Few studies have so far taken an in-depth look at the role of financial incentives during change processes. To better understand how financial incentives influence behavior change, I analyzed existing literature and conducted a case study. The results can be found in my thesis for the “Executive Master in Consulting and Coaching for Change” at INSEAD, which can be downloaded below.
Due to the technological, social, and economic developments of the past decade, organizations find themselves in a quickly evolving market environment, which they need to adapt to. The management of organizational change therefore remains one of the top priorities for today’s corporations. This is reflected by the large amount of academic research focused on the management of change both at the level of the individual and the organization. Organizational change is seen as a multi-step process with the key factor for success being the affected individuals’ commitment to alter their behaviors.
Few studies have so far taken an in-depth look at the role of financial incentives during change processes, even though the use of monetary rewards to create commitment and drive behavior change might seem like a viable option to many practitioners. To better understand how financial incentives influence behavior change, when they are viable to use, and how they should be structured, I analyzed existing literature from the fields of change management, behavioral economics, and motivational psychology to derive the key theoretical concepts available in today’s research. I then conducted a case study involving managers from an organization that implemented a new bonus scheme to drive behavior change. Following a phenomenological approach with semi-structured interviews, I collected additional insights into the implications of explicit financial incentives on the affected employees.
My key finding is that organizations can, under certain limited conditions, profit from using explicit financial incentives to drive change. This is especially true in highly time-critical situations and in corporate cultures that embrace the use of monetary rewards. In other situations the use of financial incentives comes with the risk of incurring negative long-term effects on cooperation and intrinsic staff motivation. The framing of a financial incentive can alleviate some of these side effects if employees do not perceive it to be explicitly targeted at certain behavior changes.