Getting Incentives Right: The Economics of Motivating Employees

Last Updated Dec 7, 2007 3:15 PM EST

The Economics of Motivating EmployeesEvery manager wants to know how to motivate her employees to perform better. A common solution is to throw money at the problem. It might seem like sound economics, but yesterday Knowledge@Wharton spoke to an economist who suggests that managers rethink their system of incentives. Tyler Cowan, an economics professor at George Mason University and author of a new book entitled "Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist" argues that:
A lot of employers put too much stress on money as an incentive and not enough on fun. They often don't realize just how much their employees need to feel in control of their own destiny. But these are very common mistakes, and they usually arise because the employer himself or herself has a great need to feel in control. That's often counter productive, and people rebel against it.
If fun is a primary motivator, how about those annual bonuses to spur performance? Should managers forget about them entirely? Cowan argues that rather than forgo bonuses, employers need to make sure they're done right.
These incentives need to be framed the right way, accompanied with the right signals; like meetings, they are an act of social theater... People have to know why they received the incentive they did, what it means in terms of their broader status in the workplace. Framing it the wrong way, for example, would be penalizing somebody without saying what they are doing right. Negative signals are much more likely to be heeded when bundled with something positive.
A common problem with bonuses, however, is people often feel, rightly or wrongly, that they are used to reward favorites. If they are perceived that way, they are probably counter-productive.
Though the interview is full of insights for managers, Cowan also applies the art & science of economic incentives to a wide range of situations from a pain-free trip to the dentist to why schools are often so dreary for students (hint: it's all about the funding). Also check out Cowan's blog Marginal Revolution.

(Image of motivational fortunes by aarontait, CC 2.0)

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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.