By Ian MacRae Psychologist, author, consultant. Fueled by intense interest in everything .

Money talks: Understanding the role of money in motivation

Extrinsic motivators (external rewards) have more power to make people dissatisfied than satisfied. Money, in particular, has more power to demotivate than motivate. It is disenchanter not an enchanter.

One of the most important things to understand about money as a motivator, in comparison with other motivators like independence, is that some things motivate while others have more power to lead to dissatisfaction. The motivators that interfere with motivation are not the same as those that make people happier, more satisfied or more engaged.

As a topic, money constantly a topic of discussion. More importantly it is perennially relevant in how powerful a tool it can be to motivate the average worker. Economists argue that money is the only serious motivator. Supposedly people are logical, rational decision-makers that always act in their financial self-interest. Right? Not entirely.

The simple fact is that money is only one motivator and not always the most powerful. Job security, a pleasant environment, a considerate boss are all motivators as well.  Consider the following: Would you prefer £1,000 (tax free) or a week’s extra holiday?  £10,000 or a new job title? £50,000 or a job guarantee for life? £100,000 or meaningful and intrinsically satisfying work?  Put like that, as a choice between money alone other motivators, the power of money may decline.

If money really is a powerful motivator or satisfier at work, why has research consistently shown that there is no relationship between wealth and happiness? There are four good reasons why:

  • Adaptation – although everybody feels “happier” after a pay rise, windfall or pools win, one soon adapts to this and the effect very rapidly disappears.
  • Comparison – people define themselves as rich/wealthy by comparing themselves to others. However, with increased wealth, people usually move in more “up-market” circles where there is always someone wealthier than themselves.
  • Alternatives – as economists say, the declining marginal utility of money means that as one has more of the stuff, other things like freedom and true friendship seem much more valuable.
  • Worry – an increased income is associated with a shifting of concern from money issues to the more uncontrollable elements of life (eg. self-development) perhaps because money is associated with a sense of control over one’s fate.

Money doesn’t always bring happiness.  People with ten million pounds are no happier than people with only nine million.  Yes, everyone wants more money.  Economists are right: money does act as a work motivator, but to a large extent in the short term, for some workers more than others, and at a cost often to the morale of the organization. Psychologists are also correct – money is only one of many motivators of behaviour.

The main value of money is that we live in a world in which its importance is overestimated. The research on compensation shows money does not really increase happiness, and only decreases happiness when its absence is a source of stress. This can happen for two reasons:

First, when a person or a family cannot afford basic necessities like food, clothing, housing, utilities and the basic costs of living. Income levels beyond basic needs has little long-term effect on happiness. Second, when people over-extend themselves financially. Making a million pounds every year is less satisfying when one is spending twice that amount. And the happiness or satisfaction associated with greater spending is short lived. A larger house, a more expensive car, a more costly label on clothing can provide a momentary boost of excitement. It does not contribute to any sort of long term happiness. Money only affects happiness in a relative sense. Spending/earning less money leads to dissatisfaction while spending/earning more money only provides a temporary high. Like any addictive substance, people get used to income levels very quickly and that becomes the new normal. Only changes in that level create emotional reactions.

The lesson: Money is important, and don’t forget it. You can’t pay your rent or mortgage on independence or work engagement or a positive attitude. But money only goes so far, and is hardly enough to bring out the best in people.

Ian MacRae is the co-author of new book Motivation and Performance: A guide to motivating a diverse workforce, out now, published by Kogan Page, priced £19.99.

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