Incentives are increasingly linked to a wide range of measures, both quantitative (sales targets, customer satisfaction ratings) and subjective (for example, assessment of an individual's effectiveness in personal interactions).
Ayse Kocabiyikoglu, Instructor at the School of Management at Bilkent University, and Ioana Popescu, Assistant Professor of Decision Sciences at INSEAD, investigate the drivers of managerial motivation, focusing on decisions undertaken by managers in response to a performance-based contract. Throughout, motivation is measured by the level of effort expended on work activity. They analyse the factors influencing motivation and how an individual's own preferences feed into them.
The authors' research addresses a gap in the literature in this area - very little study has been done into how individuals respond to contract terms. Nevertheless, this knowledge is vital to organisations - there is no value to firms in changing their incentive and reward patterns if there is no measure of response to existing conditions in the environment.
This paper analyses how changes in an individual's preferences (identified as risk-aversion, prudence, aggressivity and conservatism), a firm's policies, and market conditions affect managerial motivation under given contract structures. For this, the authors use a static model to express the problem, their assumptions and basic notations. This model is applied to various preference configurations.
There are some surprising discoveries - not least that low-risk environments and salary increases not only fail to improve employee motivation but are actively demotivating in some circumstances. Firms should actually offer the lowest acceptable salary and focus on variable compensation in order to drive motivation.
Relevant motivators prove to be reward plans, increased productivity (contrary to the common notion that increased productivity induces laziness), changes in the marketplace (size of market and market prices) and increased workload (inventory). However, the extent to which these factors are motivating depends on managers' risk attitudes.
In conclusion, the authors suggest that it is worth a firm's while to assess an individual's preferences in order to understand their motivational patterns and create the best contractual and performance incentives.
INSEAD Working Paper, Reference: 2005/72/DS