Incentive

Last updated
Protest sign displaying "Stop Climate Change" at climate strike in Melbourne, Australia. Climate movements may incentivize governments and industry to take collective action in the fight against climate change. Stop Climate Change - Climate Strike Melbourne 21 May 2021 (51194849093).jpg
Protest sign displaying "Stop Climate Change" at climate strike in Melbourne, Australia. Climate movements may incentivize governments and industry to take collective action in the fight against climate change.

In general, incentives are anything that persuade a person to alter their behavior in the desired manner. [1] It is emphasized that incentives matter by the basic law of economists and the laws of behavior, which state that higher incentives amount to greater levels of effort and therefore higher levels of performance. [2]

Contents

Divisions

An incentive is a powerful tool to influence certain desired behaviors or action often adopted by governments and businesses. [3] Incentives can be broadly broken down into two categories: intrinsic incentives and extrinsic incentives. [4] Overall, both types of incentives can be powerful tools often employ to increase effort and higher performance according to the "law of behavior."

Incentives are most studied in the area of personnel economics where economic analysts, such as those who take part in human resources management practices, focus on how firms make employees more motivated, through pay and career concerns, compensation and performance evaluation, to motivate employees and best achieve the firms' desired performance outcomes. [5]

Intrinsic and extrinsic incentive

An intrinsic incentive is when a person is motivated to act in a certain way for their own personal satisfaction without seeking any external reward, nor facing any external pressure to perform the task. [6] For instance, a singer who enjoys singing may be intrinsically motivated to spend several hours a day to improve their performance without receiving any recognition or awards from others. [7] Often, intrinsic incentives are useful in increasing one's empowerment, utility level, and autonomy and can reinforce employees’ work involvement and commitment. [8]

Intrinsic incentives and extrinsic incentives are both important in driving people's behavior. Experts believe that intrinsic incentives are stronger motivators compared to extrinsic incentives as they increase employees’ work engagement and genuine enjoyment of work. [9] However, people's intrinsic motivation tends to decrease when they are offered too many extrinsic rewards. In order to maintain the action, constant incentives have to be provided. This is known as the Overjustification Effect.

While both types of incentive are a fundamental concept in economics that play a crucial role in motivating behavior, the extent to which and how they influence individual may depend on varies factors. Factors to consider may include the type of activity being incentivized, the individual's personal values and goals, and the context in which the incentive is offered. A well-designed incentive system should take into account to avoid unintended consequences and ensure that they align with the desired outcomes.

There are some parties who oppose the benefits of using extrinsic incentives and believe that they cause more harm than good. These opponents believe that the constant use of extrinsic incentives can lead to the crowding out of intrinsic incentives, which are also valuable performance motivators. [2] When people are constantly being incentivized by external pressures, they neglect their intrinsic motives which could consequently be detrimental to their work ethic. [10] Employees can become too comfortable with consistently gaining some reward for acting in a manner which is consistent with the interests of the firm. As a result, employees begin to believe that they deserve to earn rewards for doing certain things, not for the benefit of the firm but rather for their own benefit, which leads to them shirking if no extrinsic incentive is offered in return for high effort. [10]

Nonetheless, incentives (both intrinsic and extrinsic) can be beneficial in altering a person's behavior and can be effectively used and executed within many different areas of life including in the workforce, in education and within one's personal life. [1]

Classification

Classified by David Callahan, the types of incentives can be further broken down into three broad classes according to the different ways in which they motivate agents to take a particular course of actions: [11] [12]

ClassDefinition
Remunerative incentives (or financial incentives)Exist where an agent can expect some form of a material reward like money in exchange for acting in a particular way. [12]
Moral incentivesExist where a particular choice is widely regarded as the right thing to do or is particularly admirable among others. [12] An agent acting on a moral incentive can expect a sense of positive self-esteem, and praise or admiration from their community. However, an agent acting against a moral incentive can expect a sense of guilt, condemnation or even ostracism from the community. [12]
Coercive incentivesExist where an agent can expect that the failure to act in a specific way will result in physical force being used against them by others – for example, by inflicting pain, or by imprisonment, or by confiscating or destroying their possessions. [12]

Monetary incentives

Monetary incentives are any form of financial good given to someone to incentivize their actions and align their incentives with those of the principal who provides the monetary incentive. [13] This is a type of extrinsic incentive and is commonly seen in the workplace. The effect of monetary incentive can be broken down into two categories: the "standard direct price effect," and "indirect psychological effect". These two types of monetary effect often work in opposite direction and crowd out incentivised behaviour. [14] However, several studies have suggested that it is possible to manage the crowding-out effects by utilising a principal-agent model that incorporates nonstandard assumptions. [14] For instance, a monetary incentive may come in the forms of profit sharing, bonuses, stock options or even paid vacation time. As such, a well-chosen monetary incentive programs can produce positive motivation and influence the productivity and output of individuals and firms. [15]

A common monetary incentive system used by firms is performance-based pay where incentives are paid based on employees' productivity or output over a particular period of time. Some methods are commission-based where the employee, for example a salesperson, receives a payment directly correlated to their output level. Firms also pay additional wages or rewards for employees who work overtime and for their additional work above firm expectations. Expectancy theory implies that, provided employees place sufficient value on the monetary incentive to justify their extra effort and perceive that greater effort will result in better performance, such incentives can motivate employees to maintain high levels of effort and discourage shirking. This in turn increases the individual productivity of workers and the overall productivity of the firm. [13]

Other monetary incentives are less direct, such as awarding periodic, discretionary bonuses to top performers, offering the possibility of a promotion to a higher-paying position or profit sharing for team projects. [16] Alternatively, firms can also incentivize their employees to perform by threatening to demote or terminate them for poor performance. [16] When employees feel that their careers are in jeopardy, they are more likely to increase their efforts.

Monetary incentives do affect the effort and average performance of employees but are likely dependent on the scope of the job and the task variables. For routine jobs such as clerical and administration jobs that are mundane, the presence of monetary incentives will encourage employees to demonstrate consistent effort of diligence when the intrinsic incentive has been exhausted. On the other hand, if the task assigned is too challenging, monetary incentives make little to no difference in increasing an employee's contribution to work. [17]

The effect of monetary incentives can depend on the framing of the rewards. For example, in cadaveric organ donation, funeral aids are perceived to be more ethical (particularly in showing gratitude and honoring the deceased donor) and potentially increase donation willingness than direct cash payments of the same monetary value. [18] [19]

Non-monetary incentives

Non-monetary incentives can act as an impactful reward system to employees with superior performance that is independent to predetermined targets. [20] They refer to the use of rewards or benefits that are not directly related to money or financial compensation to motivate individuals to perform specific actions or achieve desired outcomes [21]

The use of non-monetary incentives is based on the recognition that individuals are motivated by a range of factors beyond financial rewards and acts as a reinforcement to encourage work engagement and productivity. [22] Some examples of these incentives include extra paid holidays, recognition, praise, opportunity for personal or professional growth, gifts, family benefits or even work-based perks such as more interesting projects or work.

Individual may be motivated by a sense of purpose, a desire for personal fulfillment or growth, a need for social recognition or status, or other non-financial factors. By providing these types of incentives tend to boost employees' job satisfaction as they feel more appreciated for their efforts and lower turnover rates. Compared to monetary incentives, studies have shown that employees find non-monetary incentives more memorable as they are separated from normal pay and hence are more distinguishable. [23] In addition, non-monetary incentives are known to promote long-term commitment and loyalty among employees [21] Effective use of non-monetary incentives can positively influence employees’ perception of the company's image as well as increase the morale of firms. [24] Compared to monetary incentives, non-monetary incentives hold a stronger and longer-lasting influence on employees’ motivation as it results in a higher utility level. [25] Employees with higher job satisfaction and morale were found to have better overall performance, contribution and hence higher productivity. [26] Another advantage of non-monetary incentives that it allows a positive work culture that emphasizes cooperation, teamwork, and social responsibility.

However, non-monetary incentives also have some limitations and undesirable consequence. [21] For instance, it can be less effective in motivating individuals who are primarily motivated by monetary incentives such as financial rewards. This may be especially true for individuals who are in low-paying jobs or who face significant financial stress or insecurity. Another concern is that non-monetary incentives may be more difficult to quantify and evaluate than monetary incentives. [21] This may create several challenges for a firm or organisation to design and implement effective incentive programs that are aligned with their goals and objectives.

Overall, both monetary and non-monetary incentives are important tools to influence individual and organizational behavior. While monetary incentives may be more effective for some individuals or in some contexts, non-monetary incentives can be equally effective in promoting long-term commitment, fostering a positive work culture, and promoting social responsibility. Ultimately, the most effective incentive programs will likely incorporate a combination of monetary and non-monetary incentives to create a positive and comprehensive approach to motivation and performance.

Incentives in the economic context

The economic analysis of incentives focuses on the systems that determine the incentives needed for an agent to achieve a desired outcome dictated by the principal. [16] Incentives can help companies link employees' rewards to their productivity. When a firm wants their employees to produce a certain amount of output, it must be prepared to offer a compensation scheme such as a monetary bonus to persuade employees to reach the target output. [16] Compensation must achieve two goals. The first is to reduce employee turnover and retain the highest performing and most productive employees. Compensating employees can help attract workers to work harder and retain their ability. The second is to improve productivity. Compensation can not only stimulate the ability of workers to produce output, but also improve the enthusiasm of employees to work, thus promoting business development. [16] A rise in pay variance across the firm reflects an increased demand for highly productive workers, and therefore compensation has begun shifting towards pay-for-performance. [27] This helps employees recognize the direct relationship between their work output and their reward.

While incentive has become one of a powerful tool to motivate and influence certain behaviour or action, they can also have unintended consequences. [28] Recent research indicated how extensive and intrinsic can come into conflict with other motivation. For example, a poorly designed incentive system can potentially lead to unintended behaviours and actions as such, individuals or companies gaming the system to earn rewards without actually achieving the desired outcomes. This is known as the "principal-agent problem," where the incentives of the principal (e.g., the government or a company) do not align with the incentives of the agent (e.g., individuals or employees). This incentive conflicts can lead to adverse selection and moral hazard. [22] A moral hazard refers to a situation in which a particular party engage in a risky behaviour because it fails to bear the full costs of that risk. On the other hand, an adverse selection occur when there is a asymmetric information between different parties. As such, adverse selection often creates an incentive for plans to inefficiently distorts benefits. As incentive can bring conflicts between parties involve, effective management plan is required to resolve incentive conflicts.

Misaligned incentives

A misaligned incentive refers to a situation where the goals of different parties involved in a particular situation such as a firm or system are not aligned and may even conflict with each other. Misaligned incentives can potentially arise in many other contexts, such as in government policies, healthcare, education, and environmental regulations. Principals within a firm want their agents to work for the principals' best interests, but agents often have different goals than the principals. [29] Due to this problem of misaligned incentives, firms must design compensation plans to induce workers to act in the firm's best interest and generate a level of output that maximizes the firm's profits. [16] The problem of asymmetric information means that the principal does not know exactly how to motivate its agents to act in the firm's best interests. Consequently, compensation plans are difficult for firms to design. [30] The principal-agent theory is used as the guiding framework when aligning incentives with the employee's effort to obtain the efficient level of output for the firm. [16] For example, a manager may want a certain level of output from an employee but does not know the capabilities of the employee in the presence of imperfect monitoring, and to achieve the best outcome, an optimal incentive scheme must be designed to motivate the worker to increase their productivity. [30] Research shows that if a principal offers a high incentive, the agent will also recompense with a higher effort. [31]

However, in this relationship, an informal advantage usually exists among agents over the principal. A moral hazard could be present where principals are unable to know for sure if agents are giving their all on a delegated task, and an adverse selection could exist as principals usually have insufficient knowledge on the agents’ capabilities and face difficulties in selecting the agent best suited for a task. [32] In instances where principals have contradicting goals with the agents, agents would have an incentive to shirk and to leak information to competing principals. [33] Self-interested agents may also want to maximize their own interest by lying [34] or deliberately hiding information from the principal to decrease their workload. [32]

CEO incentives

The board of directors in a company plays an important role in creating incentives for CEOs so that their best interest aligns with that of the shareholders. CEOs can be given incentives in many forms, including salary, bonuses, shares, and stock options to reward spectacular performance while penalties can be imposed for unsatisfactory performance. To ensure that the CEOs are appropriately incentivized, CEOs can be made the substantial owners of the company's stock by the board of directors. CEOs that own a portion of the company's stock will have an incentive to work towards the common best interest of themselves and the company shareholders. Threat to dismiss the CEOs for unsatisfactory performance can also act as an incentive to reinforce the performance of the CEOs, which can in turn maximize the company's value. The possibility of dismissal will increase CEOs’ accountability for their own actions considering that the possible dismissal would likely lead to a poor reputation for themselves. As a result, a potential increase in work engagement and performance can be seen. [35]

Apart from monetary incentives, non-monetary incentives also play a part in increasing the work performance of CEOs. Non-monetary incentives can be introduced in the form of benefits such as power, public acknowledgement, prestige, and title. However, some argue that non-monetary incentives are less impactful. [35]

Tournament theory

Tournament theory describes a framework of compensation based on an individual's position within a firm's hierarchy. [5] The theory demonstrates that individuals are not promoted on the basis of their absolute performance and output, but instead based on their performance relative to other employees in the same position within the organization. [5] Ceteris paribus, the larger the difference in compensation between one position to the next, the greater the incentive to exert more effort in order to achieve a promotion. [13] However, that incentive is diminished as the size of the firm (and therefore the potential candidates for promotion) increases.

Firms must address the risk that a relative compensation scheme could incentivize uncooperative behavior amongst co-workers. Accordingly, firms encounter a trade-off between incentivizing workers to increase their efforts by increasing pay variance between the promoted and the unpromoted and, on the other hand, minimizing disharmony amongst co-workers by maintaining some level of pay compression. [13]

Self-selection effects of incentives

Employees know more about their own abilities, competitiveness and risk attitudes than potential employers. Due to this asymmetric information, firms design incentives not only to enhance employees’ motivation to act in the interests of the firm and maximize their output, but also to influence the type and quality of workers that they attract. [36] This is known as the self-selection or sorting effect of incentives. For example, empirical studies have shown that firms which implement pay-for-performance rather than fixed wage compensation schemes tend to attract more productive workers who are less risk averse. [37] Greater risk aversion reduces workers' willingness to work for variable as opposed to fixed pay. [38] Accordingly, firms may use incentives as a method of filtering out low productivity workers or workers who lack the personal characteristics that those firms are searching for.

Team-based incentives

Production is increasingly organized around teams in many large firms. [5] Teamwork may enhance company productivity for firms that encounter multidimensional, complex problems. A firm may be able to solve a complex task which requires a high level of various different skills by assigning it to expert workers with complementary skills. [5] Due to constantly advancing technologies, seldom does an individual employee have an absolute advantage across all skills that are required to solve the complicated problems that firms face, hence team collaboration is crucial and beneficial to ensure the success of a team. [5]

Individualized incentives are said to be dysfunctional in an interdependent working environment where individual performance is difficult to observe [39] and so firms may opt for team-based incentives instead. Team-based incentive refers to the incentive system that rewards employees based on performance of the team. [40] Team-based incentives are described as more beneficial to companies than individual-based incentives. By paying a straight piece rate to individual employees, they would have little to no motivation to help each other as the incentives they receive are irrespective of the result of others. On the other hand, paying team incentives based on team output can promote cohesiveness, trust, cooperation, and support within a team. [41] Researchers found a positive relationship between team-based incentive and employees’ work efficacy, stability, and salary [42] as well as company output. [43]

Research shows that employees prefer individual-based incentives over team-based incentives due to a few reasons. Firstly, they believe that team-based incentives are prone to unfairness. Employees with more contributions may be discouraged from seeing employees that contributed less receiving the same level of incentive. [44] Moreover, as a team expands and the effect of team incentives weakens, employees struggle to establish a clear link between effort given and incentives received. [44] It is also inevitable that team incentives could induce the free-rider problem because an employee's motivation to maximize their individual output could be diminished. [45] Managers may need to offer a team incentive that is strong enough to ensure that each worker's individual payoff from exerting the level of effort that allows the company to maximize its profits is greater than their individual payoff from free riding on the efforts of other team members. [46]

Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding. Team-based incentives game.png
Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding.

Using Game theory to illustrate this, firms need to implement a team-based incentive that results in the value of ‘Y’ in Game 1 being greater than 100 and enforce a punishment for free-riding that makes the value of ‘X’ less than 40. This would ensure that both team members’ dominant strategy in Game 1 is to work hard and the Nash equilibrium is (Work Hard, Work Hard).

In contrast, some studies have shown that peer pressure and employees’ intrinsic incentive to perform well in a team environment may mitigate the free-rider problem associated with team-based incentives. [47] [48] Such case studies demonstrate that team incentives increase firm productivity in settings that involve complex, interdependent production where peer pressure and intrinsic incentives outweigh selfish preferences. [47] Peer rating system can also be introduced for team members to rate each other's contribution to a task. Research findings show that imposing a penalty on free riders is useful in decreasing the tendency of free riding. [49]

Potential issues associated with the use of incentives in firms

Ratchet effect

Incentives are arguably beneficial in increasing productivity, however, they can also have an adverse effect on the firm. [16] This is evident through the ratchet effect. A firm may use its observation of an employee's output level when they are first employed as a guide to set performance standard and objectives for the future. [50] Knowing this, an employee may deliberately reduce their output level when first employed or hide their ability to produce at a higher output with the intent of exploiting being rewarded in the future when they strategically increase their output level. [50] Best performances of employees can be limited from it. Thus, the ratchet effect can significantly diminish production levels of a firm and planned economies. [51]

Crowding-out effect

Additionally, in the 1970s psychologists began exploring the relationship between extrinsic and intrinsic motivation whilst economists were simultaneously studying the "crowding-out" effects of monetary incentives. This came as a result of Richard Titmuss' 1970 publication, "The Gift Relationship", which explained how the constant use of extrinsic incentives can result in conflict with intrinsic motivators and lead to the desired behavior being "crowded out". [52] In his publication, Titmuss argued that the use of monetary incentives was disrupting social norms around the idea of voluntary contribution and would ultimately have a crowding-out effect. He acknowledged that if the incentives are large enough, they are more likely to offset crowding-out effects (at least in the short run while the incentives are being offered). However, Titmuss noted that making the incentives too large could also have an adverse effect due to the possibility of negative inferences being drawn from the size of the incentives. [53] Crowding-out effects can also occur when temporary incentives are removed in the long run. In the workplace, the complete removal of extrinsic incentives can result in employee effort levels being lower than they were when the incentives were offered, thereby hindering motivation and performance. [52]

Stock options

Incentives are not always effective at aligning employees' incentives with those of the firm. [54] For example, some corporate policies popular during the 1990s aimed to encourage productivity have led to failures as a result of unintended consequences. [55] Moreover, providing stock options was intended to boost CEO productivity through offering a remunerative incentive to align the CEOs' interests with those of the shareholders to improve company performance. [55] However, CEOs were found to either make good decisions which resulted in a reward of a long-term price increase of the stock, or were found to have fabricated the accounting information to give the illusion of economic success and to retain their incentive-based pay. [55] Furthermore, it has been found to be extremely costly for firms to incentivize CEOs with stock options. Nevertheless, firms are forced to pay substantial amounts of money to ensure that CEOs act in the best interest of the firms. [16]

Conflicts generated by pay variance

Incentives can have a bipolar effect on the company. On the one hand, the company's incentives to employees may create a pay gap. For example, low-paid employees may reduce their production or contribution to the company. Low-paid employees and high-paid employees may not be able to communicate and cooperate effectively, causing low-paid employees to gradually lose their enthusiasm for work. [56] Firms should provide a fair amount of incentives for both low-paid and other employees, incentives for low-paid workers can be breaks rather than monetary incentives. Motivating employees with financial rewards may make a difference. That's because if the company is profitable in the first year, it may have plenty of bonuses to hand out to employees. However, if the company makes less money in the second year than it did in the first year, the company may not be able to give employees the same bonuses as in the first year even though they put in the same effort. This also reduces employees' motivation to work. Therefore, incentives may be counterproductive. Firm can provide other types of incentives rather than monetary incentives, such as promotion or vacation breaks for high-performing employees.

Incentives in the context of voluntary contributions

When it comes to volunteering activities, monetary incentives can bring negative effects. According to the Self-perception theory, humans constantly seek explanations for their behavior. [57] When individuals are involved in volunteering activities, they most likely perceive themselves as prosocial and altruistic, and attach a symbolic price to the act of volunteering. [58] [59] When a monetary reward is attached to an otherwise prosocial activity such as volunteering, people may perceive that their originally altruistic actions are now linked to extrinsic incentives, [60] causing their self-image benefit [61] and prosocial motivation to decrease. [62] A crowding-out effect leads to a decrease in individuals’ desire to volunteer and people eventually stop contributing due to the rewards attached. For example, if monetary incentives are offered for voluntary blood donation, it will have a negative effect on the number of people donating blood. [60]

Incentives in education

Extrinsic incentives offered to unmotivated students can potentially have positive short-run effects on education. [52] However, the use of extrinsic incentives in education has been opposed on the basis that they are morally corrupt and have the potential to crowd out intrinsic incentives for educational effort. [52] Furthermore, there is scarce empirical evidence to support the success of monetary incentives awarded for educational outputs such as academic achievement as opposed to educational inputs such as attendance and enrolment. [63]

The dynamic effects of incentives are evident in the context of education. Studies have demonstrated that the impact of monetary incentives is dependent on previous academic performance and individual ability. [64] Monetary incentives tend to improve the academic results of high-ability students but have an adverse effect on the performance of students with lower aptitude. [64]

Conclusion

Ultimately, there is always potential for conflicts to arise, both in the short and in the long run, during the application of incentives in different areas, as incentives that seek to change behaviors can crowd-out intrinsic motivators. A growing pool of evidence suggests that economists must broaden their focus when exploring the effects of incentives as the effect they have is largely dependent on how they are designed and specifically how they interact with intrinsic and social motivators in the short run and the long run. [26]

See also

Related Research Articles

From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties.

<span class="mw-page-title-main">Principal–agent problem</span> Conflict of interest when one agent makes decisions on anothers behalf

The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity takes actions on behalf of another person or entity. The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".

Content theory is a subset of motivational theories that try to define what motivates people. Content theories of motivation often describe a system of needs that motivate peoples' actions. While process theories of motivation attempt to explain how and why our motivations affect our behaviors, content theories of motivation attempt to define what those motives or needs are. Content theory includes the work of David McClelland, Abraham Maslow and other psychologists.

Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management". It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.

The overjustification effect occurs when an expected external incentive such as money or prizes decreases a person's intrinsic motivation to perform a task. Overjustification is an explanation for the phenomenon known as motivational "crowding out". The overall effect of offering a reward for a previously unrewarded activity is a shift to extrinsic motivation and the undermining of pre-existing intrinsic motivation. Once rewards are no longer offered, interest in the activity is lost; prior intrinsic motivation does not return, and extrinsic rewards must be continuously offered as motivation to sustain the activity.

Self-determination theory (SDT) is a macro theory of human motivation and personality that concerns people's innate growth tendencies and innate psychological needs. It pertains to the motivation behind people's choices in the absence of external influences and distractions. SDT focuses on the degree to which human behavior is self-motivated and self-determined.

Motivation crowding theory is the theory from psychology and microeconomics suggesting that providing extrinsic incentives for certain kinds of behavior—such as promising monetary rewards for accomplishing some task—can sometimes undermine intrinsic motivation for performing that behavior. The result of lowered motivation, in contrast with the predictions of neoclassical economics, can be an overall decrease in the total performance.

An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees and in sales to attract and retain customers. Scientific literature also refers to this concept as pay for performance.

Organizational ethics is the ethics of an organization, and it is how an organization responds to an internal or external stimulus. Organizational ethics is interdependent with the organizational culture. Although it is to both organizational behavior and industrial and organizational psychology as well as business ethics on the micro and macro levels, organizational ethics is neither organizational behavior nor industrial and organizational psychology, nor is it solely business ethics. Organizational ethics express the values of an organization to its employees and/or other entities irrespective of governmental and/or regulatory laws.

Incentivisation or incentivization is the practice of building incentives into an arrangement or system in order to motivate the actors within it. It is based on the idea that individuals within such systems can perform better not only when they are coerced but also when they are given rewards.

Cognitive evaluation theory (CET) is a theory in psychology that is designed to explain the effects of external consequences on internal motivation. Specifically, CET is a sub-theory of self-determination theory that focuses on competence and autonomy while examining how intrinsic motivation is affected by external forces in a process known as motivational "crowding out."

Compensation and benefits (C&B) is a sub-discipline of human resources, focused on employee compensation and benefits policy-making. While compensation and benefits are tangible, there are intangible rewards such as recognition, work-life and development. Combined, these are referred to as total rewards. The term "compensation and benefits" refers to the discipline as well as the rewards themselves.

Warm-glow giving is an economic theory describing the emotional reward of giving to others. According to the original warm-glow model developed by James Andreoni, people experience a sense of joy and satisfaction for "doing their part" to help others. This satisfaction - or "warm glow" - represents the selfish pleasure derived from "doing good", regardless of the actual impact of one's generosity. Within the warm-glow framework, people may be "impurely altruistic", meaning they simultaneously maintain both altruistic and egoistic (selfish) motivations for giving. This may be partially due to the fact that "warm glow" sometimes gives people credit for the contributions they make, such as a plaque with their name or a system where they can make donations publicly so other people know the "good" they are doing for the community.

<span class="mw-page-title-main">Pay-for-Performance (Federal Government)</span>

Pay-for-Performance is a method of employee motivation meant to improve performance in the United States federal government by offering incentives such as salary increases, bonuses, and benefits. It is a similar concept to Merit Pay for public teachers and it follows basic models from Performance-related Pay in the private sector. According to recent studies, however, there are key differences in how pay-for-performance models influence federal employees in public service roles. James Perry is one scholar who has conducted such studies. His research reveals that public servants tend to be more intrinsically motivated, and thus, are prone to have a negative reaction to monetary incentives. There is still debate, however, on what exactly makes the public sector different.

Work motivation is a person's internal disposition toward work. To further this, an incentive is the anticipated reward or aversive event available in the environment. While motivation can often be used as a tool to help predict behavior, it varies greatly among individuals and must often be combined with ability and environmental factors to actually influence behavior and performance. Results from a 2012 study, which examined age-related differences in work motivation, suggest a "shift in people's motives" rather than a general decline in motivation with age. That is, it seemed that older employees were less motivated by extrinsically related features of a job, but more by intrinsically rewarding job features. Work motivation is strongly influenced by certain cultural characteristics. Between countries with comparable levels of economic development, collectivist countries tend to have higher levels of work motivation than do countries that tend toward individualism. Similarly measured, higher levels of work motivation can be found in countries that exhibit a long versus a short-term orientation. Also, while national income is not itself a strong predictor of work motivation, indicators that describe a nation's economic strength and stability, such as life expectancy, are. Work motivation decreases as a nation's long-term economic strength increases. Currently work motivation research has explored motivation that may not be consciously driven. This method goal setting is referred to as goal priming. Effects of primed subconscious goals in addition to goals that are consciously set related to job performance have been studied by Stajkovic, Latham, Sergent, and Peterson, who conducted research on a CEO of a for-profit business organization using goal priming to motivate job performance. Goal priming refers to the achievement of a goal by external cues given. These cues can affect information processing and behaviour the pursuit of this goal. In this study, the goal was primed by the CEO using achievement related words strategy placed in emails to employees. This seemingly small gesture alone not only cost the CEO very little money, but it increased objectively measured performance efficiency by 35% and effectiveness by 15% over the course of a 5-day work week. There has been controversy about the true efficacy of this work as to date, only four goal priming experiments have been conducted. However, the results of these studies found support for the hypothesis that primed goals do enhance performance in a for-profit business organization setting.

Employee motivation is an intrinsic and internal drive to put forth the necessary effort and action towards work-related activities. It has been broadly defined as the "psychological forces that determine the direction of a person's behavior in an organisation, a person's level of effort and a person's level of persistence". Also, "Motivation can be thought of as the willingness to expend energy to achieve a goal or a reward. Motivation at work has been defined as 'the sum of the processes that influence the arousal, direction, and maintenance of behaviors relevant to work settings'." Motivated employees are essential to the success of an organization as motivated employees are generally more productive at the work place.

Reward management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization.

<span class="mw-page-title-main">Uri Gneezy</span> Israeli-American behavioral economist

Uri Hezkia Gneezy is an Israeli-American behavioral economist, known for his work on incentives. He currently holds the Epstein/Atkinson Endowed Chair in Behavioral Economics at the University of California, San Diego's Rady School of Management. He is also a visiting research professor at the University of Amsterdam and NHH in Bergen.

Employee recognition is the timely, informal or formal acknowledgement of a person's behavior, effort, or business result that supports the organization's goals and values, and exceeds their superior's normal expectations. Recognition has been held to be a constructive response and a judgment made about a person's contribution, reflecting not just work performance but also personal dedication and engagement on a regular or ad hoc basis, and expressed formally or informally, individually or collectively, privately or publicly, and monetarily or non-monetarily.

Employee motivation, also known as work motivation, is a feature of employees that refers to how motivated they are to work. It has a significant impact on employee productivity and efficiency." While motivation is defined as why individuals do or participate in certain behaviors.

References

  1. 1 2 Gneezy, Uri (2011). "When and Why Incentives (Don't) Work to Modify Behavior". Journal of Economic Perspectives. 25 (4): 191. doi: 10.1257/jep.25.4.191 .
  2. 1 2 Gneezy, Uri; Meier, Stephan; Rey-Biel, Pedro (Fall 2011). "When and Why Incentives (Don't) Work to Modify Behavior". Journal of Economic Perspectives. 25 (4): 191. doi: 10.1257/jep.25.4.191 .
  3. ↑ Clark, Peter B.; Wilson, James Q. (1961). "Incentive Systems: A Theory of Organizations". Administrative Science Quarterly. 6 (2): 129–166. doi:10.2307/2390752. ISSN   0001-8392. JSTOR   2390752.
  4. ↑ Masterclass. "Understanding Incentives in Economics: 5 Common Types of Economic Incentives". Masterclass. Retrieved 2022-04-29.
  5. 1 2 3 4 5 6 Lazear, Edward. P; Shaw, Kathryn. L (2007). "Personnel Economics: The Economist's View of Human Resources" (PDF). Journal of Economic Perspectives. 21 (4): 91–114. doi:10.1257/jep.21.4.91.
  6. ↑ Li, Pamela (19 April 2019). "What is Intrinsic Motivation & How Does it Work?". Parenting for Brain. Retrieved 2022-04-29.
  7. ↑ Benati, Igor; Coccia, Mario (2018). "Rewards in Bureaucracy and Politics". In Farazmand, Ali (ed.). Global Encyclopedia of Public Administration, Public Policy, and Governance. Cham: Springer International Publishing. pp. 1–6. doi:10.1007/978-3-319-31816-5_3417-1. ISBN   978-3-319-31816-5. S2CID   158421245.
  8. ↑ O'Reilly, C. A.; Chatman, J.; Caldwell, D. F. (September 1991). "People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit". Academy of Management Journal. 34 (3): 487–516. doi:10.2307/256404. ISSN   0001-4273. JSTOR   256404. S2CID   45619898.
  9. ↑ Waqas, Zafarullah; Saleem, Sharjeel (2014-11-01). The Effect of Monetary and Non-Monetary Rewards on Employee Engagement and Firm Performance. The International Institute for Science, Technology and Education (IISTE). OCLC   1358510932.
  10. 1 2 Behavioral Science Solutions. "Incentives". Behavioral Economics. Retrieved 2022-04-29.
  11. ↑ Callahan, David (2004). The cheating culture: Why more Americans are doing wrong to get ahead. Harcourt. ISBN   9780156030052.
  12. 1 2 3 4 5 Dalkir, Kimiz (2011). Knowledge Management in Theory and Practice (Second ed.). The MIT Press. ISBN   9780262015080.
  13. 1 2 3 4 Lazear, Edward P. (Summer 2018). "Compensation and Incentives in the Workplace". Journal of Economic Perspectives. 32 (3): 195–214. doi: 10.1257/jep.32.3.195 . ISSN   0895-3309. S2CID   158410132.
  14. 1 2 Gneezy, Uri; Meier, Stephan; Rey-Biel, Pedro (2011-11-01). "When and Why Incentives (Don't) Work to Modify Behavior". Journal of Economic Perspectives. 25 (4): 191–210. doi: 10.1257/jep.25.4.191 . ISSN   0895-3309.
  15. ↑ Pokorny, Kathrin (May 2008). "Pay—but do not pay too much: An experimental study on the impact of incentives". Journal of Economic Behavior & Organization. 66 (2): 251–264. doi:10.1016/j.jebo.2006.03.007. ISSN   0167-2681.
  16. 1 2 3 4 5 6 7 8 9 Neilson, William S. (2007). Personnel Economics. Pearson Education Inc. p. 11. ISBN   9780131488564.
  17. ↑ Camerer, Colin F.; Hogarth, Robin M.; Budescu, David V.; Eckel, Catherine (1999). "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework". In Fischhoff, Baruch; Manski, Charles F. (eds.). Elicitation of Preferences. Dordrecht: Springer Netherlands. pp. 7–48. doi:10.1007/978-94-017-1406-8_2. ISBN   978-90-481-5776-1.
  18. ↑ Arnold, R.; Bartlett, S.; Bernat, J.; Colonna, J.; Dafoe, D. (2002). "Financial incentives for cadaver organ donation: an ethical reappraisal". Transplantation. 73 (8): 1361–1367. doi: 10.1097/00007890-200204270-00034 . PMID   11981440. S2CID   29823737.
  19. ↑ Pham, V. (2021). "Cash, Funeral Benefits or Nothing at All: How to Incentivize Family Consent for Organ Donation" (PDF). Review of Behavioral Economics. 8 (2): 147–192. doi:10.1561/105.00000136. S2CID   237705443.
  20. ↑ Hooi, L. W.; Abdullah, A. A. (2013). "Relationships of Non-Monetary Incentives, Job Satisfaction and Employee Job Performance". International Review of Management and Business Research. 2 (4): 1085–1091.
  21. 1 2 3 4 Lefebvre, Mathieu; Stenger, Anne (2020-01-17). "Short- & long-term effects of monetary and non-monetary incentives to cooperate in public good games: An experiment". PLOS ONE. 15 (1): e0227360. doi: 10.1371/journal.pone.0227360 . ISSN   1932-6203. PMC   6968839 . PMID   31951622.
  22. 1 2 Burgess, S. (2003-06-01). "The Role of Incentives in the Public Sector: Issues and Evidence". Oxford Review of Economic Policy. 19 (2): 285–300. doi:10.1093/oxrep/19.2.285. ISSN   1460-2121.
  23. ↑ Cassar, Lea; Meier, Stephan (Summer 2018). "Nonmonetary Incentives and the Implications of Work as a Source of Meaning". Journal of Economic Perspectives. 32 (3): 215–238. doi: 10.1257/jep.32.3.215 . ISSN   0895-3309. S2CID   52834710.
  24. ↑ Depedri, Sara; Tortia, Ermanno C.; Carpita, Maurizio (2010). "Incentives, Job Satisfaction and Performance: Empirical Evidence in Italian Social Enterprises". Euricse Working Papers. N.012 | 10. SSRN   1698598.
  25. ↑ Jeffrey, S. (2004). "The benefits of tangible non-monetary incentives". University of Chicago: 702–77.
  26. 1 2 Gneezy, Uri; Meier, Stephan; Rey-Biel, Pedro (Fall 2011). "When and Why Incentives (Don't) Work to Modify Behavior". Journal of Economic Perspectives. 25 (4): 206. doi: 10.1257/jep.25.4.191 .
  27. ↑ Lazear, Edward P.; Shaw, Kathryn L. (2007). "Personnel Economics: The Economist's View of Human Resources" (PDF). The Journal of Economic Perspectives. American Economic Association. 21 (4): 91–114. doi:10.1257/jep.21.4.91. JSTOR   30033753.
  28. ↑ Edmans, Alex; Fang, Vivian W.; Huang, Allen (2018). "The Long-Term Consequences of Short-Term Incentives". SSRN Electronic Journal. doi:10.2139/ssrn.3037354. ISSN   1556-5068. S2CID   53073899.
  29. ↑ Prendergast, Canice (March 1999). "The Provision of Incentives in Firms". Journal of Economic Literature. 37 (1): 7–63. doi:10.1257/jel.37.1.7.
  30. 1 2 "Asymmetric Information: The Principal-Agent Problem" (PDF). Archived from the original (PDF) on 2015-11-23.
  31. ↑ Irlenbusch, Bernd; Sliwka, Dirk (September 2005). "Incentives, Decision Frames, and Motivation Crowding Out – an Experimental Investigation". IZA Discussion Paper No. 1758. doi:10.2139/ssrn.822866. hdl: 10419/33245 . S2CID   16424059. SSRN   822866.
  32. 1 2 Braun, Dietmar; Guston, David H (October 2003). "Principal-agent theory and research policy: an introduction" (PDF). Science and Public Policy. 30 (5): 302–308. doi:10.3152/147154303781780290. ISSN   0302-3427. S2CID   144005311.
  33. ↑ Waterman, Richard W.; Meier, Kenneth J. (1998). "Principal-Agent Models: An Expansion?". Journal of Public Administration Research and Theory. 8 (2): 173–202. doi: 10.1093/oxfordjournals.jpart.a024377 .
  34. ↑ Williamson, Oliver E. (1985). The economic institutions of capitalism: firms, markets, relational contracting. The Free Press. ISBN   978-0-684-86374-0. OCLC   12216444.
  35. 1 2 Jensen, Michael C.; Murphy, Kevin J. (Winter 2010). "CEO Incentives-It's Not How Much You Pay, But How". Journal of Applied Corporate Finance. 22 (1): 64–76. doi:10.1111/j.1745-6622.2010.00262.x. ISSN   1078-1196. S2CID   219968200.
  36. ↑ Prendergast, Canice (March 1999). "The Provision of Incentives in Firms". Journal of Economic Literature. 37 (1): 14–15. doi:10.1257/jel.37.1.7.
  37. ↑ Bram Cadsby, C.; Song, F.; Tapon, F. (April 2007). "Sorting and Incentive Effects of Pay for Performance: An Experimental Investigation". The Academy of Management Journal. 50 (2): 389–392.
  38. ↑ Dohmen, T.; Folk, A. (2010). "Yout Get What You Pay For: Incentives and Selection in the Education System". The Economic Journal. 120 (546): 257–258. doi:10.1111/j.1468-0297.2010.02376.x. JSTOR   40784482. S2CID   12928709.
  39. ↑ Franco-Santos, Monica; Gomez-Mejia, Luis R. (2015). "Creating a culture of collaboration, innovation and performance through team-based incentives". Team-based incentives: Creating a Culture of Collaboration, Innovation, and Performance. The Compensation Handbook (6th ed.). McGraw-Hill. pp. 199–209.
  40. ↑ DeMatteo, J. S.; Eby, L. T.; Sundstrom, E. (1998). Team-based rewards: Current empirical evidence and directions for future research. Research in organizational behavior. Vol. 20 (B. M. Staw & L.L. Cummings ed.). Elsevier Science/JAI Press. pp. 141–183.
  41. ↑ Beersma, B.; Hollenbeck, J. R.; Humphrey, S. E.; Moon, H.; Conlon, D. E.; Ilgen, D. R. (2003). "Cooperation, Competition, and Team Performance: Towards a Contingency Approach". Academy of Management Journal. 46 (5): 572–590. doi:10.2139/ssrn.325401. ISSN   0001-4273. SSRN   325401.
  42. ↑ Kruse, Douglas (May 2022) [December 2016]. "Does employee ownership improve performance?". IZA World of Labor. 311. doi: 10.15185/izawol.311 . hdl: 10419/148536 . ISSN   2054-9571.
  43. ↑ Hamilton, Barton H.; Nickerson, Jack A.; Owan, Hideo (June 2003). "Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation". Journal of Political Economy. 111 (3): 465–497. doi:10.1086/374182. ISSN   0022-3808. S2CID   11969481.
  44. 1 2 Gerhart, Barry; Rynes, Sara L.; Fulmer, Ingrid Smithey (January 2009). "6 Pay and Performance: Individuals, Groups, and Executives". Academy of Management Annals. 3 (1): 251–315. doi:10.5465/19416520903047269. ISSN   1941-6520.
  45. ↑ Holmstrom, Bengt (1982). "Moral Hazard in Teams". The Bell Journal of Economics. 13 (2): 325–328. doi:10.2307/3003457. JSTOR   3003457.
  46. ↑ Alchian, A.; Demsetz, H. (1972). "Production, Information Costs, and Economic Organization". The American Economic Review. 62 (5): 779–781. JSTOR   1815199.
  47. 1 2 Frederiksen, A.; Hansen, D.; Manchester, C. (2022). "Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process". IZA Institute of Labor Economics: 2–4.
  48. ↑ Kandel, E.; Lazear, E. (1992). "Peer Pressure and Partnerships". Journal of Political Economy. 100 (4): 803–811. doi:10.1086/261840. JSTOR   2138688. S2CID   16757647.
  49. ↑ Hashim, Matthew J.; Bockstedt, Jesse C. (5–8 January 2015). "Overcoming Free-Riding in Information Goods: Sanctions or Rewards?". 2015 48th Hawaii International Conference on System Sciences. Kauai, HI, USA: IEEE. pp. 4834–4843. doi:10.1109/hicss.2015.574.
  50. 1 2 Kanemoto, Yoshitsugu; MacLeod, W. Bentley (1992). "The Ratchet Effect and the Market for Secondhand Workers". Journal of Labor Economics. University of Chicago Press. 10 (1): 85–98. doi:10.1086/298279. JSTOR   2535130. S2CID   154244118.
  51. ↑ Cooper, David J.; Kagel, John H.; Lo, Wei; Gu, Qing Liang (1999). "Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers" (PDF). The American Economic Review. 89 (4): 781–804. doi:10.1257/aer.89.4.781. ISSN   0002-8282. JSTOR   117159.
  52. 1 2 3 4 Gneezy, Uri; Meier, Stephan; Rey-Biel, Pedro (Fall 2011). "When and Why Incentives (Don't) Work to Modify Behavior". Journal of Economic Perspectives. 25 (4): 192. doi: 10.1257/jep.25.4.191 .
  53. ↑ Ariely, Dan; Gneezy, Uri; Loewenstein, George; Mazar, Nina (2009). "Large Stakes and Big Mistakes" (PDF). The Review of Economic Studies. 76 (2): 451–469. doi:10.1111/j.1467-937X.2009.00534.x . Retrieved 3 May 2022.
  54. ↑ Chiappori; Salanié (2003). "Testing contract theory: a survey of some recent work". In M. Dewatripont; L. Hansen; S. Turnovsky (eds.). Advances in Economics and Econometrics (PDF). Vol. 1. Cambridge: Cambridge University Press. pp. 115–149. doi:10.1017/CBO9780511610240.005. ISBN   9780511610240. S2CID   3067063.
  55. 1 2 3 Jain, Abha (2019). Sports Psychology. India: Friends Publications. p. 215. ISBN   978-93-88457-75-0.
  56. ↑ Breza, Emily; Kaur, Supreet; Shamdasani, Yogita (10 October 2017). "The Morale Effects of Pay Inequality*". The Quarterly Journal of Economics. 133 (2): 611–663. doi: 10.1093/qje/qjx041 .
  57. ↑ Bem, Daryl J. (1972). "Self-Perception Theory". In Leonard Berkowitz (ed.). Advances in Experimental Social Psychology. Vol. 6. Academic Press. pp. 1–62. doi:10.1016/s0065-2601(08)60024-6. ISBN   9780120152063.
  58. ↑ Frey, Bruno S.; Jegen, Reto (December 2001). "Motivation Crowding Theory". Journal of Economic Surveys. 15 (5): 589–611. doi:10.1111/1467-6419.00150. ISSN   0950-0804.
  59. ↑ Heyman, James; Ariely, Dan (November 2004). "Effort for Payment". Psychological Science. 15 (11): 787–793. doi:10.1111/j.0956-7976.2004.00757.x. ISSN   0956-7976. PMID   15482452. S2CID   8573184.
  60. 1 2 Bolle, Friedel; Otto, Philipp E. (February 2010). "A Price Is a Signal: on Intrinsic Motivation, Crowding-out, and Crowding-in". Kyklos. 63 (1): 9–22. doi:10.1111/j.1467-6435.2010.00458.x. ISSN   0023-5962. S2CID   154039981.
  61. ↑ Brekke, Kjell Arne; Kverndokk, Snorre; Nyborg, Karine (September 2003). "An economic model of moral motivation". Journal of Public Economics. 87 (9–10): 1967–1983. doi:10.1016/s0047-2727(01)00222-5. hdl: 10419/192272 . ISSN   0047-2727.
  62. ↑ Qiao, Dandan; Lee, Shun-Yang; Whinston, Andrew B.; Wei, Qiang (2021-01-02). "Mitigating the Adverse Effect of Monetary Incentives on Voluntary Contributions Online". Journal of Management Information Systems. 38 (1): 82–107. doi:10.1080/07421222.2021.1870385. ISSN   0742-1222. S2CID   232765666.
  63. ↑ Fryer, Roland (November 2011). "Financial Incentives and Student Achievement: Evidence from Randomized Trials". The Quarterly Journal of Economics. 126 (4): 1758. doi: 10.1093/qje/qjr045 .
  64. 1 2 Leuven, E.; Osteerbeck, H.; van der Klaauw, B. (2010). "The Effect of Financial Rewards on Students' Achievement: Evidence from a Randomized Experiment". Journal of the European Economic Association. 8 (6): 1259.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.