To give or not to give incentives

Incentives are an economist tool. They are useful instruments for people’s behaviors and many economic policies are based on using incentives to encourage individuals to behave in a certain way. If self-interest is the greatest driver in human behavior, then incentives are the tool used to manipulate what is in one’s ‘self-interest’. But incentives aren’t always perfect tools and in many cases fail. Imprisonment is the one of the most prevalent incentive tools used in society. What society deems as unwanted behavior is often fined or cause for imprisonment. While this is not always the only way to reduce crimes, legal experts will often argue that stricter punishments are a good tool to decrease crime. Anti-homosexuality laws are proven ineffective incentives to slowing down two people who are in love. But the strongest use of incentives to direct population’s behavior is monetary compensation. The better one works, the harder one studies, the more one perfects their craft, the more money they will make. The world’s greatest graduate education programmes pull the best students to apply to them by showing the employment report of recent classes and their average salaries. 17.8 percent of the United States adult population has a tertiary degree and make, on average, double the salary of the rest of the population. An International Monetary Fund study showed that Sub-Saharan Africans with graduate educations were 97% more likely to be in the top 1% of their population than the rest of the population. There can be little debate that money is one of the primary motivators in human behavior in a capitalist environment. However, incentives involving monetary motivation can sometimes fail. A Rwandan entrepreneur I spoke with lamented that they attempted to promote one of their employees who showed ‘particular drive and a dynamic attitude.’ The new role would include the opportunity to grow in the organization, learn new skills and a significant pay rise. The person in question rejected that role as they would have to work on Sundays which was their designated day for church. So while this individual was about to embark on a career, make more money and contribute more significantly to their organisation, they felt that the incentive was not sufficient to change their lifestyle. Other Rwandan business owners equally complained that their workers would find excuses to come to work late but were always on time to leave the end of the day. When it was suggested that they pay their workers more, they responded that their workers were already paid 50% more than their competitors paid for similar roles. Both of these job creators claimed that individuals that worked for them had disincentives because an increase in their pay would not change their lifestyle significantly. If an individual made 30,000Rwf (under $42-48) an increase of 20% would not ‘substantially’ change their standard of living. The Rwandan government has decided to use the ‘carrot and stick’ method regarding incentivizing individuals. Imihigo are contracts that local leaders enter into with the government which binds them to achieving specific goals. This makes their progress measurable which is often an issue that other governments have when evaluating civil servants. While this has been a success overall, some local leaders have chosen to manipulate numbers or, worse still, simply survive by not being the worst. Now, one cannot claim that this is simply a Rwandan phenomenon. People will ignore incentive, either positive or negative, depending on how they evaluate the opposite benefit. Every manager needs to use tools to get the best out of their workers. Incentives schemes are effective and have been proven to help solve society’s problems, but they are not foolproof. No solution is easy but this makes a strong case for fluid and innovative management of organisations, taking into account multiple methods to bring out the best in your workers. The writer is an economist, based in Washington DC