Tag: incentive program design

Incentive Design and the Power of Loss Aversion

It seems the year that was 2021 is the gift that keeps on giving.  Dr. Anthony Fauci announced today that the US is “certainly out of the pandemic phase” and, as welcome as that news is – the pandemic accelerated changes that cannot be overlooked and will remain with us into the future.

Amid an ongoing labor shortage and increased preference for remote work, and in an environment with bolder employees willing to walk away or go without a job until their expectations are met, the need to effectively address engagement and culture is more pressing than ever.

Now more than ever, there is a need for creativity in the workplace when it comes to engagement and culture.   In a world where just 38 percent of employees identify as “enthusiastic stayers” at their current organization, how can employers retain talent that feels appreciated and engaged in the workplace?  After all, the Society for Human Resource Management (SHRM) estimates that it costs a company 6 to 9 months of an employee’s salary to replace him or her.

Considering the need for creative and effective approaches to today’s volatile workplace, I found an article by Allan Schweyer to be interesting and beneficial. As part of the Incentive Research Foundation’s (IRF) Academic Research in Action series, Schweyer presents a critique of economist John A. List’s The Voltage Effect – highlighting its relevant and timely message.

The article recaps List’s belief in the importance of intrinsic and extrinsic motivation in driving business results, and a well-designed program will utilize both.  Schweyer says, “List and many others have argued that extrinsic rewards, applied carefully, ethically, and fairly, build rather than erode intrinsic motivation.  Moreover, they scale, and they don’t have to cost a lot”

According to List, a key consideration in designing incentive programs has to do with loss aversion.  Schweyer connects this to two other behavioral phenomena which also should be taken into account.

  • Loss Aversion – people most dislike losing something they have approximately twice as much as they enjoy gaining something they don’t
  • The Endowment Effect – once a person owns a thing – even something trivial like a coffee mug – they place greater value on it than its market worth
  • The Prospect Theory – most people avoid risks with a potential upside but accept risks when hoping to avoid an equivalent loss

The loss aversion phenomenon relates to things other than money or tangible assets – and this is an approach that is reinforced by incentive programs that include social and peer recognition.  People not only want to hold on to tangible things – they will exert much effort to avoid losing social standing. Check out Allan Schweyer’s review of The Voltage Effect to find out more about the power of loss aversion and its role in designing effective and creative incentive programs.