The Science of Motivation: Rethinking Business Incentives

Personal Background and Introduction to the Case

• The speaker prefaces his talk by disclosing a "youthful indiscretion" from the late $1980s$: he attended law school.
• In terms of academic performance, he notes that he graduated in the part of his law school class that "made the top $90$% possible."
• Despite his legal training, he never practiced law for a single day.
• He frames his presentation not as a story, but as a "hardheaded, evidence-based, lawyerly case" for rethinking the management and operation of businesses.

The Candle Problem and Functional Fixedness

• The speaker introduces a classic behavioral science experiment known as the "candle problem," created in $1945$ by psychologist Carl Duncker.
• The Experiment Setup:     * The participant is brought into a room and provided with three items: a candle, a box of thumbtacks, and a book of matches.     * The objective is to attach the candle to the wall so that the wax does not drip onto the table below.
• Common Failed Attempts:     * Participants often try to thumbtack the candle directly to the wall, which fails.     * Some attempt to light a match, melt the side of the candle, and use the wax as an adhesive to stick it to the wall, which also fails.
• The Solution:     * After approximately $5$ to $10$ minutes, most participants identify the solution: emptying the box of thumbtacks and using the box itself as a platform, which is then tacked to the wall to hold the candle.
• Key Psychological Concept:     * Functional Fixedness: This refers to the cognitive bias that limits a person to using an object only in the way it is traditionally used. In this case, participants initially see the box only as a receptacle for the tacks rather than as a potential platform for the candle.

Incentives and Performance: The Glucksberg Experiment

• Sam Glucksberg, a scientist at Princeton University, conducted an experiment to test the power of incentives using the candle problem.
• Experimental Design: He divided participants into two groups to measure how quickly they could solve the problem.     * Group 1 (The Baseline): This group was told they were being timed to establish norms or averages for how long it typically takes to solve the task.     * Group 2 (The Incentivized Group): This group was offered financial rewards. If they were in the top $25$% of the fastest times, they received $\$5$. If they were the fastest of everyone tested that day, they received $\$20$. (The speaker notes that, adjusted for inflation, this was a significant motivator for a few minutes of work).
• Results:     * The group offered rewards performed worse than the baseline group.     * On average, the incentivized group took $3.5$ minutes longer to solve the problem.
• The Mismatch:     * There is a fundamental mismatch between what science knows and what business does.     * While business practices are often built around extrinsic motivators (contingent "if-then" rewards like bonuses), these incentives often dull thinking and block creativity rather than sharpening them.

The Nature of Tasks and the Efficiency of Rewards

• Glucksberg conducted a second version of the experiment to demonstrate when rewards do work.
• Modified Setup: The candle problem was presented with the thumbtacks already outside the box.
• Results of the Second Task: In this instance, the incentivized group outperformed the baseline group.
• Analysis of Success vs. Failure:     * Routine, Left-Brain Tasks: "If-then" rewards work exceptionally well for tasks with a simple set of rules and a clear destination. Because rewards narrow focus, they help people zoom straight ahead toward a known goal.     * Creative, Conceptual Tasks: For the actual candle problem (where the solution is on the periphery rather than obvious), rewards restrict the range of vision and prevent the "looking around" necessary for creative solutions.
• Economic Context:     * Routine, rule-based, "left-brain" work (e.g., basic accounting, financial analysis, routine programming) is increasingly being automated by software or outsourced to low-cost providers.     * The work that matters most in the $21st$ century involves creative, non-obvious, "right-brain" solutions to complex problems.

Marshaling the Evidence: Studies on Motivation

• Dan Ariely / MIT Study:     * Conducted by Dan Ariely and three colleagues with MIT students and sponsored by the Federal Reserve Bank of the United States.     * Students were given games involving creativity, motor skills, and concentration, with three levels of reward: small, medium, and large.     * Findings: For mechanical skills, higher pay led to better performance. However, once the task required even "rudimentary cognitive skill," the larger reward led to poorer performance.     * Replication in Madurai, India: To account for potential cultural bias, the study was replicated in India where the standard of living is lower. Even there, the people offered the highest rewards performed the worst of all. In $8$ out of the $9$ tasks examined, higher incentives led to worse performance.
• London School of Economics (LSE) Study:     * Economists at LSE (the alma mater of $11$ Nobel laureates and figures like George Soros, Friedrich Hayek, and Mick Jagger) reviewed $51$ studies of pay-for-performance plans within companies.     * Conclusion: Financial incentives can result in a negative impact on overall performance.

The New Business Operating System: Autonomy, Mastery, and Purpose

• The speaker argues that current business operating systems are built on outdated protocols rooted in "folklore" rather than science.
• The solution is a transition from extrinsic motivation (carrots and sticks) to intrinsic motivation.
• The Three Elements of Intrinsic Motivation:     1. Autonomy: The urge to direct our own lives.     2. Mastery: The desire to get better and better at something that matters.     3. Purpose: The yearning to do what we do in the service of something larger than ourselves.

Radical Self-Direction and Autonomy

• Management as a concept is an invention (like a television set, not a tree) intended for compliance. To achieve engagement, self-direction is required.
• Atlassian (Australian Software Company):     * They utilize "FedEx Days." A few times a year, engineers are given $24$ hours to work on anything they want, provided it is not part of their regular job.     * At the end of the day, there is a "wild and woolly" all-hands meeting for presentations.     * This has produced numerous software fixes and elegant hacks that might not have existed otherwise.
• $20$% Time (Google):     * Famous practice where engineers spend $20$% of their time on projects of their choice.     * It offers autonomy over "Time, Task, Team, and Technique."     * Approximately half of Google’s new products in a year (e.g., Gmail, Google News, Orkut) are born during this time.
• ROWE (Results Only Work Environment):     * Created by two American consultants and implemented in several North American companies.     * Workers have no schedules; they only have to get their work done. How, when, and where they do it is entirely up to them.     * Resulting metrics: Productivity, worker engagement, and worker satisfaction go up, while turnover goes down.

Case Study: Wikipedia vs. Microsoft Encarta

• The Microsoft Encarta Model (Mid-$1990s$):     * Microsoft funded a professional encyclopedia. They hired paid writers/editors and well-compensated managers to ensure the project was on budget and on time.
• The Wikipedia Model:     * Created for fun by volunteers who were not paid a cent, euro, or yen.
• The Outcome:     * Wikipedia is now the dominant global encyclopedia.     * Ten years ago, no "sober economist" would have predicted that the intrinsic motivator model (Wikipedia) would outperform the extrinsic model (Encarta).

Conclusion and Summary of Scientific Findings

• The speaker summarizes three core facts taught by science:     1. $20th$-century motivators (bonuses/incentives) work only in a very narrow band of circumstances.     2. "If-then" rewards often destroy creativity.     3. The secret to high performance is the intrinsic drive to do things for their own sake and because they matter.
• By repairing the mismatch between scientific knowledge and business practice, it is possible to strengthen businesses and solve modern "candle problems."