A little over 20 years ago

I did something that I regret,

something that I'm not particularly proud of,

something that, in many ways, I wish no one would ever know,

but here I feel kind of obliged to reveal.

(Laughter)

In the late 1980s,

in a moment of youthful indiscretion,

I went to law school.

(Laughter)

Now, in America law is a professional degree:

you get your university degree, then you go on to law school.

And when I got to law school,

I didn't do very well.

To put it mildly, I didn't do very well.

I, in fact, graduated in the part of my law school class

that made the top 90 percent possible.

(Laughter)

Thank you.

I never practiced law a day in my life;

I pretty much wasn't allowed to.

(Laughter)

But today, against my better judgment,

against the advice of my own wife,

I want to try to dust off some of those legal skills --

what's left of those legal skills.

I don't want to tell you a story.

I want to make a case.

I want to make a hard-headed, evidence-based,

dare I say lawyerly case,

for rethinking how we run our businesses.

So, ladies and gentlemen of the jury, take a look at this.

This is called the candle problem.

Some of you might have seen this before.

It's created in 1945

by a psychologist named Karl Duncker.

Karl Duncker created this experiment

that is used in a whole variety of experiments in behavioral science.

And here's how it works. Suppose I'm the experimenter.

I bring you into a room. I give you a candle,

some thumbtacks and some matches.

And I say to you, "Your job

is to attach the candle to the wall

so the wax doesn't drip onto the table." Now what would you do?

Now many people begin trying to thumbtack the candle to the wall.

Doesn't work.

Somebody, some people -- and I saw somebody

kind of make the motion over here --

some people have a great idea where they

light the match, melt the side of the candle, try to adhere it to the wall.

It's an awesome idea. Doesn't work.

And eventually, after five or 10 minutes,

most people figure out the solution,

which you can see here.

The key is to overcome what's called functional fixedness.

You look at that box and you see it only as a receptacle for the tacks.

But it can also have this other function,

as a platform for the candle. The candle problem.

Now I want to tell you about an experiment

using the candle problem,

done by a scientist named Sam Glucksberg,

who is now at Princeton University in the U.S.

This shows the power of incentives.

Here's what he did. He gathered his participants.

And he said, "I'm going to time you. How quickly you can solve this problem?"

To one group he said,

"I'm going to time you to establish norms,

averages for how long it typically takes

someone to solve this sort of problem."

To the second group he offered rewards.

He said, "If you're in the top 25 percent of the fastest times,

you get five dollars.

If you're the fastest of everyone we're testing here today,

you get 20 dollars."

Now this is several years ago. Adjusted for inflation,

it's a decent sum of money for a few minutes of work.

It's a nice motivator.

Question: How much faster

did this group solve the problem?

Answer: It took them, on average,

three and a half minutes longer.

Three and a half minutes longer. Now this makes no sense right?

I mean, I'm an American. I believe in free markets.

That's not how it's supposed to work. Right?

(Laughter)

If you want people to perform better,

you reward them. Right?

Bonuses, commissions, their own reality show.

Incentivize them. That's how business works.

But that's not happening here.

You've got an incentive designed to

sharpen thinking and accelerate creativity,

and it does just the opposite.

It dulls thinking and blocks creativity.

And what's interesting about this experiment is that it's not an aberration.

This has been replicated over and over

and over again, for nearly 40 years.

These contingent motivators --

if you do this, then you get that --

work in some circumstances.

But for a lot of tasks, they actually either don't work

or, often, they do harm.

This is one of the most robust findings

in social science,

and also one of the most ignored.

I spent the last couple of years looking at the science of

human motivation,

particularly the dynamics of extrinsic motivators

and intrinsic motivators.

And I'm telling you, it's not even close.

If you look at the science, there is a mismatch

between what science knows and what business does.

And what's alarming here is that our business operating system --

think of the set of assumptions and protocols beneath our businesses,

how we motivate people, how we apply our human resources --

it's built entirely around these extrinsic motivators,

around carrots and sticks.

That's actually fine for many kinds of 20th century tasks.

But for 21st century tasks,

that mechanistic, reward-and-punishment approach

doesn't work, often doesn't work, and often does harm.

Let me show you what I mean.

So Glucksberg did another experiment similar to this

where he presented the problem in a slightly different way,

like this up here. Okay?

Attach the candle to the wall so the wax doesn't drip onto the table.

Same deal. You: we're timing for norms.

You: we're incentivizing.

What happened this time?

This time, the incentivized group

kicked the other group's butt.

Why? Because when the tacks are out of the box,

it's pretty easy isn't it?

(Laughter)

If-then rewards work really well

for those sorts of tasks,

where there is a simple set of rules and a clear destination

to go to.

Rewards, by their very nature,

narrow our focus, concentrate the mind;

that's why they work in so many cases.

And so, for tasks like this,

a narrow focus, where you just see the goal right there,

zoom straight ahead to it,

they work really well.

But for the real candle problem,

you don't want to be looking like this.

The solution is not over here. The solution is on the periphery.

You want to be looking around.

That reward actually narrows our focus

and restricts our possibility.

Let me tell you why this is so important.

In western Europe,

in many parts of Asia,

in North America, in Australia,

white-collar workers are doing less of

this kind of work,

and more of this kind of work.

That routine, rule-based, left-brain work --

certain kinds of accounting, certain kinds of financial analysis,

certain kinds of computer programming --

has become fairly easy to outsource,

fairly easy to automate.

Software can do it faster.

Low-cost providers around the world can do it cheaper.

So what really matters are the more right-brained

creative, conceptual kinds of abilities.

Think about your own work.

Think about your own work.

Are the problems that you face, or even the problems

we've been talking about here,

are those kinds of problems -- do they have a clear set of rules,

and a single solution? No.

The rules are mystifying.

The solution, if it exists at all,

is surprising and not obvious.

Everybody in this room

is dealing with their own version

of the candle problem.

And for candle problems of any kind,

in any field,

those if-then rewards,

the things around which we've built so many of our businesses,

don't work.

Now, I mean it makes me crazy.

And this is not -- here's the thing.

This is not a feeling.

Okay? I'm a lawyer; I don't believe in feelings.

This is not a philosophy.

I'm an American; I don't believe in philosophy.

(Laughter)

This is a fact --

or, as we say in my hometown of Washington, D.C.,

a true fact.

(Laughter)

(Applause)

Let me give you an example of what I mean.

Let me marshal the evidence here,

because I'm not telling you a story, I'm making a case.

Ladies and gentlemen of the jury, some evidence:

Dan Ariely, one of the great economists of our time,

he and three colleagues, did a study of some MIT students.

They gave these MIT students a bunch of games,

games that involved creativity,

and motor skills, and concentration.

And the offered them, for performance,

three levels of rewards:

small reward, medium reward, large reward.

Okay? If you do really well you get the large reward, on down.

What happened? As long as the task involved only mechanical skill

bonuses worked as they would be expected:

the higher the pay, the better the performance.

Okay? But one the task called for

even rudimentary cognitive skill,

a larger reward led to poorer performance.

Then they said,

"Okay let's see if there's any cultural bias here.

Lets go to Madurai, India and test this."

Standard of living is lower.

In Madurai, a reward that is modest in North American standards,

is more meaningful there.

Same deal. A bunch of games, three levels of rewards.

What happens?

People offered the medium level of rewards

did no better than people offered the small rewards.

But this time, people offered the highest rewards,

they did the worst of all.

In eight of the nine tasks we examined across three experiments,

higher incentives led to worse performance.

Is this some kind of touchy-feely

socialist conspiracy going on here?

No. These are economists from MIT,

from Carnegie Mellon, from the University of Chicago.

And do you know who sponsored this research?

The Federal Reserve Bank of the United States.

That's the American experience.

Let's go across the pond to the London School of Economics --

LSE, London School of Economics,

alma mater of 11 Nobel Laureates in economics.

Training ground for great economic thinkers

like George Soros, and Friedrich Hayek,

and Mick Jagger. (Laughter)

Last month, just last month,

economists at LSE looked at 51 studies

of pay-for-performance plans, inside of companies.

Here's what the economists there said: "We find that financial incentives

can result in a negative impact on overall performance."

There is a mismatch between what science knows

and what business does.

And what worries me, as we stand here in the rubble

of the economic collapse,

is that too many organizations

are making their decisions,

their policies about talent and people,

based on assumptions that are outdated, unexamined,