One lump or two? Incentives and the psychology of motivation

A stable owner had two horses. One was strong and swift; the other slower but determined. Wanting to improve their speed, he introduced a reward system: for every race won, the victor would receive a sugar cube.

At first, the system worked brilliantly. The fast horse, already skilled, pushed itself a little harder, eager for the sweet reward. The slower horse, desperate to keep up, also found new energy, striving to claim the prize.

But as time went on, unintended consequences emerged.

The fast horse, once driven by the joy of running, began racing only when it saw the sugar cube. Without a reward in sight, it trotted lazily, uninterested. It had learned to run for prizes, not for the thrill of the race.

The slower horse, realising it couldn’t win through speed alone, started playing dirty. It nudged its racing rival. It tried to trip its competitor up, even starting before the signal. Winning mattered more than fairness.

The stable owner, pleased with the faster races, increased the stakes: more sugar cubes for more victories. The rivalry between the horses grew bitter. Instead of improving together, they became fixated on the reward. They forgot about their natural abilities, their teamwork, and even their health.

One day, exhausted and frustrated, both horses simply refused to race. The system had collapsed under its own weight, leaving the stable owner to wonder if he had really made them better runners – or had he just made them chase sugar?

We might have seen this horserace play out in our own organisation, when well-intentioned incentives sometimes undermine natural motivation, promote short-term wins over long-term growth, and create unintended negative behaviours.

But why does this happen? And how do we create incentives and motivation without the unintended consequences?

The psychology of motivation: Why Rewards Can Backfire

Motivation psychology is a study of how biological, psychological, and environmental variables contribute to motivation. Psychologists usually attempt to show how motivation varies within a person at different times or among different people at the same time – though a single, unified theory of motivation has eluded psychologists for decades (psychologists never agree on anything!).

There are many different models that have been proposed – from Maslow’s Hierarchy of Needs to Locke’s Goal-Setting Theory – and some have found homes in the corporate world (Dweck’s Growth Mindset and MacGregor’s Theory X and Theory Y are just two examples that might be familiar).

Broadly, the common theme throughout the models is that we cannot motivate others; we can only motivate ourselves. This might sound surprising. After all, we’ve all seen examples of payment for completing work, trophies for achievement in sports, and even earning loyalty points on purchases with a store card.

Each of these is a form of extrinsic motivation. This is the drive to engage in an activity or a behaviour to gain an external award or to avoid the negative consequence of not engaging. Examples might include praise, payment or performance, or avoiding punishment.

In some models, extrinsic motivation is subdivided into external, introjected or identified motivations:

External Motivation:

“I have this goal because someone else wants me to pursue it”
The motivation comes from compliance, external rewards and pressure, and punishment.
Example: A key performance indicator target, such as conversion rate or calls per hour

Introjected Motivation:

“I have this goal because I feel guilty or anxious if I don’t”
The motivation comes from compliance, external self-control, ego-involvement, standards and rules.
Example: Working overtime because other team members are doing so

Identified Motivation:

“I have this goal because it is a good thing to strive for, and I truly want to do it”
The motivation comes from personal importance and values.
Example: A first call resolution goal (external), where the adviser feels that they have resolved the customer query fully because it’s also important to them (internal)

Extrinsic motivation is external to an individual or group. This is part of the reason that organisations focus primarily on salary, incentives, working environments, performance management consequences, and role promotions. They’re simpler to administer, measure and assess the impact of initiatives.

But they can also miss that common motivational thread: we can’t motivate others.

What we can do, though, is to nurture the conditions where individuals can choose to be motivated. This is intrinsic motivation: motivation that comes from inherent satisfaction, enjoyment, or personal fulfilment.

Psychologists Edward Deci and Richard Ryan, in their Self-Determination Theory, identified three core human motivators: autonomy, mastery, and purpose. When people feel they have control over their work, are developing their skills, and see their efforts as meaningful, they thrive.

But incentives – particularly in environments like contact centres – can work against these intrinsic motivators. When the focus shifts to external rewards (bonuses, leaderboards, commissions), employees may lose their natural drive to perform well.

Consider a contact centre adviser who once took pride in helping frustrated customers find real solutions. Introduce a cash incentive for reducing average call times, and suddenly, speed matters more than problem-solving. Calls get rushed. Customers feel dismissed. Employee satisfaction declines. The agent who used to find meaning in their work is now just chasing sugar cubes.

This phenomenon is not limited to call centres. People often voluntarily donate blood out of a sense of altruism and social good. With blood stocks declining in the UK and USA in the sixties, financial incentives were introduced in some areas to increase donation rates.

However, the donation rates actually decreased. Researchers found that people who had once donated out of a sense of moral duty began to see it as a transactional activity, and those who had been willing to give for free lost motivation when money was involved.

A separate study found that when children were paid to read books, their overall interest in reading declined once the rewards stopped. The external incentive – money – replaced their intrinsic love of reading, making the activity feel like work rather than a pleasurable pastime.

Extrinsic motivational approaches have their place and their benefits. They can improve short-term performance, work as part of group motivation where competition is encouraged, and they are simpler to administer and assess their impact on performance. When incentives are not carefully structured and motivation is not considered fully, we risk shifting focus away from the task itself and onto the reward.

Once employees see work as a means to an end rather than something inherently valuable, motivation diminishes.

To truly engage employees, organisations must go beyond surface-level incentives and create environments where intrinsic motivation can thrive. Recognising behaviours, not just outcomes, is the key to long-term success.

The Performance Paradox: When More Incentives = Worse Outcomes

In a sales function, a Business Development Manager is taken unexpectedly ill in the middle of a large tender.

A high-performing Adviser, Stacey, is approached and asked to step into the BDM role to complete the tender process and land the prospective client. Stacey readily accepted. The feeling of being recognised by her Sales Manager and the opportunity to be developed was motivating for her – and she set about her new role with gusto. She develops the sales pack, researches the prospect, investigates the market and competitors and builds an impressive pitch.

On the day of the pitch, Stacey impresses the prospect with her knowledge, approach and professionalism. Stacey cannot match the pricing offered by the competitor and although she handles the objection, repositions and highlights her company’s benefits, the prospect still elects to go with the rival. It’s outside of Stacey’s control and she doesn’t win the contract.

For the company, the measure of Stacey’s success was the contract being signed. Without landing the client, she had not achieved that performance indicator.

The BDM recovers from their illness and returns to the business. Stacey returns to her adviser role, disillusioned. Her external performance metric had been recognised (i.e., she didn’t achieve the goal), but her behaviours leading to the performance were not. These behaviours were driven by her intrinsic motivation: pride in her work, passion for making a difference, and learning new skills. But the company didn’t recognise these motivations and a high-performing adviser is now considering a new role outside of the business.

This story happens daily because intrinsic motivation is difficult to consider. It takes time, insight and knowledge. Understanding an individual’s drivers – why they do what they do – is often only thought of at a superficial level.

For example: “My kids are my ‘why’” is not really an intrinsic motivation; it’s extrinsic. Intrinsic motivation is deeper and rooted in our own identity and values. The sense of purpose that a child might give us, feeling that we have made a difference in the world, or leaving a legacy behind us are deeper motivations – but they are unique to each of us.

Intrinsic motivation is complex, nuanced and requires purposeful consideration. The pay-off is that it is more sustainable, delivers greater performance, productivity and creativity, and improves well-being and job satisfaction.

Designing Better Incentives: How to Avoid the ‘Sugar Cube’ Trap

Almost all incentives – hopefully – begin with a simple statement: What is the outcome we’re trying to achieve. This might be a movement in a performance goal, such as an increase in sales, reduction in handling time or consistency in attendance.

The temptation is to stop at this point. Once the goal is identified, focus often moves to the measure’s target and the logistics behind the incentivisation approach: budget, mechanics, fulfilment etc. “If adviser x hits target y, they receive z.”

This is eerily close to “If horse A wins a race, they get a sugar cube.”

This style of incentivisation has a place in our organisations. For example, agreeing to pay a base salary to someone who attends work, performs at a certain level and adheres to our conditions of employment is not likely to change. But this is also a hygiene factor.

Hygiene factors start out as extrinsic motivators, but quickly change. When you receive a promotion, you’re rewarded with a spike in dopamine, serotonin, oxytocin and other “happy hormones”. That pay rise is a welcomed benefit. But when was the last time you celebrated pay day? When did you last cartwheel away from the cash point?

This process is called hedonic adaption. And extrinsic motivators are always fighting a losing battle against it. Hedonic adaption – sometimes called hedonic treadmill – is the tendency for humans to return to a relatively stable level of happiness. It’s a survival process (it’s unwise to be too happy or too low for extended periods, as it distracts us from threats) and the brain regions involved in processing and regulating our emotional responses, particularly the ventral striatum and prefrontal cortex, play central roles. In short, motivation is emotional.

It’s why when you purchased your first car, you were excited and likely showed it off to your friends. But just a few weeks later, it’s just a car. The excitement has completely gone; just as it did post-promotion. But if that car broke down or your salary hadn’t been paid, that hygiene factor now means this becomes a demotivator. It’s an expectation.

When something’s an expectation, there is little upside. If the equation is completed – if my pay is processed – that’s fine. But woe betide if it’s not completed.

I remember an organisation arranging for Easter eggs to be given to employees as a thank you for a particularly tough start to the year. It’s something that they did every year – but this particular year, Easter fell in April. In the run-up to the initiative, the rumbles started. “Are we not doing it this year?”; “It’s gonna be summer before we get any chocolate ‘round here.” etc.

Eventually, the event happened on Maundy Thursday: the day before Good Friday. The complaints started immediately.

“I’ve already bought Easter eggs now. It’s too late.”; “You haven’t got any lactose-free chocolate.”; “They were bigger last year.”

Because Good Friday is a bank holiday in the UK, some individuals had chosen to take leave Monday to Thursday to maximise their time off. They’d missed the event, and a wave of additional complaints arrived. Something that was a nice gesture and an appreciation was no longer that. It had become an expectation; a hygiene factor.

So how do we avoid the temptation of stopping our planning at that point and creating unintentional hygiene factor incentives?

Sustainable Incentives: A Considered Approach

When building incentives – whether as reward or recognition approaches, or as a means to dissuade certain results – we can still begin in the same manner as the approach above: What are we trying to achieve and how will we know it is successful?

This provides us our goal and potential measurable impact. Now comes the harder, but more rewarding, work: What behaviours would support that goal’s achievement?

If we had no management information, stats or performance results, could you still anticipate or identify who your best advisers are? What are the behaviours these individuals exhibit that support delivery of that identified goal? Focusing on desired behaviours – the actions that lead to great performance – ensures employees are motivated for the right reasons.

For example, if we intend to encourage customer engagement, we might traditionally reward advisers for keeping average handling time low. This delivers lower AHT, but may also result in unintended behaviours, including rushed calls, cutting calls off or unnecessary transfers.

If we identify the behaviours that lead to our required customer engagement result, we might balance efficiency with quality through rewarding advisers who actively listen and summarise key points to confirm understanding. We could recognise those who proactively solve root issues, reducing repeat calls (First Call Resolution) or who receive positive customer feedback tied to effort reduction, not just time savings.

By identifying and rewarding the right behaviours, rather than just the output, you create a more sustainable performance culture where motivation stays high – without the “sugar cube” effect.

Specific is Terrific

Once we’ve identified the behaviours, building the mechanics – the identifiers of the behaviour, the process of the recognition/reward etc. – becomes easier to complete. However, we still have the spectre of hedonic adaptation, threatening to move our behaviourally focused recognition and praise towards an expectation. How do we reduce the prospect of this investment being undone?

In Deci and Ryan’s Self-Determination Theory, we identified autonomy, mastery, and purpose as core human motivators. One approach to avoid hygiene factor pitfalls is to link the fulfilment of the incentive to one or more of these factors.

A simple, but powerful, technique is to replace praise with recognition.

Praise is generic:

“Stacey worked hard on the project and went the extra mile, living our values and putting the customer at the heart of what we do. We wish that we could clone Stacey. Well done!”

It’s a lovely statement. But “Stacey” could be replaced in this praise, and it would still apply to almost anyone else in the business – even if they were working in a different area, on a different team, with different projects. It sends a subtle message that the recogniser didn’t consider Stacey and her individual contributions (mastery) or the difference she made (autonomy).

Unlike praise, recognition is specific. It highlights the specific impact of the behaviour or action, and the contribution that the individual made. It demonstrates that the recogniser has considered that specificity that is unique to Stacey.

Conclusion: Beyond Sugar Cubes – Building Lasting Motivation

Incentives are a powerful tool. But like the stable owner’s sugar cubes, they can have unintended consequences when misapplied.

When organisations focus solely on extrinsic rewards – bonuses, leaderboards, and performance metrics – they risk shifting attention away from the work itself and toward the prize. Over time, this can erode intrinsic motivation, leading to disengagement, short-term thinking, and even counterproductive behaviours.

To create a truly motivated workforce, we must move beyond the traditional incentive trap. Recognising and reinforcing desired behaviours, not just outcomes, ensures employees stay engaged for the right reasons. Avoiding hygiene factor pitfalls helps prevent rewards from becoming expectations that lose their impact. And most importantly, fostering intrinsic motivation through purposeful alignment of incentives with autonomy, mastery, and purpose to create a sustainable culture of performance and fulfilment.

In the end, people don’t thrive on sugar cubes alone. They thrive when they feel valued, when their contributions are meaningful, and when their motivation comes from within.

Organisations that understand this will not only achieve better results, but also build workplaces where people genuinely want to do their best – not because they have to, but because they choose to.

References

Deci, E. L. (1971). Effects of externally mediated rewards on intrinsic motivation. Journal of Personality and Social Psychology, 18(1), 105–115. https://doi.org/10.1037/h0030644

Deci, E. L., & Ryan, R. M. (2000). The “what” and “why” of goal pursuits: Human needs and the self-determination of behavior. Psychological Inquiry, 11(4), 227–268. https://doi.org/10.1207/S15327965PLI1104_01

Chartered Institute of Personnel and Development. (2024). Pay, performance and transparency 2024 report. CIPD. Retrieved from https://www.cipd.co.uk/knowledge/strategy/reward/pay-performance-transparency

Psychology Today. (n.d.). Hedonic Treadmill. Retrieved March 30, 2025, from https://www.psychologytoday.com/us/basics/hedonic-treadmill