Updated: Aug 19, 2021
One of the most common management methods I encounter is the carrot and stick, whether done consciously or unconsciously. Whenever a manager decides something is important, like morale or teamwork, they bring out a carrot. Whenever a deadline is approaching, they bring out a stick. In each case, this is a bad idea. Bear with me, and I'll explain.
Tversky and Kahneman determined that aversion to losses has a more significant impact on preferences than the prospect of attaining gains. In a nutshell, people are more loss averse than benefit seeking. People measure gains and losses in relation to the status quo, which is why the carrot does not work in the long run. Sure, it may work in the short term, but it also resets the status quo. If the carrot is money, then future carrots will have to be higher amounts of money. If the carrot is praise, then future carrots will require more significant levels of praise.
Additionally, because you reset the status quo, failing to match the new status quo is a perceived loss and employees' work will decline to compensate. This truth is one of the reasons docking pay is a bad idea. Employees who have had their pay docked will dock their efforts for a net result of zero.
Yes, you can find people who will work for money. This reality is why some salespeople gravitate to commission-based jobs. Unfortunately, these people are primarily motivated by cash instead of doing a good job. An easy example of this problem is a used car lot. I challenge you to name a single, commission-based used car lot, independent or chain, to which you are loyal. I have never met anyone who can identify one. Commissions drive salespeople to screw over customers in an effort to increase their commission. Screwed over customers are unsatisfied customers, which endangers the long-term viability of the business.
To sum up, gains are not a very powerful motivator. When they work, they reset the status quo, which requires even bigger carrots going forward. Carrots are extrinsic motivators and only work with hungry rabbits. If the rabbit is not hungry, the carrot won't do anything. Starving rabbits eat the carrot and stop once full. Their stomach expands, and bigger carrots are required in the future. Carrots are one of the most expensive means of motivating people in the long run.
When you do find rabbits who are always hungry, they never get enough carrots. They destroy your garden before moving on to another yard. Their hunger is unquenchable. Commissions can be useful, but only when earned for long-term mindsets. I have seen an employer switch compensation to a base rate plus a three-month-delayed commission. At that store, most customer interactions occur during the first three months after purchase. Earning a commission requires making a sale and spending three months ensuring the customer is happy. This simple change encouraged salespeople to think long-term. The next sale did not give them rent and grocery money; the sale made three months ago did. I refer you to another article I wrote on store performance-based pay for a similar idea.
I admit that people have extrinsic needs and to a point are extrinsically motivated. If you refer to Maslow's hierarchy of needs, you will discover all basic needs are external, like food, clothing, shelter, and safety. Beyond those, needs are intrinsic, like belonging, esteem, and self-actualization . Kahneman and Deaton determined that individual happiness improved in line with salary increases (within the US) up to about $75,000 per year . Beyond that, despite welcoming any and all pay increases, people did not experience increased levels of happiness. Gains are not powerful motivators and beyond $75,000 per year; the gains are negligible.
Conversely, Gagné and Deci determined that intrinsic motivation correlates directly to work performance . At some level, we already know this. When you go to the doctor, do you want one who is in it for the money or one who loves helping people? When you choose whom to marry, do you want someone in it for the money or someone who loves you? I have been unable to locate anyone who can give me an example of any extrinsically motivated person outperforming an intrinsically motivated person. So why would you want to hire those people, let alone work with them?
Next week, I'll explain why sticks don't work. In the meantime, think about alternatives to carrots and sticks. Intrinsic motivation exists in people who want a fair day's pay for an honest day's work. These people love what they do. Find them and put as many of them in your life and your business as possible. Moreover, if you aren't one of them, I encourage you to become one!
What truly motivates you to work harder, do a better job, and improve?
Last week, I discussed why carrots do not motivate properly and promised to explain the failure of sticks this week. If you have not read that article, I encourage you to do so. For those not familiar with the expression of "carrot and stick," it refers to the management method applying rewards and punishments as motivators. Before we delve deeper, please understand that I am not promoting a lack of consequences. We live in a cause and effect world, and not everyone makes the team. If you have a policy that fraud or sexual harassment results in termination, this is not a stick; it is a consequence. If you believe this policy is the only deterrent keeping employees from engaging in these actions, please contact me for an in-depth discussion of your hiring practices.
A stick is merely a threat, and if I instead said, "you cannot motivate employees by threatening them," most everyone would agree. In the equine world, it is well known that a whipped horse will run faster... for a while. Eventually, the whipping breaks the horse's spirit, since it cannot escape the whip no matter how fast it runs. Using a stick with people is no different. The fear will propel them in the short term, but leave them exhausted. Any productivity gains realized initially are eventually lost when exhaustion sets in. This fact is why the Pony Express changed horses every 20 minutes, and also why many businesses have high turnover. With high turnover, increased employee acquisition and retention costs offset any productivity gains and usually result in higher losses. Cost-center accounting methods often hide this fact but is true nonetheless.
Additionally, threatened employees focus on the threat instead of the task. When told to do a good job or face termination, employees become very focused on one thing... keeping their job. For some employees, this may mean it is time to find a new job where they are not threatened. After all, who enjoys suffering intimidation? For other employees, they identify precisely what is required and do no less, but also no more. What never happens is that employees focus on doing a good job. They find the bar against which they will be measured and meet that bar. They completely lose sight of the task at hand and focus instead on the threat. Employees are not thinking about group goals when focusing on individual needs, so teamwork ends too.
As if all that were not bad enough, people under threat have been proven to be less creative and less willing to take risks. Creativity and calculated risk-taking tend to be advantages in most fields and can help a business identify new solutions to face changing economic pressures. Customers today are different from customers ten and twenty years ago, and so are their wants and needs. The adage "the only certainty in life is change" continues to be a truism. Unfortunately, threatening employees causes them to cease all creativity and cling to what helped them deal with the threat in the past. This fact is also why you hear the adage "no one was ever fired for buying IBM." If you aren't familiar with this adage, it refers to employees presented with new solutions and turning them away to use the tried and true method.
If lack of change sounds beneficial to you, please contact me directly to explain your business and how it has not changed over the last few decades. The doubling rate of human knowledge in 1900 and before is estimated at every 100 years. Currently, the doubling rate is about every 13 months. If you are not taking advantage of advances to technology and new data, this article is not meant for you because your business will not be around much longer. Change is inevitable, and I encourage everyone to embrace an outlook which embraces change. Trust me, and you'll be better for the experience!
In closing, the best spot to find sticks is in your employee policies and human resources activities. If your HR department is not hiring and building teams for your managers to lead, start there. If your managers are not leading teams but rather whipping horses, start there. I promise you that ridding your business of carrots and sticks will result in positive, healthy changes for you, your employees, and your business.
 Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics, 106(4), 1039-1061.
 Maslow, A. H. (1943). A theory of human motivation. Psychological Review, 50(4), 370-396. http://dx.doi.org/10.1037/h0054346
 Kahneman, D., & Deaton, A. (2010). High income improves evaluation of life but not emotional well-being. Proceedings of the National Academy of Sciences of the United States of America, 107(38), 16489-16493. Retrieved from http://www.jstor.org/stable/20779694
 Gagné, M., & Deci, E. L. (2005). Self‐determination theory and work motivation. Journal of Organizational Behavior, 26(4), 331-362.