Irksome Incentives

Government agencies need to get smarter about how to implement individual and organizational incentives, writes Shelley Metzenbaum.
by | October 24, 2007

Pay $1,500 up front for personal training sessions I might stop using after two weeks? Was I crazy? But I know the way my mind works. Once I forked over the big bucks, I wouldn't let the sessions go to waste. So I signed up.

And, here it is, six weeks later and I am still working out regularly with a trainer. Not only that, I spend additional time on the cardio machine to earn points toward free training sessions. After years of mocking people on these machines, I have become a cardio convert. This incentive system might not have worked for me two years ago, and might not work a year from now, but right now it is giving me the external motivation I need.

When incentives are well structured, they can be incredibly effective motivators. Problems arise, however, when incentives are not well suited for the person and the situation, and therefore result in discouragement and trigger dysfunctional responses. Given that government frequently uses incentives in a wide variety of ways -- to motivate personnel, contractors, regulated parties, other levels of government, and individual behavioral change -- it is somewhat disconcerting that so little attention is devoted to understanding the circumstances under which different government incentive structures are likely to work.

Horror stories pop up all too frequently. Teachers, fearful of penalties, shift students to special-education placements, hold students back a grade or stand over student test-takers until they get the right answer. Police downgrade a crime's classification to improve the "stats." Fearful they will lose federal funding if they miss their targets, states avoid serving particularly challenging clients. They also adopt easily met targets when possible, undermining the innovation-driving value of a stretch goal.

Problems arise with positive incentives, as well. Enron's collapse was attributed to a poorly structured bonus system. Reward quotas, which limit the number of people in an organization who can earn annual bonuses, deter cooperation. Even large bonuses discourage employees when they are lower than expected. And using rankings to reward top performers can dampen the spirit of employees who like to work hard but do not like to compete.

What's a government to do? Government agencies need to get smarter about how to implement individual and organizational incentives. They need to actively learn from experience, as well as scan the academic literature, to structure experiments that will effectively show what works and what does not. The federal government and government member associations, such as the National Governors Association and the National Association of Counties, need to invest in research efforts to examine how incentives work in a government context. The amount and types of incentives used in the public sector -- as well as the varying motivations of employees -- differ systematically from the private-sector contexts on which most existing empirical research is based.

In the interim, let me offer a few simple public-sector dos and don'ts based on available research1:

o When multiple parties need to cooperate to get the job done, avoid rewarding individuals. Instead, reward all who contribute. Maricopa County, Ariz., has successfully encouraged a multiyear cost-saving effort by sharing a portion of the money saved each year with all county employees.

o When cooperation is needed from others to achieve a goal, enlist stakeholders with up-front rewards such as grants. Communities are successfully using incentives to recruit good teachers in hard-to-serve communities. The federal government effectively uses grants to enlist states and local entities to join it in tackling specific problems.

o To focus attention on a goal that would otherwise be ignored because attaining the goal is expensive, threaten penalties. Federal penalty threats successfully convinced states and local governments to adopt costly air-quality improvements.

o When people are already motivated, resist the temptation to introduce incentives. Let intrinsic motivators, the altruistic instincts and internal drivers that prompted individuals to join the government, work. Current proposals to reward individual teachers for improving student performance are ludicrous and will undoubtedly backfire. Teachers don't need to be rewarded for helping students. They chose to be teachers because that is what they want to do.

o To set new performance levels, while avoiding discouraging those who do not like to compete, use contests and prizes to recruit those who do to vie for performance records. The city of Shanghai ran a design competition to garner the best ideas for redevelopment of its eastern section.

o Don't hesitate to reward more than one party. Rather than choose a single winner, Shanghai picked the five best, gave each a financial reward, and used ideas from all of the winners.

o Use grants to convince stakeholders to measure progress in a standardized way, enabling analysis across communities to identify problems and effective practices. NatureServe, a nongovernmental organization, successfully used grants to recruit states, localities and other NGOs to collect conservation data in a standardized way.

o When someone tries and fails, despite a strong effort and cogent strategy informed by the evidence, don't penalize them. Bill Bratton said it well when he was commissioner of the New York City Police Department: "Nobody got in trouble if the crime rate went up. They got in trouble if they did not know why it had gone up and did not have a plan to deal with it."

My fitness facility figured it out. It somehow got me to pay the cost of my own incentive. No one gets hurt but me if the incentive does not work, but the facility owner, the trainer, and I all benefit if it does. If my fitness center can figure it out, why can't government? Given the many proposals out there calling for government to increase its use of incentives, isn't it time to pay more attention and devote more resources to understanding government incentive structures and disseminating those insights?

1. For more discussion of the research in this area, see Building Block 5 in Metzenbaum, "Performance Accountability: The Five Building Blocks and Six Essential Practices, available at: http://www.businessofgovernment.org/pdfs/MetzenbaumReport2.pdf.

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