Monday, 19 January 2009

Human nature: Self-interested bastard or community-builder?

Whenever I ask executives how they should make an organisation more entrepreneurial, more customer-focused or simply more profitable they virtually always come back with: “incentivize people”.

Reward people for their ideas, their efforts and initiatives and they will deliver.

But always, when I ask them, if you would be on a fixed salary, would you still do your best to come up with new ideas, be entrepreneurial and deliver the best value you can for your customers? And then the answer is, invariably, “yes I would, because I don’t do it for the money”. Then people say they like being good at what they do, initiate new things, and deliver customers the best they possibly can.

But why do we always assume that other people are motivated – and motivated only – by money, and the way to get them to do stuff is by financially incentivizing them, but we? no we do things out of intrinsic motivation, because we want to do the best we can and contribute to the success of our firm. Is everybody really so different from us?

If you hadn’t noticed: that was a rhetorical question.

So why do we assume other people are only motivated by money? My guess is it goes back to why we organise our firms the way we do. How we, in our society, organise our companies is basically based on two sources: 1) The Roman army (i.e. a hierarchy with unity of command), 2) economics.

Economics has had a huge influence on how we govern our firms. For example, the use of stock options to incentivize and reward top managers comes straight out of “agency theory”, and the spread of this practice has been linked to the spread of “agency theorists” across business schools in the US after which, gradually, the phenomenon started to diffuse. And there are other examples.

Yet, economics – including agency theory – works from the assumption that people are rational and self-interested. The will work if they get rewarded for it. But if they don’t receive a direct reward or nobody can really observe their efforts, they will “shirk” and be lazy. Under this logic, indeed, you have to incentivize people; otherwise they won’t do a thing.

And I guess to some extent, we are indeed rational and self-interested, and hence motivated by money. However, there is another fundamental aspect to our human nature, one which through millions of years of evolution has made us the way we are: we like being part of a community and contribute to the well-being of that group.

Because we, humans, evolved as being part of a tribe. And people who were purely self-interested, shirking and lazy would be kicked out of the tribe, clubbed to death, if not consumed for dinner. So our gene base evolved into making us a bit self-interested but equally also community-lovers. Our deep human nature is that we all like doing things not only for our direct individual reward but also because it contributes to the community that we are part of. This community used to our tribe. Nowadays, it is often our organisation.

And if you, as a manager (i.e., headman) manage to tap into that deep fundamental need among your employees, you can build a powerful firm indeed. People love to do stuff that strengthens their firm, fulfils them with pride, and makes us feel stronger as a whole. We don’t need to be financially incentivized to do that; it’s our human nature.


6 comments:

vlade said...

Very, very true.
Every successful (medium/long term) company I saw had employees that were loyal.
There's one glitch though. One can be loyal to someone - a really great manager/leader is someone who can built the loyalty of his employees, so that they "do the impossible" for him. That often means they move with him, and the success is related to this team/group. Often, when they leave, the company slips at best to mediocricity (until they find a replacement), at worst they assume they can continue as before and fail miserably.

The much larger task, and one that I haven't seen successfully implemented yet in a commercial company, is a loyalty to the organization. That usually means a loyalty to an idea. It's much easier for not-for-profits, but it tend to be hard for commercial companies (especially the ones with diffuse ownership) to articulate an idea (other than "let's make money!") that people could identify with and truly believe in the longer term - the company has to demonstrate true commitment to the idea in times good and bad, over a longer period of time to overcome some cynicism. That said, ideas like this make for the lasting institutions (the church comes to mind as an institution with followers loyal to an idea rather than a person)

Laura McCracken said...

I agree that money is not always the answer and 'incentive plans' are certainly not a substitute for management. My question, however, is whether or not people will make the extra effort to deliver new ideas in the absence of some sort of recognition or signal from management that such new thinking is indeed valued.

Managers often use monetary incentives as a 'communication tool', but there are other creative ways of stimulating new ideas and fostering a more entrepreneurial environment, such as employee recognition programs or good old fashioned 'public praise'. So again, I agree that money is not the answer, but think that some creative stimulation and recognition by managers could go a long way towards fostering an innovative culture.

Freek said...

I certainly agree with that. We may like to do things that are good for the tribe but we would like others to see us doing these things! Making "sacrifices" for the good of the organisation without anyone knowing about it is much less appealing than doing it and receiving a "thank you" (or a "distinction").

Such actions may still be "irrational" from a monetary perspective - even when taking into account the long-term effects of increased status and promotion chances - because the effort & sacrifice may very well outweigh whatever benefits come with the public approval.

vlade said...

In my (admittedly limited) experience, a simple thank-you (as long as it's not overused) is often more efficient than money or publicly given prize. The latter is often seen with a very cynical world-view, while the former is seen as expressing genuine interest in the person and a real appreciation.
Conversely, I found that a missing of the simple sincere thank-you is often a reason for grumpiness even if the person did receive a financial or other "official" reward.
It could well be with the expectation - we appreciate more the unexpected, and the official reward is more expected than the sincerity?

Mahesh said...

I have seen improvement ideas (with no intention of any reward honestly) being stolen and promoted higher up and some of the promoters of the idea getting promoted! I don't know how often that happens. But sadly happens.
I would say that good feeling keeps us a bit more vibrant and contribute more and help us grow more.

Emre said...

One point one may consider, when talking about intrinsic vs. extrinsic motives to act in a certain way, is the so-called "crowding-out effect", which is due to R. Titmuss and his study on the effects of monetary incentives on people's tendency to donate blood. Contrary to received economic theory, his study (and follow-up experimental studies) found out that introduction of a material incentive, along with an intrinsic drive, destroys the "spirit" behind the action for a good cause which results in (1) reduction of voluntary behavior and (2) reduction in the overall quality of contributions.
Hence, firms should be careful in incentivizing certain behaviors via "carrots" at the first place, for such schemes may even crowd-out those who would be intrinsically motivated but refrain from contributing not to seem greedy. Same also applies should the firm uses "sticks" to control output level. Again, experimental data shows that organizational control designs developed in the spirit of agency theory may backfire and bring about a "self-fulfilling prophecy of distrust".
That said, I believe it is yet another story, and rather challenging task too, to go about developing the organizational culture in which voluntary contributions are perceived to be a "good cause" and fulfils organizational members with pride.

Emre
Stockholm School of Economics