By Susan Muldowney

Behavioural scientists have long believed that peak human potential can be reached through a system of rewards and punishments commonly referred to as the carrot-and-stick approach. It’s a theory that likens a human being to a donkey hitched to a cart and is readily applied in business – if you exceed your budget, you’ll receive a bonus but if you fail to impress, you’d better watch your back.

But what if these kinds of short-term rewards and punishments don’t actually succeed in motivating employees to do their very best? What if money in itself isn’t enough today? Are managers wasting their time and budget fumbling for the switch that really turns workers on?

In his book, Drive, author Daniel Pink says contingent rewards are an ineffective form of motivation. He believes they’re out of step with modern ways of working where complex conceptual work is prized above mechanical tasks, which are increasingly being outsourced.

“Essentially, what we’ve had as a mainstay motivator is you give them rewards,” he says. “This is great for 19th-century work and actually not bad for a lot of 20th-century work, but woefully out of date for 21st-century work.”

Pink believes the key to motivation is in fact the opposite of the carrot and stick. He says the answer lies in understanding the fundamental human desire for self-rule.

“Part of what makes us human is we want to have control over our own life and a lot of the mechanisms used in conventional forms of management, and certainly management that was deployed for more simple mechanical blue-collar and white-collar work, was very controlling,” he explains. “What science tells us very clearly is that people do their best work on creative conceptual tasks when they have some sovereignty over what they do.”

Innovative companies are already giving employees a degree of freereign. Google asks employees to dedicate 20 per cent of their working week to doing anything they want. Some of the company’s most successful products, such as Gmail, were devised during this ‘free time’. LinkedIn also gives employees regular hack days to help unleash creative ideas.

But giving employees autonomy is also not enough. They need to understand their purpose, too. “One of the things that managers can do, which is extraordinarily effective in boosting motivation and performance, is explain to employees why they are doing what they are doing,” explains Pink.

“It’s a very easy and inexpensive thing that managers can do.  Does what I do contribute to the larger whole? Would things not go as well if I didn’t do my piece? That’s enormously important to people and managers can have more conversations about why and maybe fewer conversations about how.”

It’s not that money doesn’t matter. It matters a lot. You can give people all the autonomy and purpose they need but if you don’t pay them fairly, they’re unlikely to stick around.

“Money is a threshold motivator,” adds Pink. “If you want people to stuff a lot of envelopes, pay them per envelope and they will stuff more. The problem is that few of us are doing that kind of work and when people are doing more creative conceptual work, you don’t want them thinking about the money. You want them thinking about the work.”

Nicholas Rogers, manager of Hudson’s accounting and finance recruitment practice, says that while money is always high on a job seeker’s wish list it’s not a strong retention tool, nor does it lead to engagement and increased productivity. “Salary is a very extrinsic motivator for people,” he says. “There’s a lot of internal alignment issues that people tend to focus on more. People want a sense of belonging, they want to feel that they’re working with people who share the same values, they want to feel that they’re working together as a team.”

However, money does matter more to one group of employees. Results of Hudson’s 2014 Hiring Report shows that 84 per cent of Gen Y, the group that has long demanded flexibility and career progression, ranks salary as the number one driver when it comes to considering a new role. Salary was less important for Gen X, with 68 per cent seeing it as a motivating factor, and only 46 per cent of Baby Boomers were driven by money.

Michael McQueen, a social researcher specialising in Gen Y, says that while this generation has historically been motivated by work-life balance, variety and empowerment in their role, this is now something that all generations expect.

“Workplace cultures have evolved and adapted so some of the things that Gen Y used to rate as the most important things are increasingly the norm,” he says. “The other factor is that you’ve got more and more Gen Ys who want to do things like buy a house in Sydney, for instance, and suddenly the economic realities are biting. Perhaps there is a sense now that they’re getting on with some of those commitments that, by their nature, they delayed.”

Gen Y may need to save a little harder as current market conditions show little movement in salary levels. John Egan, chairman and founder of remuneration specialists Egan Associates, says the market is experiencing a containment in fixed remuneration. “Where pay adjustments have been contained under 4 per cent, that is now coming back to 3 per cent. If I go back several years, it would have been 5 per cent or 6 per cent.”

Egan adds he has seen a shift in the importance placed on salary as a motivator for job performance. “I think there’s an increasing proportion of the workforce that has a view that work-life balance is as important as pay. It’s not until the pay increment is too tempting that the view of that circumstance becomes more difficult. And I believe that increment isn’t 10 per cent or even 15 per cent, I think it’s probably got to be 20–30 per cent for them to make the sacrifice to allow financial gain to be an adequate substitute for quality of life.”

While fixed remuneration has been largely contained, Egan adds that there has been an increased focus on incentive plans. Yet Daniel Pink says short-term incentive schemes can also produce results that managers don’t want.

“If you’re a manager and the only thing you care about in the world is that your sales team hits its numbers for the month of March, you should give people the biggest bonus you possibly can. People will hit their numbers if you off er them that huge bonus at the end of the month,” he says.

“But it could have collateral consequences. People might cut corners in order to reach those goals. People might not necessarily do right by customers or clients because they are so focused on getting that goal. And there’s the collateral consequences of not delivering on long-term results.”

Pink says if you want to motivate people to do their best, pay them fairly, set high standards and goals and then leave them to it. “Autonomy is the pathway to high performance on most of the work that people in the US and Australia are doing today. If you think of other people like yourself, you’re going to recognise that they are driven by things other than the fear of the leash or the crunch of the carrot.”

This article originally appeared in Leadership Matters, AIM’s bimonthly magazine exclusively for Members.