of psychology - not economics, from where most business leaders derive their inspiration.

To solve a problem, you need to first define and understand it properly. The use of financial incentives as the cornerstone for motivation comes out of neoclassical economics, where individuals are deemed to be self-serving and to act rationally. Behavioural economists have shown convincingly that this assumption is full of holes. Frankly, if one wants to understand how people think and act, and how the brain functions, it's best to look to psychology. For psychologists, rewards and punishments can be counter-productive because they can undermine intrinsic motivation.