Organizations can avoid Extrinsic Incentive Bias to creep into their culture.
EWhat comes to your mind when one says he wants to be a Doctor or Engineer or wishes to join the defense forces? The first thing that would come to your mind would be, “Must be attracted to the fat salary and perks.” If you are one of those who think like this, you would be surprised to know that you are suffering from a cognitive bias called Extrinsic Incentive Bias. Is it hard to believe? Let’s understand what this is and how it can impact employee relations at the workplace.
Extrinsic Incentive Bias
Two motivating factors encourage an employee to work hard at the workplace. First is extrinsic motivating factors or external rewards such as a salary, bonus, or a monetary perk an individual would receive for the job. The other is intrinsic motivating factors, which give the employee joy from within in executing a task. For instance, employee ‘X’ is a business development manager in an IT services firm. The most exciting or motivating factor he likes about the job is that it pays him so well that he can give himself and his family a comfortable life.
On the other hand, employee ‘Y’ is also a business development manager in the same firm, but the most exciting factor she likes about the job is the job itself. She loves interacting with clients and directly impacting the business’s revenue through business closures. She loves upskilling herself and gaining a higher stature in the organization through her remarkable performance. And then, for her, a fat salary comes at number three, again a substantial motivating factor but not the most exciting one that keeps her going.
How Extrinsic Incentive Bias came into existence
Chip Heath coined the term Extrinsic Incentive Bias from Stanford, known as a management scientist, in his paper ‘Social Psychology of Agency Relationships: Lay Theories of Motivation Overemphasize Extrinsic Incentives’ in 1999. Heath experimented with 25 managers and 29 customer service representatives of Citibank Call Centre as part of his research. He requested the 25 managers to attribute intrinsic and extrinsic rewards to their customer service representatives. The managers assumed that they knew their representatives very well, and as part of their response, extrinsic rewards like salary and job security ranked top, while intrinsic rewards such as skill development and satisfaction ranked low. On the other hand, when the representatives were asked to rank their own rewards, intrinsic rewards featured on the top.
Extrinsic Incentive Bias Can Become Dangerous
When it comes to making a balanced rewards and recognition strategy, it should include a combination of monetary rewards such as bonuses and fat incentives for their employees, which keeps them satisfied, but real motivation engagement comes with intrinsic rewards such as career development, purpose at work and giving a positive work culture. If this balance is present, it would become easier for the organization to retain people for longer.
How to avoid Extrinsic Incentive Bias
Heath’s study has shown that Extrinsic Incentive Bias is real, and many workplaces can be suffering from the same. However, employers can keep certain things in mind and avoid such biases from creeping into their work culture.
Don’t focus only on monetary rewards
There is a difference between satisfied employees and engaged employees. Job satisfaction comes from extrinsic rewards such as salary, bonuses, incentives, and other perks. But engagement at work can only be driven through intrinsic rewards such as giving a good work culture to employees where they can see success and also find meaning & purpose in their job.
Build a culture of care
In today’s time, when businesses thrive on meaningful relationships, employers cannot afford to have transactional relationships with their employees. This is why we must build a culture where people feel that care and positivity. This can be through various things such as supportive policies like childcare for new mothers or establishing a string POSH policy where women employees can feel safe. Companies cannot expect to have an engaged workforce where, on one end, one gives big fat bonuses, and on the other, the workforce is struggling with a toxic work culture.
Practice Empathy
Post-COVID-19, empathy has become a buzzword in the workplace. Putting oneself in someone else’s shoes gives a different perspective. Organizations around the globe are making efforts to train their managers to practice empathy and compassion in the workplace, where they can build a better connection with their employees.
Listen to your employee
We hear a lot about the importance of employee listening. What exactly does that mean? It refers to the exercise of knowing what the employees want. Companies should regularly take feedback from their employees through internal engagement surveys to know the preferences of their people. It will help them understand what kind of an R&R (Rewards and Recognition) strategy they should adopt.
Building a balanced R&R strategy is essential in today’s time. A higher retention of employees cannot be achieved with only monetary rewards. Companies should focus on skilling their employees, giving them better opportunities and a sense of purpose at the workplace. If your organization only focuses on providing employees monetary benefits, it is a sign that it might have fallen prey to the Extrinsic Incentive Bias.
Frequently Asked Questions (FAQs)
1) What is Extrinsic Incentive Bias?
Extrinsic Incentive Bias is the tendency to assume that someone who works hard in his/her job is solely motivated by monetary factors, i.e., monetary rewards and undervaluing the intrinsic motivation factors, which leads to intellectual stimulations in an individual while performing the job.
2) Why is Extrinsic Incentive Bias dangerous for organizations?
Over-relying on monetary rewards creates only satisfied employees, not engaged ones. True employee engagement comes from intrinsic motivators — a positive work culture, career development opportunities, purpose at work, and empathetic leadership. Organizations that overlook these factors struggle with long-term retention, even when offering competitive pay, because they fail to address what actually keeps employees motivated and committed.
3) How can organizations avoid Extrinsic Incentive Bias in their R&R strategy?
Organizations can avoid Extrinsic Incentive Bias by balancing monetary rewards with intrinsic motivators — offering career growth, meaningful work, and a culture of care and empathy. Regularly listening to employees through engagement surveys, training managers to practice empathy, building supportive workplace policies, and ensuring psychological safety all help create an R&R strategy that drives genuine, long-term engagement rather than surface-level satisfaction.
