Summary by Rosalyn Mansour
Ph.D. Program in Accounting
University of South Florida, Spring 2004
Theories Main Page | Research Methods Main page
Whether dealing with accountants or experimental subjects, both accounting firms and researchers need to understand how monetary incentives affect performance. The authors begin by explaining the relationship between monetary incentives, effort and performance and then discuss 4 theories applicable to this relationship. Next, they present a literature review of laboratory or field experiments that study the effects of monetary incentives on individual effort or performance. Such studies include one of the 4 theories or other variables identified by the authors such as person variables (characteristics of individuals), task variables (characterize the task), environmental variables (characteristics of the surroundings of the person performing the task), incentive scheme variables (characterize the incentive scheme) as well as other variables related to affect, expectancies, self-interest, and arousal.
Generally, it is thought that monetary incentives will increase effort and performance; but research has been inconclusive. The more important question is how monetary incentives affect effort and performance. To that end, the authors present a framework of the effects of monetary incentives on effort and task performance. Each construct is explained in further detail.
Below, I attempt to summarize some of the salient points in literature reviewed by the authors. In other words, I’m being overly simplistic because the authors’ presentation of prior research, while succinct, is voluminous. For many of the points I summarize below, the authors have discussed references to studies that may in some other context not hold. This piece of work is very rich and any effort to summarize it would be inadequate. However, to give an idea of some of the issues it covers, the following is provided using some of the same subject headings as used in the paper.
Effort can have two directions – towards a task or towards learning. Both will eventually lead to performance, but while effort towards a task (direction, duration, and intensity) results in immediate performance, learning delays performance and is an important characteristic of strategy development.
Effort Duration – “refers to how long a person works (p. 306)”
Effort Intensity – “refers to how hard a person works. (p. 306)”
In general, if monetary benefits are seen to outweigh the time and other resources that must be expended for a task, then performance-based incentives should increase effort on that task.
Strategic Development – person is not directly working on the task, but is doing other activities (for example, problem solving, planning, or innovation) that will allow for future performance of the task. It is thought that monetary incentives lead to strategic development when immediate performance at the required level is not immediately possible.
The authors present 4 theories to explain how incentives affect effort, although there are more, and are: expectancy theory, agency theory (via expected utility theory), goal-setting theory, and social-cognitive (self-efficacy) theory.
“People act to maximize expected satisfaction with outcomes (p. 307). “ People are motivated by two things: (1) what they think the payoff is for a particular behavior and (in this case, money) and (2) how much they value that payoff (research shows people value monetary payoff over non-monetary payoff). The combination of these two factors is what motivates people. In other words, people make more effort when performance-based incentives are used because they believe they will get money when they perform as expected and they really like money.
“Individuals have utility for increases in wealth (p. 308).” Agency theory assumes that people are rational and will make choices based on the choice’s ability to increase either their wealth or leisure. If a task does not add to economic well-being, people will shirk the task.
“…proposes that personal goals are the primary determinant of, and immediate precursor to, effort (p. 308).” Prior research has shown that challenging and specific goals are most effective at increasing effort because they require more effort to be achieved. Goals have a main effect on effort, separate from expectancy, and are themselves affected by monetary incentives in that monetary incentives may cause people to “set goals when they otherwise would not (p. 309),” “set more challenging goals than they otherwise would (p. 309), and have “higher goal commitment (p. 309).”
Self-efficacy directly affects effort when a person expends effort (direction, intensity, duration, and learning) on a task that he or she believes he/she is able to accomplish. The belief that one can achieve a task also indirectly affects effort via goal setting such as when people who believe they are able to accomplish much, set high goals for themselves, which according to goal-setting theory would immediately precede effort. The authors also discuss how self-efficacy indirectly affects effort through other “cognitive, motivational, affective, and task mechanisms (p. 309).”
The authors review prior literature and provide many personal variables that can impact the relationship between monetary incentives, effort, and task performance. Those variables identified include the person’s “knowledge content, knowledge organization, abilities, confidence, cognitive style, intrinsic motivation, cultural values, and risk preferences (p. 312).” These variables affect a person’s “memory retrieval, information search, problem representation, hypothesis generation, and hypothesis evaluation (p. 312).” They focus a major part of the remaining discussion of this section on how a person’s skills impacts the relationship between monetary incentives, effort, and performance and then provide some further discussion on other variables that also have an effect.
Basically, the level of task knowledge a person has can negatively affect an otherwise positive relationship between effort and performance. In other words, incentives may increase a person’s effort, but that effort will not necessarily lead to increased performance if the individual is lacking the requisite skills. In some cases, when subjects lacked adequate skills to perform the task, monetary incentives only increased certain dimensions of effort. While it would seem rather obvious and simple, there is much unknown about how and when this attenuation occurs. The authors provide quite a few research ideas that would help illuminate the relationship between monetary incentives, skill, effort, and performance.
Skill can indirectly affect performance by its affect on self-efficacy. In other words, if a person has the requisite skills, then he/she should tend to believe that the task could be accomplished. As a result of increased self-efficacy, a person may then set higher goals and/or be more committed to those goals. Therefore, it is important that accounting firms and experimenters take skill level into consideration when assigning people to tasks. Otherwise, people who would otherwise be positively motivated by monetary incentives to increase their effort may instead “give up” and not even try.
Skill can also work as a method for weeding-out those who do not have requisite skills for a task because those people will self-select non-contingency remuneration whereas those with requisite skills will likely choose performance-based incentives for completing a task in which they are skilled. In other words, if a firm or experimenter gives people a choice in incentive structure, it is likely that those who chose the performance-based incentives will actually be able to perform the task. The authors also talk about research that has investigated prior research that explores whether ability to choose the type of monetary incentive will affect performance. It has also been found in some research that performance-based incentives will attract high-skilled workers, but specific incentive schemes have not been studied thoroughly. Examples of other factors that would be relevant to a discussion on skill’s indirect affect on the incentive-effort-performance relation are: risk, differences in perceptions based on gender, complexity of the tasks, and any factors that would explain the process that occurs when someone “gives up” on a task for which they are unskilled.
Other variables that the authors recommend studying include need for high achievement (intrinsic motivation) and dimensions of cultural background.
There are many possible task variables including: task complexity, effort-sensitivity, framing, presentation format, processing mode, response mode, and attractiveness. The authors focus on task complexity in their review of the literature.
Task complexity has to do with the amount of a task’s structure and required processing. The more structure a task has and the less processing it requires, the less complex a task is. Task complexity can affect dimensions of effort (duration, intensity, or strategy development) or it can affect the relationship between monetary incentives, effort, and performance indirectly through its impact on skill requirements, self-efficacy, expected benefit over cost of expending effort, and level of arousal. In general, one would expect that an increase in task complexity would ultimately lead to a decrease in the effect of monetary incentive’s impact on performance, unless a person has a high enough level of self-efficacy and skills to offset task complexity’s effect. The authors discuss the results of two accounting studies that could be understood to have contradictory findings.
The authors discuss the dimensions of accounting information (clarity and amount), preference reversals, prospect theory, framing, and categorization and how these factors affect the relationship between monetary incentives, effort, and performance.
Environmental variables are all the things surrounding the person who is doing a task and monetary incentives is one such variable. Additional variables that either have been or should be studied would include “time pressure, accountability relationships, assigned goals, and feedback (p. 325)” as well as a firm’s accounting system. The authors focus a large portion of their discussion to assigned goals, as it is a part of an organization’s control mechanism.
Generally, monetary incentives and goals can both affect performance independent of one another; however, they have a larger effect when both are brought to bear on the situation. Generally, it is thought that assigned goals have an indirect positive affect on effort by its positive direct affect on both personal goals and self-efficacy. Self-efficacy also has a relationship with personal goals and personal goals can directly affect all four dimensions of strategy. However, if assigned goals are so extreme that they cannot be accomplished, then they will have a negative impact on performance. Furthermore, specific goals lead to greater effort than vague ones. Monetary incentives, combined with assigned goals, can also affect all four dimensions of effort such as when compensation is tied to accomplishment of goals.
Several environmental variables discussed are accounting methods and feedback (outcome, cognitive, and task-properties), training, accountability, decision rights, and time pressure. Feedback can positively affect motivation, learning, and self-efficacy and it can interact with monetary incentives such as when people use feedback to increase their performance. Or, if information asymmetry exists, feedback can assist people in shirking.
Examples of incentive schemes highlighted by the authors include “timing of the incentive, whether it embodies competition, what dimensions of performance the incentives reward, and payoff magnitude (p. 331).” The authors go into more detail on the “performance dimensions that the incentive scheme rewards (p. 331)” because employees’ job duties often entail various tasks.
Discussion includes the benefits and drawbacks of monetary incentives directed at one dimension of performance when other dimensions are not rewarded. Another issue of interest is how to structure monetary incentives so that employees not only are encouraged to increase performance, but also are motivated to take appropriate risk.
The authors discuss existing research on how the level of pay affects the relationship between incentives, effort, and performance as well as the impact of timing of introducing monetary incentives. Future research would include “predictive ability of various efficiency wage theories,” “effects that payoff magnitude has on employees’ propensity to take risks and innovate,” and “attention to person variables (skill) and task variables (complexity) that might interact with payoff magnitude (p. 335).” Other dimensions of incentive schemes are also discussed.
In conclusion, this paper is so
information packed, that I could only scratch the surface. It is an excellent
literature review with many ideas for future research.