Gregory Mankiw calls them a “superpower”.
They are something I offer to get you to do something.
Incentives can be allocated under four general types. The most obvious is known as remunerative, which is a material reward or payoff. Think of financial bonuses, salary increases and the like.
There are also coercive incentives, which are when threats of pain to yourself or others are made, or imprisonment or confiscation of property.
The other types, labelled as natural (satisfaction of curiosity, mental exercise, pursuit of truth etc.) and moral (doing the right thing, acting in line with social norms), are applicable at the personal level. This is where social considerations come in: the culture you’ve grown up in, the habits you’ve acquired, the level and extent of your education, your propensity for selfless or selfish behaviour and all the peculiar influences that compose human nature.
As you can see, incentives of differing strengths underly a vast majority of our actions.
In a context pertaining to business, work and enterprise, incentives take on a certain importance.
Employers must offer some sort of incentive for their employees to get the best from them. Customers must be given to some incentive to purchase from one firm instead of another. Employees, in a reversal of the above, must offer something to their employers that allows them to remain employed. Entrepreneurs often start new businesses because of the incentives available to them; independence, excitement, reward.
Not all incentives are equal though.
Firstly, incentives are for the most part, incredibly personal, which results in them being relative. There is no absolute hierarchy that sets one incentive above another.
For an employee whose salary allows his subsistence to be covered, who has enough to keep a roof over his head, raise his family, take a few holidays and go surfing at the weekends, more financial incentives may not be the most effective strategy. Such an individual might be motivated more by personal incentives, things that inspire him to fulfil sense of duty, or the feeling that he is doing meaningful work, or that he is learning and getting better, or the esteem he gains from his community for the work he does.
Financial incentives are bounded. Past a certain point, they diminish in return.
There’s also a morality when we consider incentives.
If it is strong enough, an incentive could promote behaviour that, whilst resulting in profit for himself, causes harm to others. For example, a tobacco corporation offers an ad agency half a million to boost their sales, or one million to a research agency to conduct studies that conclude their product is not harmful. Or consider a politician who is told that if he can force through bills favourable to a certain corporation there’ll be a lucrative advisory position for him upon retirement.
Having seen the different types of incentives and the consequences they can effect, let’s consider what makes an incentive succeed. What is the difference between an incentive that elicits a response and one that doesn’t?
Incentives are successful only when you first understand the person or entity you are trying to elicit a response from. If you don’t have a good idea of what they desire, why they desire it, what type of character they are and what might make them hesitant, your incentive is doomed to fail.
However, if you do have a grasp of that, there’s several more things you can do to get the best possible chance of success.
– Make your incentive simple to receive, ideally with as few steps as possible between acceptance of your offer and fulfilment.
– Make sure it has a high value (not necessarily a high cost).
– Make it personalised, or at least present it as if it is.
– Ensure the value is worth several times the effort required to access it.
– Make it unusual, unique, not widely available.
– Appeal primarily to the heart, to the deeper emotional drives.
– Fulfil an actual need.
– Ensure your incentive offers an advantage over those who don’t have it.
In essence you might think it is as simple as making sure the benefits outweigh the costs. Yet, it is more nuanced than that. You must ensure certain benefits outweigh certain costs. And to do that, you have to understand the individual you are trying to inspire to action.
While it is important to know how to use incentives to your advantage, it is perhaps more important to know how they can be leveraged against you.
Remember that incentives are most effective when you know what the individual values the most. Predatory organisations identify and use incentives to fuel the insecurities we try so hard to conceal.
They inundate us with what we should be wearing (their clothes), what we should be eating (their food), what we should be buying (their goods and services) and how we should be spending our time. And usually do so in a way that is brutally effective. Since the manipulative behaviour of advertisers and marketers requires far more space than I have, I will leave you with two final thoughts regarding incentives.
Firstly, if you control the right incentives, you control the individual.
And secondly, from Seeking Wisdom, remember, the behaviour you get is the behaviour you reward for.