One of the first statements in most economics textbooks is that incentives are important for understanding behavior. Clearly, people respond to incentives. Adam Smith coined the term the “invisible hand” meaning that individuals striving for their self-interest would benefit society as a whole. But, of course, there are problems with self-interest. In the absence of laws preventing pollution, it would be in the self-interest of a factory to reduce its private costs by transferring these costs to society by polluting the environment. Also, when firms gain a high degree of market power, it would be in their self-interest to take advantage of this power at the expense of consumers. So, although clearly imperfect, we have tried to construct laws which try to prevent these abuses.
The use of incentives is also fundamental to the management process. Recently, I was fortunate to serve on a dissertation committee studying the leadership within firms using Employee Stock Ownership Programs (ESOPs). An ESOP provides employees with either partial or complete ownership of a firm. There are some variations of employee ownership of firms, and the key characteristic of these organizations is the expectation that employees will inherently assume a greater sense of responsibility for the success of the firm since they are owners and, therefore, decision makers. However, the actual results are not quite so clear. If employee-owned organizations are more efficient than investor-owned firms, then why aren’t they the dominating type of organization we see in business? Digging a little deeper, we do find the principle of incentives are important, but….incentives do not automatically result in heightened motivation and improved efficiency. Hertzberg, in his classic two factor theory,[i] separated management factors into motivators and hygiene categories. He showed that factors which motivated employees to increased productivity are challenging jobs, recognition, and personal growth. He categorized monetary compensation as a hygiene factor which, if low, could lead to job dissatisfaction, but it was not really a motivator. So, providing financial benefits and some decision making power to employees through some form of employee ownership may help to make the jobs marginally more satisfying, but it certainly does not provide automatic motivation for greater efficiency. Virtuous leadership and management are still the vital components for motivating people.
Finally, we must consider incentives and stewardship. All resources come from God (Psalm 24:1, 100:3; Col. 1:16); moreover, we are called to be wise stewards of those resources (Luke 6:38; Rom. 14:12; 1 Cor. 4:2; Eph. 6:7). That is the framework that must inform our decision-making. Thus, an incentive of “ownership” must imply God’s ownership and not our ownership. Accordingly, our business management models should focus on incentives which are lasting—and not the temporal incentives we often follow.
- What incentives has your company put in place?
- What are the real outcomes of those incentives? In other words, how has employee behavior changed (if at all) as a result of implementing specific incentives?
[i] Herzberg, F., Mausner, B., & Snyderman, B. (1959). The motivation to work. New York, NY: Wiley.