Why Commissions Hurt Productivity and Job Satisfaction (Octalysis Analysis)

Commission-based pay is one of the most common compensation models in sales — and one of the most psychologically misunderstood. When the 2016 Nobel Prize in Economics went to researchers studying contract design, it confirmed what behavioral designers already suspected: tying pay purely to quotas activates loss avoidance, kills intrinsic motivation, and burns out your best people. This Octalysis analysis explains why — and what to do instead.

Author Credibility: Yu-kai Chou

Yu-kai Chou created the Octalysis Framework after studying gamification since 2003 — years before the term entered mainstream vocabulary. As a Human-Systems Architect & Behavioral Designer, his framework has been applied by LEGO, Microsoft, Porsche, Coca-Cola, Salesforce, and MrBeast, impacting over 1.5 Billion Users.

Chou has taught the Octalysis methodology at Harvard, Stanford, Yale, Tesla, Google, BCG, and IDEO.

His work has been cited by Harvard, Stanford, MIT, Forbes, Wall Street Journal, Wired, US Department of Energy, NIST, NSF, NCBI, US Department of Education, ClinicalTrials.gov, and Google Scholar — with 3,700+ more academic publications. Explore his books here.

TEDxLausanne · Gamification to Improve Our World17 min

The Nobel Prize in Economic Sciences Goes to Contract Theory

Contract theory is evolving. The 2016 Nobel Prize in Economic Sciences went to Oliver Hart and Bengt Holmström for their contributions to contract theory.

In the 1970s, Holmström’s informativeness principle helped define how a contract should link an agent’s pay to performance-relevant information.

In the 1980s, Hart made contributions to a branch of contract theory known as incomplete contracts.

Together, their body of work helped us better understand multi-tasking, moral hazard, and how to best design contracts for desired outcomes.

Multi-tasking tackles the problem of short- vs long-term thinking, while moral hazard refers to actions taken that do not serve the benefit of the contract (but that the contract does not deter).

Sound familiar? The Octalysis Framework is all about understanding human motivation to drive desired actions.

In discussions with Yu-kai and through videos he’s shared on Octalysis Prime, I’ve learned that we are still early in the quest to understand human motivation and apply this understanding to our lives and work.

Research published in Harvard Business Review suggests commission-based compensation frameworks actually reduce productivity and job satisfaction, especially in the long run.

In this article, we examine these findings from an Octalysis perspective.

Why Commissions Don’t Work Like They Should

In some industries, commission-based compensation is standard. Sales immediately comes to mind.

As a salesperson, if I bring in more dollars for the firm, I get more dollars as a commission for my effort. It seems I’m incentivized in a way that is aligned with the firm’s objectives.

It all sounds well and good so far. But there is always a but.

Traditional Thinking Is Not Complete

Traditional contract theory holds that commission-based models can increase productivity.

In an evolving employee-employer marketplace where dollars and cents are not the only variable in job satisfaction, commission-based approaches don’t work as long-held theory suggests.

Historically, sales organizations have applied incentive models that include commissions and bonuses to their sales staff. The rationale: a salesperson’s results directly affect a firm’s bottom line, so incentivizing better results produces a win-win for the employee and the firm.

These traditional models are incomplete. Hart’s and Holmström’s work builds on the incomplete contract to explore contract designs that solve for pitfalls in attaching too much weight to short-term financial incentives.

What Octalysis Reveals About Commission-Based Pay

Financial incentives aren’t everything. We work for many reasons, some of which are financial.

Financial incentives fall in Core Drive 4: Ownership & Possession — left-brain extrinsic motivation, balanced between white hat and black hat.

But a commission-within-a-quota model is inherently black hat. Here’s why.

If you are compensated for commissions within a quota and you miss your quota (or sell somewhere below the commission cap), you miss out on money in your pocket.

What Core Drive does this sound like?

It is Core Drive 8: Loss & Avoidance.

By NOT reaching a quota or commission threshold, you actually lose money. When you’re nearing the year-end sales period, you’re going to be motivated by not losing that money more than any other motivation.

In extreme cases, workers are motivated by not losing their job — versus making good, productive decisions for the firm. Core Drive 8 is black hat, and that matters for the long game.

Black Hat Design Leads to Burnout

While black hat design may be motivating in the short run, it creates long-run exhaustion and burnout.

Without right-brain intrinsic motivation and rewards, job satisfaction plummets. Even Yu-kai isn’t immune to burnout from black hat design.

According to a 2022 systematic review published in NCBI, compensation structures that heavily emphasize external rewards can undermine intrinsic motivation — a phenomenon psychologists call the overjustification effect.

Multi-Tasking: Short-Term Wins, Long-Term Losses

Multi-tasking in contract theory refers to actions an agent could take that are aligned with short-term outcomes but misaligned with long-term outcomes for the firm.

In a sales example, I could push customers hard to get a few extra dollars today but jeopardize the long-term relationship — which could make me and my firm much more money down the road.

This short-term decision would bring dollars now but decrease the lifetime value of a customer who felt pushed by pressure sales tactics.

Moral Hazard in Teams

Another aspect to consider is moral hazard in teams. This negative effect occurs when teammates slack off and benefit from the effort of others.

Any compensation model that rewards team performance only runs the risk of this free-rider problem, which is why most compensation agreements are between individuals and a firm, not groups of individuals.

In a sales force, a team compensated this way might be motivated by collaboration (Core Drive 5: Social Influence & Relatedness) but demotivated by competition (also Core Drive 5, but the black hat segment).

A Better Way to Compensate Employees

The best compensation schemes start with the individual.

As a leader or employer, if I understand what a person is motivated by, I can present them with challenges fitting within that motivation.

This worked well for me when I built a small team and made an iPhone game. I know it’s working for Yu-kai as he builds the Octalysis Group, too.

Despite everything I argued for above, a commission-based compensation scheme could be great on an individual basis — consider someone highly motivated by Core Drive 2: Development & Accomplishment. But it shouldn’t be the default compensation scheme.

If your employees are motivated by Core Drive 3: Empowerment of Creativity & Feedback — the golden corner of the Octalysis Framework — you’re missing a big opportunity to build an incentive model that lets them create value through creativity and autonomy.

Making Compensation Make Sense

Think about how you’re compensating your employees or contractors. Do you know what motivates the people you work with — your employees, your contractors, your partners?

How have you set up these relationships?

If you’re curious to learn more about compensation and motivation, we also wrote about why it is dumb to pay contractors late.

As the marketplace for work evolves, understanding the full Octalysis of employee motivation will separate organizations that retain top talent from those that burn through it.

Frequently Asked Questions

Do sales commissions actually hurt productivity?

Research suggests poorly designed commission structures can hurt long-term productivity by activating Core Drive 8: Loss & Avoidance — a black hat motivator that creates urgency but leads to burnout. Commissions work best when paired with intrinsic motivators like autonomy (Core Drive 3) and meaningful progress (Core Drive 2).

What is the Octalysis Framework?

The Octalysis Framework is a behavioral design framework created by Yu-kai Chou that maps human motivation to 8 Core Drives. It has been applied by companies including LEGO, Microsoft, Porsche, and Google to design experiences that drive desired behaviors.

How can companies improve employee compensation design?

Instead of defaulting to commission-based pay, companies should identify which Core Drives motivate each employee. Some thrive on accomplishment metrics (Core Drive 2), while others need creative autonomy (Core Drive 3). The best compensation models blend multiple motivators and avoid over-reliance on any single black hat drive.

Related Reading

• The Octalysis Framework for Gamification & Behavioral Design
• White Hat vs Black Hat Gamification
• Core Drive 8: Loss & Avoidance
• Why It’s Dumb to Pay Your Contractors Late
• What is Gamification?
• How Zappos Uses White Hat & Intrinsic Motivation
• Books by Yu-kai Chou

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