Awards in Firms?

11 December 2006 at 11:10 am Nicolai Foss Leave a comment

| Nicolai Foss |

This is the third post on the economics of awards (see here and here), prompted by Bruno Frey’s recent work on the subject.

When we think of awards, most of us can easily come up with examples from public hierarchies, the military, sports, and volunteering, humanitarian and religious organizations, where awards are bestowed upon employees or members, or to public organizations/the state/the monarch bestowing awards upon citizens.

The only example that comes immediately to mind from for-profit organizations is that of employee-of-the-month awards.

Clearly, this is a fairly widespread practice in for-profit organizations (if perhaps more in the US than in Europe). However, it is actually hard to think of other kinds of awards that firms systematically use. As average job tenure has decreased, so has the use of award rituals such as the bank manager giving the retiring clerk a gold watch for his long and faithful tenure with the bank. In fact, for-profit firms would seem to constitute relatively award-free zones — and perhaps increasingly so.

There may be several reasons for this. A basic one is that public hierarchies are usually more constrained with respect to how high-powered they can make the incentives employees face. To supply incentives, they have to make relatively more use of other incentive instruments (if any!). Awards are such alternative and cheap incentive instruments. However, they are arguably not very powerful. For this reason, we would expect to see more use of awards in public than in private hierarchies.

Another reason may be that public hierarchies organize relatively more of those hard-to-measure activities that may require relatively soft incentive instruments and where it is essential to not crowd out intrinsic motivation.

A third reason is path-dependence, the public sector being a sort of heir to earlier state apparatuses that were essentially identical to the monarch’s administration. In contrast, historically, merchants and industrialists have seldom bestowed awards upon each other.