How to Motivate Employees with Incentives

Starting a company is tough work and getting the right people in the right spots can be just as difficult. Founders often scratch their heads after they hire good people and just don't seem to be getting results.

The answer lays in human psychology and the study of economics. If you can think like an economist who understands the that incentives influence behavior, then you can figure out how to motivate your employees.

What is economics?

Most people think that economics is the study of how to get rich, trade stocks, or understand finance. This isn't true. Thomas Sowell, Hoover Institution Fellow, states that, "economics is the allocation of scarce resources which have alternate uses"

This means that things which are scarce, such as people, time, and energy, can be given incentives or disincentives, to do certain things.

If you want less work, then tax it. If you want more work, then don't tax it. It's basic economics but invaluable to motivating your teams.

Step #1- Identify What You Want to Motivate

You need to first think about what you are doing in your company to disincentivize your employees. In other words, what are you doing that discourages them from doing the things you want them to do.

For instance, if you want a culture of innovation and new ideas, but require every new idea to come with a 5-page report, do you really think people are going to go through that hurdle? It might not be worth it, it's just too time-consuming and painful.

This may sound silly but it happens all the time, especially at big companies. Understanding the vision and strategy of what you want your company to be about is crucial to your short-term and long-term success as a startup.

If you want innovation, agility, flat hierarchies, and and spontaneity, then your culture needs to encourage this.

Create a list of what you want your company culture to be about, to encourage, and to value, and then make sure doing those things isn't difficult or painful.

Step #2- Remove Barriers to Innovation

After you have spent time deciding what you want encouraged in your company, then remove as many barriers as possible.

If you want innovative ideas, then don't make your teams fill out reports about their new idea.

If you want your teams to stay on top of industry trends, then send them to conferences and buy them books or access to Pluralsight.

Whatever it is that you want your people to do, you need to make it easy for them to do it.

Step #3- Create Incentives for Good Behavior

After identifying your goals and removing barriers to your goals, the last step is to create incentives behind these goals.

I once worked with an analyst who saved the company $250,000 per year. He received a thank you card for $50 and that's it. No promotion. No internal publicity. No big raise or bonus. Yes, $50 was great, but did it really motivate him to find the next big savings? No, absolutely not. It felt cheap and he knew it.

What would have been better is if the company had created an incentive structure that allowed him to get a percentage of the savings he found. That way, employees are encouraged to find bigger savings because they'll get a bigger amount themselves.

For instance, if you want your team finding new and bigger contracts, then give them bigger percentages of the contracts. 

If you want your team to find savings in organizations, then give them large percentages, even 51% of the savings found so they feel like it's a major win.

The wrong way to look at this is to view the incentive given to the employee as lost revenue to the company. The right way to look at this is to recognize that giving the employee 51% of the bonus or savings is still creating the other 49% of value to the company that otherwise would not have been realized.

What Next?

As a leader, entrepreneur, or startup operator, you need to put in place the framework to encourage good behavior and results that will take your organization to the next level.

Share the wins with your team and you will motivate them to find even more and bigger wins in the future. By understanding the basics of incentives and how humans are motivated to act, you can leverage the best in your people, outpace your competition, and create big wins in the marketplace.