„Money matters. It's just not as important as we think”

Slow progress, imperfect progress, but progress

Dan, in 2009 your book "Drive" and your TED talk "The Puzzle of Motivation" received significant attention. You explained that extrinsic incentives such as bonuses are poison for creative tasks and can displace intrinsic motivation. Have companies heeded your advice?

Some did, some didn't. Some companies, including large ones, have reacted and simplified their compensation systems. Instead of complex incentive structures, they now rely on models that provide for only a few bonuses in addition to the basic salary. Some have abolished sales commissions. They also grant more autonomy, mastery and purpose, especially in areas of innovation. So, progress is being made, slow progress, imperfect progress, but progress nonetheless.

Why is the change in performance management only making slow progress?

Because it’s complicated! Money does matter. If you don’t pay people well and fairly, you won’t get motivation. But “if-then rewards” — as in “if you do this, then you get that” — don’t work nearly as well as we think. Worse, they can mislead us. If you dangle rewards in front of people, you get them to focus and act in the short term. But you don’t always improve the quality of their work. For instance, in this interview if you were to give me a bonus of 100 euros for good answers, then I would try very hard. But I don't think my answers would be any better than without the bonus. They might even be worse. Because I’d be thinking about the money and forget to have a real conversation. Or let's take sales: you can use contingent rewards to increase sales figures at the end of the month. That can work quite well in the short term. But in the race to hit their short-term numbers, they might burn your best customers or take the low road or even cheat.    

“If-then rewards” — as in “if you do this, then you get that” — don’t work nearly as well as we think. Worse, they can mislead us.

So first, it's very easy to get attention with if-then rewards. And second, the transition to a system based in autonomy, mastery and purpose is very difficult. You have to understand what intrinsically motivates employees. You have to align those motivations with others in a way that produces results. You need to make sure that they learn, grow and that they are connected to the purpose of the company. That's hard!

So, companies prefer to take the easy way out...

Exactly. Managers are often not well prepared for this and experience a lot of pressure when it comes to short-term measures.

Are we living a rollback?

Some German companies have tried it with fewer individual bonuses, but are now turning back the clock focussing more on performance-related incentives again. Did they perhaps think it was too easy? And do you perhaps have a small part in this, as the triad of autonomy, mastery and purpose sounds so catchy?

The ideas in my book are based on 50 years of research by people like Edward L. Deci at the University of Rochester, Richard M. Ryan, who is now in Australia, and other psychologists and economists. I didn't want to simply say what others should do, but to prove that I am more right than wrong. Simplification doesn't usually worry me too much when writing a book. But there is one thing where the message got too simple and people misinterpreted it: the idea that ONLY intrinsic rewards matter. That ONLY autonomy, mastery and purpose play a role. That's not true. Money matters. It's just not as important as we think and works in a different way. People should be paid enough to take the issue of money off the table and think about what’s their job.

There is one thing where the message got too simple and people misinterpreted it: the idea that ONLY intrinsic rewards matter. That ONLY autonomy, mastery and purpose play a role. That's not true. Money matters.

Without individual performance appraisal, some companies find themselves in a kind of fairness dilemma: if they have a person in the team who they think is doing better than the others, it doesn't seem fair if they don't get a performance bonus, but the same as the others.

Ha! This is another oversimplification. You should treat everybody fairly, but that doesn’t mean you should treat everybody the same — including on pay. Some people perform better than others. If someone creates more value, they should be paid more. Human beings are exquisitely attuned to the norm of fairness. Anyone who violates it is in big trouble.

Be aware of simplifications

So, you think that top performers should get more money, but not as a result of a certain measurable performance, but as an investment in advance?

I’m all for measuring performance. I’m just against many uses of if-then rewards.  There is a lot to be said in favour of a top footballer like Ronaldo, for example, having a higher basic salary than many of his team-mates. But above all, it is important that he is not paid primarily for goals. Because what would happen? He would try to score every touch rather than pass to his teammates and try to win the game. High-stakes, individual rewards can corrode cooperate.

You should treat everybody fairly, but that doesn’t mean you should treat everybody the same — including on pay. Some people perform better than others. If someone creates more value, they should be paid more.

But we can't measure individual performance well — and in a complex work environment, it becomes even more challenging …

Right. Businesses do need measurements — including for individuals. But fashioning the correct ones is tricky. For instance, many organizations fail to understand Goodhart’s Law, which states that whenever a measure becomes a target it ceases being an effective measure. If there are large rewards for specific behaviors, people may try to game the system and optimize for the metric than the underlying goal it is intended to measure. What I’ve also seen is that many measurements and incentive systems are extremely complicated — and require an entire costly administrative apparatus to design, implement, monitor, and adjudicate it. The best measures tend to small in number, simple in design, difficult to game, and connected to business outcomes that matter. But there’s no perfect answer.  

Many companies currently want to bring their employees back into the office, and so restrict their autonomy to a certain extent. What do you think of this strategy? 

That's a difficult one. I wrote about remote work 20 years ago, about the rise of people working from home — in the way self-employed people do. And people said, no, it'll never work. Then the pandemic hit. And in March 2020, several hundred million people did it in three days and kept it up for a couple of years. And that’s hard to undo. Many of the companies trying to do this don't really realize that. At the moment, it looks like there will be essentially permanent hybrid mix of office work and remote work. And we still need to find out what the right mix is.

We will probably get to a point where the way we work becomes so hybrid that we no longer call it hybrid, we just call it work.

When people go home at night and wonder what they should have for dinner, they make different decisions. Sometimes they cook their dinner, sometimes they walk down the street and pick up some dinner, sometimes they may have it delivered to their home or they skip dinner, whatever. We don't call that hybrid eating, right? We're saying that you figure it out for yourself as an adult what's best. And it will be the same here: we will probably get to a point where the way we work becomes so hybrid that we no longer call it hybrid, we just call it work.

To what extent are managers ready for this?

Some are, some aren’t. Some older managers especially resent this trend. They think, “When I was your age, I was in the office all the time. So, everyone else should be in the office all the time too”. Many people actually believe that people don't work at home, even though in the office they may not have been doing very much work. The fact that you can see someone is no evidence that the person is actually doing something productive or effective. And the fact that you can't see someone is not proof of the opposite.

Let's move on to your latest book "The Power of Regret". What does regret have to do with performance?

Oh, it has everything to do with performance. Regret is an emotion. It makes us feel bad when we look back and say: If only I had done something differently or in a different way. So, we regret certain decisions, actions or inactions. It is one of the most common feelings people have – and one of the most useful. Because if we deal with our regrets properly — don't ignore them, don't stew them, but confront them — we can become better negotiators, problem solvers and strategists, avoid cognitive biases and find more meaning in life. Once again, this isn’t a wish. This is what a half-century of science tells us.

If we deal with our regrets properly — don't ignore them, don't stew them, but confront them — we can become better negotiators, problem solvers and strategists, avoid cognitive biases and find more meaning in life.

But you also write that regret does not fit well into a performance-orientated society or performance-orientated companies. Why?

We generally don't like to talk about our regrets. We think that others feel the same way. And we think that we are the only ones who feel regret. And that is a colossal mistake. There are studies that show that the most common negative emotion in everyday conversations is regret. There are people out there who say: "I don’t have any regrets". But the only people who have no regrets are: little kids, because their brains haven’t developed yet; people with certain kinds of neurodegenerative disorders; and sociopaths. Everyone else has regrets. Why is this so widespread? Because regret is useful if we treat it right. But we can’t do that if we don't talk about it and don't think about it.

Being critical with oneself

The same applies to mistakes and failure. What is the difference?

Regret is an emotion. Failure is an action. If I forget to buy insurance for my company, that is a failure. The feeling I get is regret. But we can have regrets about a whole variety of things. Mostly it's about choices we've made or not made. The key point is that regret is a signal. It shows us what is important to us and what we can do better.

You need to explain that a little more!

People make all kinds of decisions — and don’t remember most of them. But there are things that we did or didn't do five, ten or 20 years ago that we not only continue to remember, but that still make us feel bad. That's telling us something. That's a loud noise that comes from the past. It’s telling us what we value and how we can do better in the future.

So, in a way, it's about self-criticism....

That brings us to the subject of what you do with regrets. For example, if you say to yourself, “If only I had started my own business rather than staying with this job I hate,” that emotion is revealing. But you have a choice in how you respond. You could rip into yourself and say, “Yourself you’re an idiot and you are terrible.” Bad idea. You could say, “No worries. You're great anyway.” Another bad idea. The technique of self-compassion is more effective. This means that you treat yourself with kindness rather than contempt. Don’t treat yourself better than you treat others. But don’t treat yourself worse.

Don’t treat yourself better than you treat others. But don’t treat yourself worse.

And how can you learn from regret?

Self-compassion is the first step. It makes it easier to talk about regrets and takes a lot of the sting out of it. There is evidence that if we write down what we regret for 15 minutes a day for three days in a row, our stress levels are reduced. So, when we write about the things we regret or when we express them, we make these very blurry, abstract emotion concrete. This helps us to make sense of it.

But there’s one final step: what lesson do we draw from it? If someone regrets not starting a business, it’s telling that they value independence and risk-taking. Then you have to ask yourself what you should do next. This doesn't necessarily mean quitting their job straight away, but maybe taking a small step in that direction. Maybe that person starts a side gig or takes an entrepreneur class. Self-compassion, reflection and concrete action steps help to turn negative emotions into something positive.

The value of counterfactional thinking

You also mention in your book that counterfactual thinking can help. In what way?

Counterfactual thinking means thinking about how past events could have turned out differently. This cognitive capacity forms the basis of regret. Children can only think counterfactually from around the age of eight, so before they don't feel regret. In general, there are two types of counterfactuals. A downward counterfactual — where you imagine how things could have been even worse. This makes us feel better. Classic one: I wish I hadn't married Bob, but at least I have these two great kids. Then there’s the upward counterfactual, where we imagine how things could have turned out better. Example: If only I had moved out of my hometown, I’d have a richer life. That kind of counterfactual makes us feel worse. But if we treat it right, it can help us do better.

What role do human values and attitudes play in regret?

Moral regrets are one big category. People look back at a juncture in their lives, when they had a choice: Do the right thing or do the wrong thing? And when we do the wrong thing, most of us most of the time regret it. Interestingly, religious traditions have ways of dealing with regret that the secular world often does not. In Catholicism, for example, there is the confessional. You go into a booth and confess your sins and then you’re told what to do. Judaism has an entire day in the calendar where people atone for their sins. In the business world, we don't have rituals to help us understand and process our regrets.

In the business world, we don't have rituals to help us understand and process our regrets.

What tips do you have for managers on how they can better learn from their regrets in everyday life?

One effective method is to talk about professional regrets in team meetings. Managers can share their one regret, share what they’ve learned from, and tell what they’re going to do about it. This creates psychological safety in the team when regrets are normalised in a way.

Another practical technique is the failure resume. You write down five mistakes, setbacks or failures in one column, write in the next column what lessons you have learned from it and in the third column what future steps you plan to take. You don’t necessarily have to share. I've never shared mine.

Or when making decisions, I recommend what’s called "self-distancing". Imagine you were replaced tomorrow — what would your successor do? Andy Grove, the co-founder of Intel, always asked himself this question. Such a perspective enables a more objective view and better decisions, as we often are better at solving other people's problems because we see the big picture. When we try to solve our own problems, we're just way too much in the details.

At the Global Peter Drucker Forum in Vienna, a manager on stage advised us to behave in such a way that we have no regrets. Do you think that's good advice?

It’s difficult. We can’t avoid all regrets. But we should steer our lives to avoiding certain kinds of regrets, things that are really important. For example, whether you have created a stable foundation for yourself and for your family, whether you have acted with some degrees of boldness, whether you have done the right thing morally or whether you have connected with people you care about: Avoid these types of regrets! All the rest doesn’t matter. At the end of the day, it doesn't matter what shirt I wore today or whether I drink still or sparkling water. We don't like to admit it, but most of our decisions don’t matter. We should concentrate on those that matter a lot.

We can’t avoid all regrets. But we should steer our lives to avoiding certain kinds of regrets, things that are really important.

Coming back to your bestseller "Drive" and your concept of autonomy, mastery and purpose: do you have any regrets about how you described it?

Not really. The only thing I would want to change a little bit is Purpose: There is not just one, but two kinds of purpose. In the book "Drive", I write about the big purpose — for example, solving the climate crisis or feeding the hungry. In other words, big, transcendent purpose. There is a lot of evidence that this improves performance. But there is also a smaller purpose. For example, helping to complete a project or solve a customer problem. This small purpose is at least as important for performance.

You mean the contribution to the team and to the tasks of an organisation?

Exactly. And this contribution can be tiny. I don't have to save the planet every day on the job. My contribution can simply be to be a decent human being who's helping out others.