Why cash rewards miss the point

Entrepreneurs start businesses with chutzpah and charisma. So why do so many switch to rewarding employees with mere cash after the company takes off, given that cash rewards often had nothing to do with the company's success?

Consider a client of mine whom I will call Jim, the founder and CEO of a successful computer-screen company. When the company exceeded 100 employees, Jim hired a series of chief operating officers, all of whom left the company in frustration. I told Jim that they left because they hadn't been offered the type of psychological compensation he had given his start-up team.

What happened? Success had led Jim to forget that entrepreneurs don't use financial ends to justify work. They fuel their careers and the careers of those around them with what psychologists call intrinsic rewards -- the positive outcomes that derive from an activity itself rather than from what you ultimately obtain from engaging in the activity. Let's consider the washing and waxing of a car. If you're a car buff preparing for a meeting of, say, the Corvette Club of America, you will get a good feeling (an intrinsic reward) from making your customized Stingray shine. However, if you work at, or own, a car wash, and the Stingray you Simonize is one car among dozens that you'll see on any given day, it takes hard, cold cash -- an extrinsic reward -- to make all that buffing worthwhile.

The psychology of the healthy entrepreneur is that of the guy who shines the customized car or the guy who invents and franchises an automated car-wash system. In the former case, the joy comes from the car itself or from creating the shine itself; in the latter case, it comes from taking pride in successfully automating what was once a labor-intensive, low-profit operation.

As you might expect, over time intrinsic rewards are far more likely to motivate people -- not just entrepreneurs but also the people who work for them. Extrinsic rewards quickly lose their motivating properties. People are much more likely to work hard for a cause they are committed to than a job they are merely paid to do. How often have you heard of successful executives who eagerly jump from established companies to start-ups for "sweat equity" alone?

So why is it that if intrinsic rewards are what govern the behavior of entrepreneurs attempting to start a business, so many entrepreneurs self-destruct by focusing too much on extrinsic rewards for others once they achieve success? In a phrase, social pressure. Our culture raises us to be the brightest and the best and then flaunts as the ideal those who have made money far more than it does those who have smarts and character. Many of the entrepreneurs I know succumb to that social pressure and lose sight of the spirit that brought them success. As soon as they have the money to do so, they start "buying" talent and using large sums of cash to create what they believe will be commitment, instead of allowing people to develop their own sense of loyalty.

Consider the mind-set of someone who joined a team because he believed in its vision and is now paid a large salary in lieu of a chance to own that vision. For that person, the joy of doing is replaced by the external benefits of "getting," and in turn, his focus shifts from the present to the future: "How will I reward myself off the job?" Paradoxically, the more money he receives for work that was once done for the rewards inherent in sweat equity, the less psychologically committed he becomes.

Moreover, employees who once received, or who expect to receive, intrinsic compensation and are given only cash will eventually feel alienated from the company instead of feeling like team members. That once happened to me: I worked as a consultant at a company in its early days and felt as if I was a valued insider who would ultimately share the group reward. Yet after several years of work, the company refused to pay me with some form of profit sharing that would say I was "a member of the team." That led to a mutual alienation, as those I worked for came to see me as a mercenary. We finally resolved our problems when I made it clear that I was upset over how I was being paid -- not how much.

Obviously, it is impossible for an entrepreneur to found a business and give all who join it sufficient equity to compensate them over time. Nor am I arguing in favor of abandoning cash compensation as a dominant mode of economic exchange. What I am certain of is that founders of businesses will lose their most valued allies if they fail to offer them the intangible intrinsic rewards that money cannot buy. In my case, one business that "converted" me from a consultant to its chief learning officer -- giving me full control over program development, in addition to offering me stock options -- entrenched my commitment to it.

What other mechanisms, apart from ownership, can be employed to sustain psychological commitment -- as opposed to purchased compliance -- among your employees? Consider the following:

Treat employees as adults who share your goals. What better way to reward a member of your start-up than to say, "Your commitment to X Corp. has been proved beyond a doubt, so, henceforth, unless there is a crucial meeting, keep your own hours." When you show trust in a person, he or she will show devotion to you.

Encourage employees to pursue their dreams while finding a way for the company to benefit as well. Let anyone who has a desire to move to research and development (or your company's equivalent) do so on a part-time basis. Companies like 3M call that intrapreneurship. I call it fostering the motives that underlie sweat equity. Telling people that they can develop their ideas and that the company will reward them for doing so says, in essence, "We value you for what you have in yourself: your intellect." That attitude brought 3M Post-it Notes and millions in profits. It also begets commitment.

Fully vest them. When cash compensation is involved, don't tell your people you mistrust them by forcing them to be "vested" for seven years before they can reap the benefits of labors they invested in your start-up. Vesting can never engender devotion to a company among those who are counting the days until they can cash out. From my vantage point, vesting is effective only in retaining disaffected employees who have no stimulating alternatives in sight. Truly talented executives will leave cash behind if they don't have any psychological gratification and then a tantalizing offer to join something they believe in comes their way.

It may be hyperbole to say that money is the root of all evil, but money sure can undermine psychological commitment. Dangling it at the end of a stick may budge the lazy, but it will also wreak havoc on those who have joined the crusade because they buy the mission. There's no need to try to buy the commitment or the loyalty of those employees. All entrepreneurs need to do is share the vision and share the rewards.

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Steven Berglas, a clinical psychologist and a management consultant, is the director of Executive Development Resources in Boston and San Francisco. He is also on the staff of Harvard Medical School.