The Impact of Financial Incentives on Individual Performance: An Experimental Approach

Inhaltsangabe:Introduction: Many jobs are today paid via performance-based payment or at least have a component including financial payments based on individual performance. Especially, as ones performance is comparably easy to investigate, financial incentives dependent on visible achievements seem useful and practicable and in consequence are multiply used in today’s society. This means, that numerous employees, especially at a particular level (Managers) or with a substantial part of identifiable success (Sales, Consulting) are rewarded for their effort based on observed measures of performance. The intention behind performance-based compensation is to stimulate individuals... alles anzeigen expand_more

Inhaltsangabe:Introduction:

Many jobs are today paid via performance-based payment or at least have a component including financial payments based on individual performance. Especially, as ones performance is comparably easy to investigate, financial incentives dependent on visible achievements seem useful and practicable and in consequence are multiply used in today’s society. This means, that numerous employees, especially at a particular level (Managers) or with a substantial part of identifiable success (Sales, Consulting) are rewarded for their effort based on observed measures of performance. The intention behind performance-based compensation is to stimulate individuals to increase their motivation and effort spent on tasks, and hence their output, or in other words, profitability for the company. By using this way of payment, special incentives are placed and a change in one’s behavior is intended to be reached for receiving the maximum possible outcome for the company.

On the other hand, the usage and effectiveness of financial incentives is not always seen as a positive instrument at all. The application of those tools and resulting behavior changes are seen as one of the major reasons for the financial crisis beginning in 2007. Wrong incentive setting for the employees and hereby misleading behavior of the staff yielded to specific behavior which lead to a fundamental crash of the world economy and threw the world into a global recession.

After those incidents, the mode of functioning of financial incentives and the most favorable usage of this motivation instruments came forcefully to the spotlight. Especially, comparably high ‘bonus payments’ for bankers were in consequence of billions paid by governments for bank rescue and avoiding a collapse of the global financial system publicly discussed.

The existing and fundamentally logical point of view on incentives is that incentive payments lead to increased motivation which resulted in higher performance of an individual. Furthermore, a positive correlation between incentives and performance is supposed to exist. This means, the higher incentives are, consequently the higher the motivation for conducting a task and followed by this the performance on a task can be expected to be.

The need of designing optimal contracts has always been a challenge, not only for companies. Economical research is delivering tools for understanding and minimizing problems arising through incomplete […]

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