More on Performance Pay and Motivation Crowding Out

24 November 2012 at 6:00 am 1 comment

| Nicolai Foss |

Observing  how economists relate to psychology is interesting. On the one hand, there is considerable fascination:  Social psychology research often produces interesting findings about human interaction, and motivational and cognitive psychology yields insight in human behavior and decision-making which is more fine grained than most econ research. On the other hand, there is an often ill-tempered dismissal, too often based on an incomplete understanding of the relevant material, of any psychology findings that may be seen as going against the standard economics model of rationality. “This is entirely consistent with maximization once you take all constraints into consideration,” “This is just another instance of altruistic preferences”, etc. etc. are conventional defensive stratagems that are entirely understandable given the metaphysical status of the standard model in economics.

An area where many economists, at least as seen from my perspective as an outsider, seems to have given in concerns so-called “motivation crowding.”  This is  the idea that “extrinsic motivators” (such as performance pay) can crowd-out out “intrinsic motivation,” the kind of inner  motivation that, many motivational psychologists argue, is the most suitable one for tasks involving creativity, problem-solving and learning. Since this effect was first imported (from self-determination theory in motivational psychology) into economics in the mid-1990s by, first, Bruno Frey, and then David Kreps, it has been rather generally acknowledged by many organizational economists, personnel economists and labor economists as a real and worrying phenomenon. “Worrying” because it suggests that conventional incentive instruments may be counter-productive.

A recent paper by Meiyu Fang and Barry Gerhart (2012), “Does Pay for Performance Diminish Intrinsic Interest?” suggests that economists should perhaps think twice before they embrace the crowding effect, at least in the context of real world organizations.The authors question random assignment experiments on the grounds that in organizations assignment is anything but random. But perhaps more substantively they argue that “perceived competence” and “perceived autonomy” (key constructs in self-determination theory) are positively related to pay for individual performance, rather than negatively as the crowding effect would posit. For example, being exposed to performance-contingent rewards may drive feelings of control and autonomy (“I decide myself how much I wanna make here”, “If I deliver, the Man has to pay” etc.).  These ideas are tested on data from a survey of 609 white collar Taiwanese employees, and largely confirmed. A fascinating and recommended read.

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1 Comment Add your own

  • 1. Steve Phelan  |  24 November 2012 at 1:32 pm

    I had a student in class this week extol the glories of a company where employees got to vote on pay raises for fellow workers and there was no limit to vacation time. He remarked that he would be so motivated to work for such a company.

    It seems every few years we get a new story of a company that turns standard compensation practices on their heads and finds a new way to elicit motivation (including intrinsic motivation). I quoted Southwest airline back to him as an earlier example

    From an organizational economics point of view, we have to ask why most organizations do not embrace these practices. Are they stupid if such large gains are to be had? Psychologists and sociologists suggest they are. Of course, an economist would say that these approaches are not efficient for certain (most) industries and that the market process decides winners and losers of motivational systems.

    P.S. I prefer the latter explanation even though I initially trained as a psychologist.

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