What Are Incentives?

When is the last time you were influenced by an incentive?  Before you answer, think about what an incentive really is.  If you immediately thought of the trip to The Bahamas on an all-expense paid President’s Club, you might think it has been quite a while if ever.  But what about the last time you used a coupon for groceries or a discount coupon from a fabric store or hobby store?  They’re all incentives.  Incentives are designed to change anticipated behavior.  I wish I could say they change motivation but that isn’t true.  They change behavior.  Couponing is designed to get the consumer to try a new product or increase the purchase volume of a product.  Sometimes they are cross-coupons to get the consumer to purchase a product that is tied to another product.  In the retail market, it doesn’t even require a coupon to be an incentive.  In-store displays with SALE flashed all over are incentives.  So why are they sometimes viewed as negative?

Remember that incentive travel program for the AIG executives in the fall of 2009?  It’s what you remember even though it was a General American travel program for brokers that had exceeded stated objectives and earned the incentive travel trip.  So why all the negative press?  The government was bailing out AIG and here they were sending people on a “boondoggle” to Phoenix.  Wait.  The program was already paid for and cancellation penalties would exceed the cost but let’s ignore the facts.  We don’t like it because these brokers were living it up on our tax dollars.  Right? 

Just before this happened, our government announced the Cash for Clunkers program (an incentive program) that cost the taxpayers $3 billion.  Now that’s an incentive program.  Everyone thought that was great but guess what?  In studies conducted after the program, researchers found that all the program did was pull forward purchases that would have happened already.  For two months, car dealers saw an increase in sales, and this increase was completely reversed by the next 7 months of reduced car sales.  There was no effect on jobs, house prices or home default rates from the program.  Too bad our government did enlist incentive experts to assist in the design and operation of the program.  They would have created the economic models with an ROI established and measured against benchmarks like they did for the General American travel incentive program.

Incentives are all around us, influencing our behavior every day.  Without incentives, we would lack the motivators that enhance our performance beyond salary and compensation.