Critical Incentive Pay Lesson from a Jeopardy Champion
Millions of people around the world have been captivated by the recent Jeopardy winning streak by James Holzhauer. Holzhauer was recently able to amass the second largest haul in the game show’s history. During his winning streak, he averaged $77,000 per game. For those not familiar with Jeopardy, the game is often won by someone with winnings in the single-digit thousands. Yes, he knew a lot about nearly everything, but that’s not why he won so much.
Jeff Haden, the author of The Motivation Myth: How High Achievers Really Set Themselves Up to Win, believes that Holzhauer’s recently ended streak (oops, spoiler alert) is due to a single factor. This champion is apparently immune to the effects of loss aversion. Lost aversion preys on people’s tendency to avoid losses at a higher rate than taking risks to attain gains. This is where we can leverage Jeopardy to improve incentive plans.
In order for someone to experience loss aversion, they must first value the thing they may lose. A Jeopardy player loses control of the board when they get an answer wrong. They may also lose part of their “bank” if they bet on a “Daily Double” question and answer incorrectly. Finally, it’s possible to lose everything if they get the final question wrong. These potential losses are visceral and easily understood. They serve as unspoken counterbalances to the upside of winning.
Most incentive plans are very heavily weighted toward “winning.” The upside is great, but the downside can often be no payment at all. With such a plan, aiming for a safe goal may make more sense than shooting for the moon. As an example, stock options are an all-or-nothing bet. When you have no kids, no house and no established career, there is little to lose. When you have already earmarked your potential incentive compensation, this risk of losing some of it can stop you from earning all of it. This is loss aversion in action.
It would be great if we had the ability to change the psychology of our staff so they could be immune to loss aversion. But, let’s be honest, we don’t have the time or magical powers to get that done. Rather than try and get people to ignore their instincts, we can better use our understanding of this factor in better plan design and communications.
In addition to being a potential limitation, loss aversion can be a powerful motivator, especially when it comes to motivating retention. Incentive plans can be designed to offer measurable value if a real effort is made even when results may not be achieved. This provides an incentive to try. Ensuring this level of payout, even if those efforts fail to miss their intent can provide the soft-landing required to risk taking big chances.
On the other side, communicating the real potential value of high performance can overwhelm the impact of loss aversion. When people can make better-educated guesses, or easily model potential results, they can prove to themselves the motivating power of the incentives you have offered. Too often our communication and tools are not enough to make this possible.
Most importantly we should consider providing a better portfolio of incentives. Short-term incentives cannot simply be a quick way to payout on long-term goals. Long-term incentives cannot solely be based on a win-or-fail approach (unless this is a reality for your company.)
Lastly, new hires and legacy employees throughout their careers should be carefully vetted to determine if their psychology is in sync with your approach to incentives. A person with all the knowledge in the world, but a fear of losing a penny, will not be motivated by the wild potential of a new incentive plan. A person hoping to become a millionaire in five years will not get excited about an incentive plan that pays out a maximum of 40% of their base pay.
In the end, losses are bound to happen. When we build incentive programs that better limit the impact of losses and better communicate potential value, we create more opportunity for everyone to win. While I am certain James Holzhauer is disappointed that he lost, his $2.5 million in winnings has probably softened the blow.