CeDEx 2016-09: Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance

Summary

Contract theory has traditionally focused on the design of monetary incentives as the unique motivation tool. The premise of these theories is that workers will only respond to monetary incentives (eg piece rates, bonuses, stock options) leaving aside the role of intrinsic motivators. Standard theories commend a widespread use of monetary incentives rewarding workers according to observable measures of effort. However, the predictions of these models are frequently at odds with observed labour contracts. One of the major puzzles for this literature is to account for the rather limited use of monetary incentives in the workplace such as the extensive evidence that pay is much less sensitive to firm performance than what standard theories predict.

In this Nottingham School of Economics working paper Roberto Hernán-González and co-authors put forward that this discrepancy between theory and evidence may result from models neglecting important aspects of work motivation related to the use of non-monetary incentives. The authors analyse a framework in which managers can assign wage-irrelevant goals to employees. They find evidence that, when given the possibility to set wage-irrelevant goals, managers select incentive contracts for which pay is less responsive to employees' performance. The authors show that average performance of employees is higher in the presence of goal setting than in its absence despite weaker incentives. The paper suggests that non-monetary incentives are effective ways to motivate workers while substantially reducing the wage bill. So, non-monetary incentives are not only about motivating differently by appealing to intrinsic motivation it is also about saving 'real' money.

CeDEx 2016-09, Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance by Brice Corgnet, Joaquín Gómez-Miñambres and Roberto Hernán-González

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Authors

Brice Corgnet, Joaquín Gómez-Miñambres and Roberto Hernán-Gonzalez

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