In America we have a motivation problem : money. I'm not a communist. I love capitalism (I even love money), but here's a simple fact we've known since 1962: using money as a motivator makes us less capable at problem-solving. It actually makes us dumber.
A number of years ago I watched a CEO make a long series of really bad decisions. He gutted his company of most of its long-term potential. It bothered me for years because I couldn't understand why. This CEO is an intelligent, affable person. Let's call his company "Company X". I had several conversations with him over a five year period. He seemed like a good man for the job. His actions in the boardroom didn't jibe with the person I thought I had talked with.
For confidentiality reasons I cannot provide details about Company X. I've talked personally with people who worked for this company and I believe what they've told me. Think of the following as a modern day parable. For the sake of litigious prudence, let me state that details of the story have been sufficiently altered as to claim, "All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental."
There was a lot of talk in the company cafeteria about the CEO's incentivization package. If the company stock price were to hit a specified target and maintain it for a specified number of weeks, the CEO stood to gain serious remuneration. Sounded like a fine idea to me. He had to hit a target of perceived value and make it stick for a while. I'm sure the people who thought it up patted themselves on the back for it.
Life on the ground began to deteriorate. A friend of mine was working in a part of the company that interfaced with customers. He was working with a great bunch of people, but the pressure somehow kept ratcheting up. He couldn't point to anything specific, but everybody started saying things like "We've just got to hit these deadlines and then we can relax a little." They hit those deadlines. Somehow, the crisis wasn't over. It actually got worse. By the time one crisis would end, the next was already in full swing. Then came the first wave of layoffs...
Once the layoffs started, nobody complained about the new normal -- crisis time all the time. People started saying "We've got to hit these deadlines..." full stop. No one talked about relaxing in the future anymore. Eventually it became apparent that this new normal emanated from a high level personnel change intended to "improve the numbers," as I was told. Improve them it did. Their numbers were better than ever. Their lives were hell.
The culture became unrecognizable. People started backstabbing, maligning each other sometimes in meetings. Other things happened to friends of mine -- things that would have seemed ludicrous just a year earlier. My friend saw an opening in R&D. He jumped ship. He had always wanted to work in R&D, and their culture was still intact.
Life was great again. He was doing challenging work and enjoying it, surrounded by people who were thriving in their jobs. His new group was engaged in improving the core technology. They were on the real front lines. It was obvious to everyone that the R&D department needed to double or triple in size to maintain their place (at the time their technology was best in the world), but at least they were progressing. Then the unthinkable happened. That same numbers-driven focus came to R&D.
Knowing what was going to happen didn't help. His new division became just as crisis-soaked and hectic as the last one. Then the layoffs started... During a five-year period, the number of employees at Company X grew sixfold, but R&D was cut by half or two-thirds, depending on whom you ask. The decision to cut R&D was so absurdly short-sighted it bordered on comical.
Funny story: One day my friend was told that all job openings in his department were canceled. Later the company notified them of an incentive program run by a foreign government. Their group was allowed a new acquisition if they hired from within that country. Reading the announcement, one good candidate offered to move to that foreign country to work with the team, but they couldn't hire him because he actually lived in the U.S., just a few minutes drive from the rest of the team.
The company was so focused on small things like tax-deals that it had lost perspective on long term development. It was as if Company X were wearing blinders. This is exactly what research predicts.
The Candle Problem was first presented by Karl Duncker. Published posthumously in 1945, "On problem solving" describes how Duncker provided subjects with a candle, some matches, and a box of tacks. He told each subject to affix the candle to a cork board wall in such a way that when lit, the candle won't drip wax on the table below (see figure at right). Can you think of the answer?
The only answer that really works is this: 1.Dump the tacks out of the box, 2.Tack the box to the wall, 3.Light the candle and affix it atop the box as if it were a candle-holder. Incidentally, the problem was much easier to solve if the tacks weren't in the box at the beginning. When the tacks were in the box the participant saw it only as a tack-box, not something they could use to solve the problem. This phenomenon is called "Functional fixedness."
Sam Glucksberg added a fascinating twist to this finding in his 1962 paper, "Influece of strength of drive on functional fixedness and perceptual recognition." (Journal oi Experimental Psychology 1962. Vol. 63, No. 1, 36-41). He studied the effect of financial incentives on solving the candle problem. To one group he offered no money. To the other group he offered various amounts of money for solving the problem fast.
Remember, there are two candle problems. Let the "Simple Candle Problem" be the one where the tacks are outside the box -- no functional fixedness. The solution is straightforward. Here are the results for those who solved it:
Simple Candle Problem Mean Times :
WITHOUT a financial incentive : 4.99 min
WITH a financial incentive : 3.67 min
Nothing unexpected here. This is a classical incentivization effect anybody would intuitively expect.
Now, let "In-Box Candle Problem" refer to the original description where the tacks start off in the box.
In-Box Candle Problem Mean Times :
WITHOUT a financial incentive : 7:41 min
WITH a financial incentive : 11:08 min
How could this be? The financial incentive made people slower? It gets worse -- the slowness increases with the incentive. The higher the monetary reward, the worse the performance! This result has been repeated many times since the original experiment.
Glucksberg and others have shown this result to be highly robust. Daniel Pink calls it a legally provable "fact." How should we interpret the above results?
When your employees have to do something straightforward, like pressing a button or manning one stage in an assembly line, financial incentives work. It's a small effect, but they do work. Simple jobs are like the simple candle problem.
However, if your people must do something that requires any creative or critical thinking, financial incentives hurt. The In-Box Candle Problem is the stereotypical problem that requires you to think "Out of the Box," (you knew that was coming, didn't you?). Whenever people must think out of the box, offering them a monetary carrot will keep them in that box.
A monetary reward will help your employees focus. That's the point. When you're focused you are less able to think laterally. You become dumber. This is not the kind of thing we want if we expect to solve the problems that face us in the 21st century.
Is your job like that of a button pusher? or do you have to think creatively? What about a CEO? The results above apply more to a CEO than almost anybody, yet CEOs receive greater financial incentives than anyone. This practice is self-destructive. Now I understand why the CEO of Company X killed his golden goose. I understand why he decimated R&D. I understand why he upped the number of spurious lawsuits against competitors instead of investing in long term growth. He was incentivized. He was focused. The stock price was the most important metric of judgment. The same is true for many other companies.