Behavioral Economics: Optimizing Employee Performance

A study found that nearly one-third of employees leave their jobs within a month of their promotion, highlighting that financial compensation isn't everything.

Unsurprisingly, many organizations face this situation: their carefully crafted bonuses fail to motivate the employees. This could be puzzling because traditional economic theory suggests money is the universal motivator.

But is that entirely true?

As marketing influencer and thought leader Gary Vanderchuk famously said, “You do not build culture by having a foosball table or open seating. You build culture by actually talking to people, one-by-one, and understanding what they care about.”

Unfortunately, most organizations fail to realize this and continue using traditional theories and a carrot-before-the-stick approach to motivate their employees.

Emotions play a much larger role in the decisions we make. We feel them before we think them, and this is exactly where behavioral economics plays a huge part.

In this blog, we'll explore the power of behavioral economics in driving employee engagement and take away a few practical lessons from key behavioral theories that can revolutionize your HR policies.

Understanding behavioral economics

In the 2024 Lattice State of People Strategy Report, 50% of C-suites believe that a positive company culture leads directly to better business outcomes, making it a crucial part of the overall organizational productivity process.

While employee rewards and recognition are important, not every employee wants the same thing. For example, businesses may want to start an “Employee of the Month” campaign to engage and improve productivity.

However, it can only create unhealthy competition, and resentment among other employees who may feel bypassed for the award.

This is why behavioral economics is crucial for every organization. It bridges the gap between traditional economics, which assumes people make rational decisions, and psychology, which acknowledges the emotional and cognitive factors that influence our choices.

Employee engagement and behavioral economics

Behavioral economics challenges the classical economic assumption of perfect rationality. It recognizes that:

Humans are not perfectly rational: We make decisions based on emotions, biases, and mental shortcuts.
Traditional rewards can backfire: Focusing solely on extrinsic motivators like bonuses can diminish intrinsic motivation, the desire to work as the task itself is fulfilling. For example, even a good hike can look unsatisfactory if the peers have gotten more. Thus, each decision should be based not just on its impact on an individual but also on the entire workplace.
Context matters: The way information is presented and the environment we work in significantly impact our behavior.

Thus, behavioral economics isn't just about implementing HR strategies or appreciation ideas to boost productivity and engagement; it is also about properly communicating these to the workforce.

Thus, employee engagement and behavioral economics go hand in hand. Organizations and any new policy implementation should understand aspects of employee behavior, such as:

Loss aversion: We tend to feel the pain of losing something more intensely than the pleasure of gaining something of equal value. Behavioral economics can help design programs that highlight the potential negative consequences of not being engaged, like missed learning opportunities or career advancement.
Framing: The way information is presented can significantly impact our decisions. Positive framing, emphasizing the benefits of engagement rather than the downsides of disengagement, can encourage desired behaviors.
Social norms & recognition: Employees are influenced by the behavior of their peers. Highlighting examples of engaged employees and fostering a culture of recognition can create a positive social norm around engagement.
Autonomy & ownership: People crave a sense of control over their work. Giving employees autonomy and ownership over their tasks can increase intrinsic motivation and engagement.

By understanding these principles, we can design interventions that "nudge" employees toward desired behaviors without making them feel manipulated.

Key strategies to drive performance and engagement using behavioral economics

Now, we come to the crux of this blog: the strategies to implement behavioral economics in your organization.

Here are a few ways you can evaluate your workplace experiences and improve employee engagement:

1. Implementing nudge theory

Nudge theory is simply an approach to using subtle cues or “nudges” to lead people to make the choices that you want them to make.

Richard H Thaler and Cass R Sunstein, two prominent behavioral economists, mention in their book Nudge: Improving Decisions about Health, Wealth, and Happiness that a nudge is any element of the choice architecture that modifies behavior in a predictable manner without removing all options or drastically altering people's financial incentives.

It suggests that subtle interventions can influence choices without making it seem like an enforcement. Nudge theory can be implemented by following a few simple steps:

Make the desired choice easy: Simplify enrollment in wellness programs, automate positive feedback processes, and pre-populate forms with healthy defaults (e.g., opting employees into retirement savings plans).
Highlight progress & provide feedback: Use progress bars, gamification elements, and regular performance reviews to keep employees motivated and aware of their impact.
Utilize social comparison: Publicly acknowledge top performers in a positive light and create team challenges to foster a sense of healthy competition and collaboration.

2. Enhancing motivation through incentives

Another approach to improve engagement and performance is through incentives and employee rewards and recognition. By acknowledging and rewarding positive behavior and successful initiatives, you can nudge the overall team to replicate similar behavior.

For example, if their marketing team goes out of their way to help the sales team optimize their emails and marketing materials for a specific customer, which translates into a win, why not reward them? You can do this by:

Focusing on intrinsic rewards: These are not just incentives or financial rewards but those that prioritize recognition, growth opportunities, and meaningful work assignments that tap into intrinsic motivation.
Structuring incentives strategically: Consider time-bound rewards for achieving specific goals, offer public recognition for exceeding expectations, and experiment with offering choices over rewards to personalize the experience.

This approach will help to improve employee engagement and create healthy competition, even improving teamwork.

3. Creating a culture of recognition, feedback, and utilizing loss aversion

To truly embrace any change, organizations need to use a combination of recognition, feedback, and utilizing loss aversion to move the needle. This starts with a few simple processes:

The power of recognition

Publicly acknowledging employee contributions, big and small, is a powerful tool that reinforces positive behaviors and builds a culture of appreciation.

Just a simple “thank you” or a praise in front of the team goes a long way in boosting morale and has shown to improve employee expectations, engagement, and sense of belonging.

Timely feedback

Most companies give feedback to their employees at the wrong time, which is just before appraisal season. This can create distrust and often leads to employees being demotivated.

Regular, specific, and constructive feedback allows employees to understand their strengths and weaknesses, adjust their approach, and feel valued for their contributions.

Loss aversion to motivate employees

Loss aversion, a core principle in behavioral economics, highlights our tendency to feel the pain of losing something more intensely than the pleasure of gaining something of equal value.

We can leverage this principle to subtly nudge employees towards desired behaviors by:

Framing goals positively: Instead of focusing on the negatives of missing a target, emphasize the potential benefits of achieving it. For example, say, "strive to achieve X for Y positive outcome" instead of "avoid missing X and face Z negative consequence." This positive framing plays on the fear of loss but in a motivating way.
Highlighting missed opportunities: Subtly remind employees of the potential downsides of not engaging in desired behaviors. This can be done tactfully without resorting to fear tactics. For instance, "By participating in the wellness program, you can avoid potential health risks and gain access to valuable discounts on gym memberships."

This approach uses loss aversion to nudge employees towards positive behaviors that ultimately benefit them.

Believe it or not, it is not only the HR team or leadership that can enforce workplace culture. It is also dependent on the people in the workforce. If the majority do not subscribe or abide by the rules, chances are, new hires or the overall team will be likely to follow suit.

Thus, it is crucial to shape employee engagement by using subtle cues, such as:

Peer influence: Employees are more likely to adopt behaviors they see their colleagues exhibiting. Highlighting examples of engaged employees and fostering a culture of collaboration can create a positive norm around engagement.
Set clear expectations and values: Clearly communicate the company's values and expected behaviors regarding engagement. Encourage employees to hold each other accountable for upholding these standards.
Injunctive social norms: These are unwritten rules about what behaviors are considered acceptable or expected within a group. By setting clear expectations for engagement and encouraging employees to hold each other accountable, companies can cultivate a strong social norm around these desired behaviors.
Leverage social media & internal communication channels: Share stories of employee engagement successes and highlight positive team dynamics on social media platforms and internal communication channels to inspire and motivate others.

5. Framing using outcome-based communications

The way information is presented can significantly impact our decisions.

By using outcome-based communication, companies can encourage desired behaviors in employees:

Focus on positive outcomes: Frame communication about goals, tasks, and initiatives by emphasizing the positive benefits for both the employee and the company. This approach can increase buy-in and engagement.
Quantify benefits whenever possible: Use data and metrics to demonstrate how specific behaviors contribute to positive outcomes. This helps employees see the tangible impact of their work and motivates them to go the extra mile.
Simplify and use clear language: Avoid overly technical jargon and complex explanations. Ensure communication is concise, easy to understand, and directly relevant to the audience.

Source

By following these principles and framing effective communication with a focus on positive outcomes, companies can effectively nudge employees toward desired behaviors and ultimately drive higher levels of engagement.

Companies that have used behavioral economics to improve employee engagement

So is behavioral economics just some fancy term, or has it also been in practice? The answer will surely surprise you.

Companies have begun to hire Chief Behavioral Officers to help enforce these values in the organization, including Merrill Lynch, Barclays, and Bank of America, among others.

Google and Virgin have made stellar use of this method for their employee engagement and company culture.

1. Google: Nudging towards innovation

Google is a prime example of a company leveraging behavioral economics to foster a culture of innovation and high employee engagement. One key strategy is their 20% Time policy, which allows employees to dedicate 20% of their workweek to pursuing personal projects.

This seemingly simple policy taps into several behavioral economic principles:

Balance & freedom: Giving employees 20% time to work on their passion projects allows them to explore projects beyond their day-to-day activities. This encourages them to go above and beyond in their role and helps improve accountability while giving them the flexibility to determine where they should spend their time.
Autonomy and endowment effect: The policy leverages the idea that when individuals feel they have autonomy over their choices and are endowed with dedicated time to pursue their interests, they are more engaged and productive.
Encourages learning & development: Employees are more likely to use this 20% time to learn new skills and improve their knowledge in a particular field. This has a long-term benefit for both the individuals and the organization, as they develop leadership internally and encourage each team member to go beyond their scope of work.
Cultivates culture of innovation: Since team members are more likely to try out new things without letting them directly impact their evaluation, they are more likely to innovate and develop new pathways. The potential for significant rewards associated with successful personal projects creates a positive emotional response, further boosting engagement.

The outcome? Google has credited the 20% time policy with the development of some of its most successful products, including Google News, Gmail, and AdSense.

Additionally, by publicly recognizing and supporting these employee-driven projects, Google reinforces positive behavior and encourages ongoing participation.

Virgin Pulse, a corporate wellness company founded by Richard Branson, demonstrates the power of behavioral economics through its gamified wellness platform.

This platform uses elements of game design to make healthy behaviors more engaging and interactive for employees.

Challenges addressed by gamification

Inhibition to change: People do not like to change or adopt new processes unless absolutely essential. Video games conquer this by introducing new “worlds” and promoting them to explore new territories.
Challenge: Games need to be challenging for them to be interesting. However, this needs to be fine-tuned according to each individual’s capabilities. If the game becomes “too easy,” it is not fun anymore.
Lack of progression: When any new process or strategy is implemented, the general expectation is to see it creating an impact. However, the smaller changes often go unnoticed, and it is only after it has made a sizeable mark that people realize its benefits. Games conquer this by introducing small achievements and changes, such as rewards, medals, health points, and levels. This subtly shows progression, encouraging people to continue down the path.

Virgin Pulse reports significant improvements in employee engagement and well-being thanks to their gamified platform. The positive impact of combining gamification elements with social support helps create a more engaged and healthier workforce.

Conclusion

We have explored the science behind employee engagement and behavior.

By leveraging behavioral economics, companies can unlock a competitive advantage through a more motivated, productive, and innovative workforce. These strategies aren’t just about “nudges” in the right direction. They are a strategic investment in your greatest asset—your people.

As research in behavioral science and HR trends continues to evolve, we can expect even more innovative strategies to emerge, shaping the future of employee engagement and creating a win-win situation for both employees and organizations.

FAQs

1. What is behavioral employee engagement?

Behavioral employee engagement is showcased when an employee’s actions and work ethic demonstrate their dedication and enthusiasm to their role and the organization.

Such employees typically go above and beyond their job and task requirements, such as taking initiative on a new task, collaborating with other team members, and consistently striving to deliver high-quality work.

2. How does behavior affect work performance?

Employee behavior affects the overall attitude and environment of a workplace, making it a critical factor for work performance. Engaged employees are more productive, take ownership of their work, and are more likely to go the extra mile.

They actively seek out solutions to problems, collaborate effectively with colleagues, and demonstrate a willingness to learn and grow within their roles.

This indirectly encourages other employees to develop and display these positive traits, which translates into higher-quality outputs and a more positive work environment for everyone.