Incentive
In general, incentives are anything that persuade a person[1] or organization[2] to alter their behavior to produce the desired outcome. The laws of economists and of behavior state that higher incentives amount to greater levels of effort and therefore higher levels of performance.[3] For comparison, a disincentive is something that discourages from certain actions.
For other uses, see Incentive (disambiguation).Monetary incentives[edit]
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.[14] 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.[15] 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.[15] 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.[16]
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.[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.[17] Alternatively, firms can also incentivize their employees to perform by threatening to demote or terminate them for poor performance.[17] 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.[18]
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.[19][20]
Non-monetary incentives[edit]
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. 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.[24] In addition, non-monetary incentives are known to promote long-term commitment and loyalty among employees[22] Effective use of non-monetary incentives can positively influence employees’ perception of the company's image as well as increase the morale of firms.[25] 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.[26] Employees with higher job satisfaction and morale were found to have better overall performance, contribution and hence higher productivity.[27] 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.[22] 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.[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.
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.
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Incentives in the context of voluntary contributions[edit]
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.[58] 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.[59][60] 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,[61] causing their self-image benefit[62] and prosocial motivation to decrease.[63] 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.[61]
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Incentives in education[edit]
Extrinsic incentives offered to unmotivated students can potentially have positive short-run effects on education.[53] 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.[53] 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.[64]
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.[65] 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.[65]
Conclusion[edit]
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.[27]