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Motivation
How Incentives Can Send Mixed Signals
... and what to do to avoid them.
Posted August 6, 2023 Reviewed by Devon Frye
Key points
- Companies often send mixed signals through incentives, leaving workers confused about values and expectations.
- Incentives can be difficult to structure in cases where performance is based on multiple variables.
- Incentives tell a story; organizations should make sure it's the one they'd like to tell.
Our choices and actions send messages to others about our values. Consider a manager who communicates to her employees in a call center that “customer care is the most important thing for our company.” That’s a signal to others regarding values.
Now, imagine that the manager also sets the incentives such that employees are paid by the number of calls they answer. This incentive sends a very different signal about what the manager is looking for: It’s about being fast, which typically comes at the expense of quality of care. Such mixed signals leave the employees confused about the manager’s values and expectations.
This mixed signals problem is channeled into a simple question: What should be rewarded? In many cases, performance is multifaceted, but compensation is only given to one aspect of performance, typically the one that is easiest to measure. Simple “one-aspect” compensation sends a clear message to the workers: Concentrate on what we’re paying you for and ignore everything else.
For example, it might be easy to measure how many shirts factory workers produce, but if we reward them only for the number of shirts produced, what will happen to the quality of the shirts? Would workers be just as careful in making sure the stitches are straight and symmetric? If we pay our salesperson just based on the dollar amount of their sales, they might sell more, but customers might be less satisfied with the service they receive and will be less likely to come back and buy from our company in the future.
Economists struggle with the best way to incentivize behavior under such “multitasking” conditions. In some cases, if you can only incentivize one dimension (such as quantity) because it is too complicated to measure the other dimensions (such as quality), it may be better to avoid “contingent incentives”—incentives that depend on performance—altogether. There are clever ways to avoid the problem by making other dimensions of performance count.
I’ll discuss these problems and their solutions in the following four posts, each devoted to common conflicting messages that companies send, as described in the figure below.
The mixed signals arising from the conflict between what companies say they want and how they set their incentives are present in all these messages. Note that in the examples in the figure, signals are the interpretation of what the executive expects the worker to do—that is, they help workers interpret the expectations of the people who set the incentives.
The important lesson is that when you use incentives to reward an action or outcome, you need to understand and control how the incentives affect the tension between different goals. Otherwise, you’re sending conflicting messages. Companies often have “talking points” that mean next to nothing, instead of having a strong and clear message that is supported by their incentives.
This post is based on my book, Mixed Signals: How Incentives Really Work, Yale University Press, 2023.
