Living in a market society usually brings with it an interesting relationship with money; currency provides access to a host of services and experiences, and lets us acquire products and fulfill basic needs. We can probably all agree it’s a fairly important thing in most people’s lives. So it follows that opportunities to acquire more money would tend to rank high in the priorities of people living in these economies, which would increase motivation in its pursuit. Yet, research on individuals’ reactions to financial incentives has produced an interesting pattern, which does not exactly fit this assumption.

A large number of studies produced on this topic focused on financial incentives in the workplace, where performance-related pay is a popular strategy to improve employee productivity. In a workplace relationship in which work is exchanged for money, the assumption that a bigger amount of money is received when one produces a bigger amount of work may seem straightforward. Surprisingly, these incentives were empirically shown to provide very little impact. In fact, in many cases, financial incentives rewarding higher work performance produced negative outcomes123. A similar pattern was shown in the promotion of pro-social behaviour45.

The dynamic through which explicit financial incentives affect behaviour is not monotonic, and different social and professional contexts will produce different patterns. In contexts where financial incentives are relatively high, they may produce increased anxiety levels which then reduce performance. In contexts where financial incentives replace social incentives, the trade-off may lead individuals to lose motivation towards the task or behaviour required because of different intrinsic weighing.

A remarkable – and fairly well-known – illustration of these dynamics is Gneezy and Rustichini (2000)’s seminal paper “A fine is a price”6. In this study, researchers studied the impacts of financial incentives on the relationship between parents of children and a group of local daycare centers2 in Israel. Dealing with problems from parents frequently arriving late to pick up their children from the daycare, the latter had elected to impose monetary penalties to promote punctuality. In a reversal of predicted results, the lateness frequency increased for the centers that implemented the fines (versus the control group). The researchers offered multiple ideas to explain the dynamics observed. One which seems to hold particularly well is the social norms explanation, in which the payment of a fine appears to fully compensate the negative impact of the fault committed.

The results of these studies point towards the idea that financial transactions do not represent the only economic market with which individuals operate on a daily basis, even in the work place. Social capital remains an important currency for most of us. And in an interesting twist, there appears to be a crowding-out effects of these two currencies on each other; when an individual pays a financial price for a positive or negative action, its social cost or value is reduced, and motivation follows.

 

Related keywords

Explicit incentives

Performance-related pay

 

Significant papers

[1] Ariely, D., U. Gneezy, et al. (2009). “Large stakes and big mistakes.” Review of Economic Studies 76(2): 451-469.

[2] Bénabou, R. and J. Tirole (2003). “Intrinsic and extrinsic motivation.” Review of Economic Studies 70(3): 489-520.

[3] Fehr, E. and A. Falk (2002). “Psychological foundations of incentives.” European Economic Review 46(4-5): 687-724.

[4] Fuster, A. and S. Meier (2010). “Another hidden cost of incentives: The detrimental effect on norm enforcement.” Management Science 56(1): 57-70.

[5] Mulder, L. B. (2008). “The difference between punishments and rewards in fostering moral concerns in social decision making.” Journal of Experimental Social Psychology 44(6): 1436-1443.

[6] Gneezy, U. and A. Rustichini (2000). “A fine is a price.” Journal of Legal Studies 29(1 Part I): 1.

 

Other references

Bandiera, O., I. Barankay, et al. (2010). “Social incentives in the workplace.” Review of Economic Studies 77(2): 417-458.

Bonner, S. E. and G. B. Sprinkle (2002). “The effects of monetary incentives on effort and task performance: Theories, evidence, and a framework for research.” Accounting, Organizations and Society 27(4-5): 303-345.

Bowles, S. (2008). “Policies designed for self-interested citizens may undermine “The moral sentiments”: Evidence from economic experiments.” Science 320(5883): 1605-1609.

Burks, S., J. Carpenter, et al. (2009). “Performance pay and worker cooperation: Evidence from an artefactual field experiment.” Journal of Economic Behavior and Organization 70(3): 458-469.

Fehr, E. and S. Gächter (2000). “Fairness and retaliation: The economics of reciprocity.” Journal of Economic Perspectives 14(3): 159-181.

Gneezy, U. and J. A. List (2006). “Putting behavioral economics to work: Testing for gift exchange in labor markets using field experiments.” Econometrica 74(5): 1365-1384.

Heyman, J. and D. Ariely (2004). “Effort for payment – A tale of two markets.” Psychological Science 15(11): 787-793.

Hannan, R. L. (2005). “The combined effect of wages and firm profit on employee effort.” Accounting Review 80(1): 167-188.

Kachelmeier, S. J., B. E. Reichert, et al. (2008). “Measuring and motivating quantity, creativity, or both.” Journal of Accounting Research 46(2): 341-373.

Kool, W. and M. Botvinick (2014). “A labor/leisure tradeoff in cognitive control.” Journal of Experimental Psychology: General 143(1): 131-141.

Pazy, A. and Y. Ganzach (2009). “Pay contingency and the effects of perceived organizational and supervisor support on performance and commitment.” Journal of Management 35(4): 1007-1025.

Rose, T. and K. Manley (2011). “Motivation toward financial incentive goals on construction projects.” Journal of Business Research 64(7): 765-773.

Servátka, M., S. Tucker, et al. (2011). “Words speak louder than money.” Journal of Economic Psychology 32(5): 700-709.

Weibel, A., K. Rost, et al. (2010). “Pay for performance in the public sector – Benefits and (Hidden) costs.” Journal of Public Administration Research and Theory 20(2): 387-412.

 

Refining of the model

Kauhanen, A. and H. Piekkola (2006). “What makes performance-related pay schemes work? Finnish evidence.” Journal of Management and Governance 10(2): 149-177.

Lin, C. C. and C. C. Yang (2006). “Fine enough or don’t fine at all.” Journal of Economic Behavior and Organization 59(2): 195-213.