This isn’t a post about Christmas. Or about Office Space, as the picture to the left would suggest. It’s about incentives.

By my fourth Psychology 101 class in university, I was convinced I wanted to be a psychologist. At the end of that class the professor turned to us all and said, “About this time in the curriculum, some of you might be considering becoming a psychologist [WHOA!]. Psychology is about people. If you don’t find people interesting, you’re a zombie, and please don’t eat the student next to you. Just because you find this stuff interesting doesn’t mean you want to make a career out of psychology.”

Smart son of a bitch he was…I took the advice, saved myself the additional 4 years of grad school, and went into marketing instead. What’s marketing anyway if not the psychology of how people buy?

All good marketers are interested in the moral, societal, and economic incentives that drive purchasing behavior. And all good leaders are passionate about identifying the things that drive good performance among their employees.

That’s why I love this time of year. It gives us a unique opportunity to look at how we’ve incentivized our teams over the last 12 months, the behavior it’s driven, and the adjustments that need to be made.

Maybe it’s because I’m a good leader. Maybe I’m just a wannabe psychologist. In either case, understanding the incentives that motivate people to do their best work is the single most important thing you can do to drive the behavior you need. It’s about as close to a mad scientist experiment as I’ll ever get…

As a career direct marketer, I’ve always been comfortable with the math of marketing. So it stands to reason that like most of the business community, I’ve always been a believer in ‘if-then’ reward systems. If you do X, you get Y.

But some research from leading economic institutions around the world suggest that traditional ‘if-then’ reward systems actually stifle creativity and hence, decrease performance.

In this 2009 TED talk, best-selling author Dan Pink presents a pretty good case for autonomy and self-direction in place of traditional, performance-based incentives. He argues there’s a disconnect between “what science knows and what business does”.

And he’s got some pretty compelling evidence. Pink references a study commissioned by the Federal Reserve Bank, where a group of MIT students were given a series of games that involved concentration, motor skills, and creativity. High, medium, and low performance was rewarded accordingly. Even MIT students need money for beer, so you’d think there’d be a strong correlation between incentives and performance.

Not so.

To recap the study’s findings, “As long as the task involved only mechanical skill, bonuses worked as expected; the higher the pay, the better the performance. But once the task called for even rudimentary cognitive skill, a larger reward led to poorer performance.” A similar experiment in India confirmed the results. And a recent study by the London School of Economics of performance-based compensation plans in organizations concluded, “…we find that financial incentives…can result in a negative impact on overall performance.”

But perhaps the most compelling evidence Pink puts forth is the Wikipedia case study. In 1993, Microsoft launched Encarta, an online encyclopedia staffed by thousands of paid editors and well-compensated mangers to make sure the project came in on-budget and on-time. In 2009, Microsoft conceded defeat to Wikipedia, a free, collaborative project among non-compensated volunteers, and shut down the Encarta service.

A compelling argument indeed. But a business based wholly on autonomy and self-direction will only work under a narrow set of circumstances that rarely co-exist.

First, certain businesses require discipline far beyond what a reward system built on autonomy can provide. The importance of mechanical skills in running a profitable run-rate business cannot be underestimated. Walmart is successful because of its obsessive focus on cost controls and discipline. The type of discipline required to operate their business profitably simply doesn’t scale in a completely autonomous and self-directed system.

Second, the Wikipedia example is an anomaly that doesn’t apply to most products or businesses. In most cases, moving away from a traditional incentive model requires exceptionally inspirational leaders to maintain motivation and movement toward a common goal at a pace the business requires. It is unreasonable to assume that all leaders can rise to this level, even great leaders. In a way, incentive-based performance gives leaders an important tool to compensate for some of their perfectly reasonable “shortcomings”.

So? Incentive-based or autonomy? Like most things in life, it’s never black and white. The two are not mutually exclusive, and we need a little of both.

The ideal model is an example that Pink himself brings up; allocating a percentage of employees’ time to activities not directly related to their daily work – or by extension, their incentive-based compensation.

We’ve seen it work in engineering. About 50% of Google’s new products come from the 20% of time their engineers get to spend on ‘side’ projects.

Marketing can learn something from what our friends in engineering have already put in place. People need some time to think about new markets, opportunities not yet obvious, and creative solutions to problems, without the pressure of short-term incentives hanging over them.

Maybe in a year I’ll write another post with some results from my own experiment…

Follow the conversation @Adriel_S or #marketingpfft