Attachment & Pride

Attachment & Pride The Role of Incentives

Incentives: Skeptics Vs. Supporters

Much experimentation and research has been done on the topic of incentives, both in the academic and business worlds, and most researchers have aligned themselves around two main schools of thought: Skeptics and Supporters.

SKEPTICS ARE NOT CONVINCED

Skeptics argue that performance based pay schemes consistently fail to produce lasting changes in attitude and behavior; instead, they only temporarily change the way we behave. One of the primary arguments of the skeptics is that extrinsic motivators (pay, bonus, vacation, perks) cannot substitute or drive intrinsic motivation. Basically, if you hate your job, your pay check won’t make up for that. Moreover, the skeptics argue, while it is obvious that cutting pay is de-motivating, there is no reason to believe doubling someone’s pay would result in better work, once above a certain threshold. Also, the skeptics point out that there are studies which show no correlation between executive incentive plans and increased returns to shareholders, with one potential explanation being that reward systems discourage exploration and risk-taking. The argument is that if the reward is significant, people will do exactly what they are asked to do, and choose not to explore riskier but potentially more lucrative ideas, lest the reward be withdrawn. Reward systems are also regarded by skeptics as a primary cause of communication disruptions and failing morale. This problem, the skeptics argue, is even more exacerbated when there is a limited pool of employee benefits; in those types of situations, one person’s gain is another one’s loss, and it is only a matter of time before employees start regarding each other as competitors rather than colleagues.

BENEFITS ARE BENEFICIAL On the other hand, the camp of the supporters argues that reward systems not only work, but are also fairer to employees, managers and shareholders alike. According to the supporters, the core of the issue stems from the nature of the principal/agent relationship. This kind of relationship, or the agency relationship, as the economists call it, occurs whenever one party (the principal) hires another party (the agent) to take actions or make decisions that affect the payoff to the principal. This type of relationship is widely applicable in the business world. An agency relationship occurs when shareholders of a company select the management

By TEZLARU RAZVAN

team who will take decisions that will impact their wealth; likewise, whenever a manager hires an employee to take actions or decisions, the same type of relationship occurs, since the poor performance of an employee will directly and negatively reflect impact the manager’s performance. A non-obvious side effect of the agency relationship is favoritism; a study by Bandiera, Barankay and Rasul, conducted on a fruit farm in England, found, perhaps unsurprisingly, that some supervisors tended to help favored workers more, who in turn earned higher wages as a result. Interestingly, favoritism stopped, and overall efficiency increased, when the farm started paying the supervisors themselves according to the productivity of the workers. Performance based bay systems, supporters argue, simply align the interests of the parties in a way that fixed-pay systems cannot do. The agent earns more when the principal earns more, and less when the principal earns less, and so is more willing to take actions that benefit the principal.

FOLLOWING GUIDELINES

While there is no definitive answer, there are three key guidelines which a manager can use to think about reward systems in practical terms. • First, one should consider the factors underlying the agency relationship;

Benefits and Beyond

By ED TAMSON Some research suggests that there are not any long-term benefits. But when firms use different types of incentives, including material-based or non-material-based incentives, the effect on employee motivation and productivity is dependent on various personal and organizational factors. In fact, numerous studies show that engaged employees are 25% to 33% more productive for their companies than disengaged individuals. A Real Program. Kent State used an Employee Incentive Program that provided incentive compensation for employees that exceeded their four assigned goals. The Kent State employees’ goals were the same for all employees, and included “calls to new prospects, visits to donors and prospective donors, solicitations, and gift closures.” The implementation of the program did increase employee performance; of the twenty-two employees, three hit their goal in

Does Money Spur Art and Workers?

The photographer Nikolai Ishchuk was born in Moscow in 1982. Money has been a fecund subject for the arts. In the wake of the financial meltdown, a contemporary interpretation is all the more pertinent. The prints are derived from actual banknotes, whose value is exposed as fictitious and undermined through enlargement, color shifts and layering. Founded by Laura Noble and Michael Diemar, in 2009 Diemar/Noble Photography gallery has been established one of London’s key art venues, displaying photography in all its forms. The gallery maintains an education department and conducts courses for collectors and photographers as well as portfolio reviews for professionals and students. [W diemarnoble.com]

what affects the payoff to the principal? What decisions do employees take which affect the company’s bottom line? The answer to that question may not be immediately obvious, as some decisions are neither formal, nor visible. • Second, one should also consider what exactly is under the employees’ control. How do the actions of other parties influence the ability of the employee to control the outcome? Does someone else control the flow of raw material to my work station? It is important to carefully assess the effect of such decision spillover effects, in order to avoid building a system which can be perceived as unfair. • Third, one should consider the nature of the rewards themselves. Some organizational cultures may value status or recognition over money; it is important to recognize this fact in order to design appropriate rewards. Providing monetary rewards when public recognition is expected means not only wasted money, but may even be perceived as insulting in some cases. Ultimately, while it may be perfectly possible to run a successful organization without a performance based system, a wise manager should carefully consider whether such an organization is as successful as it could have been otherwise.•

01 (CHF 10, 2009) — 02 (USD 1,2010). From the series Big Bucks. Lightjet print, 40x40in / 72x72in. © Nikolai Ishchuk courtesy of Diemar/Noble Photography, London

all four categories; eleven met their goal in at least two categories, and nineteen in at least one category. The example set by Kent State with a 15% increase in performance demonstrates that Employee Incentive Programs can be an effective technique to increase employee performance with properly aligned goals.

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