When incentives strike out

By PON Staffon / Business Negotiations, Daily

Adapted from “Managers: Think Twice before Setting Negotiation Goals,” first published in the Negotiation newsletter.

The next time you’re tempted to dangle performance incentives in front of your employees, think about whether it could backfire.

As an illustration, let’s look at Major League Baseball manager Joe Torre’s renegotiation with the New York Yankees in October 2007. Torre had led the Yankees to four World Series titles and to the playoffs in all of his 12 seasons, but his future with the club was uncertain following a string of disappointing postseasons. As he approached contract talks, Torre writes in his book with Tom Verducci, The Yankee Years (Doubleday, 2009), his primary goal was to secure a two-year deal that would eliminate the distraction of knowing he might possibly be fired after a year. His salary was virtually irrelevant, he claims.

But when they met, team owner George Steinbrenner and his lieutenants told Torre they would only give him a one-year deal. The deal included a 33% pay cut, plus the possibility of three $1 million payments: one for reaching the postseason, a second for reaching the American League Championship Series, and a third for reaching the World Series.

Torre was insulted by the incentives. “I don’t need motivation to do what I do,” he reportedly told the Yankee executives. With Steinbrenner and his team unwilling to negotiate, Torre walked away. The moral of the story? Incentives won’t work if your employees don’t want them. People often erroneously assume that others are driven more by extrinsic rewards, such as financial bonuses and promotions, than by intrinsic ones, such as the satisfaction of a job well done, according to research by professor Chip Heath of Stanford University. Thus, it pays to take time to explore what truly drives your employees before you offer incentives.