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Rewards and
Recognition Programs
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The Economic Theory of Incentives
Agency theory• Employee is averse to efort• Employee is averse
to risk• Parties cannot contract on level o efort as employer is
risk averse and its
di cult to monitor
Incentive plans are used to
• Screen and Sort• Rewarding the type and quality o efort•
Benchmarking and tournaments
Challenges of
• nterdependency Pro!lem" #he $i culty in paying employees !ased
on
individual per ormance when multiple people impact per ormance%•
#he &ontrolla!ility Pro!lem" #he inherent issue in linking
compensation o
a person to events !eyond his'her control• #he Alignment
Pro!lem" &hallenge o avoiding distortionary efects o
individual pay plans in an environment where employees per orm
multipletasks%
• Ratchet efect
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Best Laid Incentive Plans
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%easures Employees( Response
Response to the customer within81 hours o opening $on=t open the
email
ndividual achievement in R>$ Race in ?ling patents
andcopyrights /which may not !ecommercially via!le2
Budgeting nnovation @ pro ect does not gothrough
&ommission on actual sale amountand not 9RP or present and
e)*employees%
Sales people treated e)isting andretired employees poorly
4eadcount reduction •
esta!lished territories5n time shipping •
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%% recognition ?nal recognition cameron over usti?cation
efect%pd
Page 88
)ver*usti+cation Efects
'tudy ! #he over*usti+cation e,ect occurs when ane)pected
e)ternal incentive such as money or priCesdecreases a personDs
intrinsic motivation to per orm atask%
'tudy -$rawing activities o children"• #he +o* award group•
#he une)pected award group• #he e)pected award group* per
ormance ell signi?cantly
6ndermining childrenDs intrinsic interest 3ith e)trinsic reward"
A test o the over usti?cation hypothesis !y
9ark r%
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Reward Ine6uity3 The Case of Capuchin %on$
9onkeys re ect unequal pay !y Sarah (% Brosnan > (rans B% 9%
de
3aal
• &ondition o Equality and nequality• (ood and Efort
&ontrol
