Incentive
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.
[7] 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.
[8] Often, intrinsic incentives are useful in increasing one's empowerment, utility level, and autonomy and can reinforce employees’ work involvement and commitment.
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.
[3] When people are constantly being incentivized by external pressures, they neglect their intrinsic motives which could consequently be detrimental to their work ethic.
[14] 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.
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.
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.
[19][20] Non-monetary incentives can act as an impactful reward system to employees with superior performance that is independent to predetermined targets.
[21] 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 [22] 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.
[23] 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.
[22] 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.
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.
[17] 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.
[23] 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.
[31] 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.
[33] 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.
[6] 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.
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.
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.
[42] Researchers found a positive relationship between team-based incentive and employees’ work efficacy, stability, and salary[43] as well as company output.
[45] 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.
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.
[52] 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.
[53] 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.
[55] For example, some corporate policies popular during the 1990s aimed to encourage productivity have led to failures as a result of unintended consequences.
[63] A crowding-out effect leads to a decrease in individuals’ desire to volunteer and people eventually stop contributing due to the rewards attached.
