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An incentive is anything that persuades a person or organization to alter their behavior to produce a desired outcome. Incentives are widely studied in personnel economics, where researchers and human resource managers examine how firms use pay, career opportunities, performance evaluation, and other mechanisms to motivate employees and improve organizational outcomes. Higher incentives are often associated with greater levels of effort and higher levels of performance. In comparison, disincentives discourage certain actions.

Incentives encourage specific behaviors or actions by persons and organizations, and are commonly employed by governments, businesses, and other organizations. Incentives may generally be divided into two categories: intrinsic and extrinsic. Incentives, however, can also produce unintended outcomes, relating to the overjustification effect, principal–agent problem, moral hazard, free-riding, or adverse selection.

Classification

Incentives encourage specific behaviors or actions by persons and organizations,^[1] and are commonly employed by governments, businesses, and other organizations.^[2] Incentives may generally divided into two categories: intrinsic and extrinsic.^[3]

Theories

Political scientists Peter B Clark and James Q Wilson categorise incentives into three types: material, solidary, and purposive.^[4]

Author David Callahan identifies three broad classes of incentives.^[5]^[6] Remunerative or financial incentives, involve material rewards.^[6] Moral incentives involve action being regarded as the right or admirable choice; individuals acting on moral incentives may experience self-esteem, praise, or admiration from others, while failing to act accordingly can result in guilt, condemnation, or even ostracism.^[6] Coercive incentives threaten, when failure to act in a specified way occurs, the use of physical or coercive force by others.^[6]

Intrinsic and extrinsic incentives

An intrinsic incentive arises when an individual is motivated by personal satisfaction, interest, or enjoyment in an activity, without seeking external rewards or responding to external pressure.^[7] Extrinsic incentives involve external rewards or pressures, such as monetary compensation, recognition, or the threat of punishment.^[8]^{[citation needed]}

Both intrinsic and extrinsic incentives influence behavior,^[9] though research suggests intrinsic motivation may have stronger and more sustainable effects by increasing genuine enjoyment and engagement.^[10] Intrinsic incentives are often associated with greater autonomy, commitment, and work involvement.^[11] At the same time, excessive reliance on external rewards can diminish intrinsic motivation, a phenomenon known as the overjustification effect, and crowd out intrinsic incentives.^[12]

Monetary incentives

Monetary incentives are financial rewards given to influence behavior and align an individual's actions with those of the provider of the incentive.^[13] They are a type of extrinsic incentive and are common in workplaces. The effects of monetary incentives are often described as a "standard direct price effect" and an "indirect psychological effect." These two effects can act in opposite directions, sometimes reducing the very behavior the incentives are designed to encourage.^[12] Some research suggests that these crowding-out effects can be managed using models that account for nonstandard behavioral assumptions.^[12] A 2026 meta-analysis of 2,193 estimates from 88 economics experiments found that, after correction for publication bias, the mean effect of financial incentives on performance is close to zero in most field settings, with modest positive effects in laboratory experiments and when incentives are framed as losses.^[14]

Examples of monetary incentives include profit sharing, bonuses, stock options, and paid vacation time.^[15] When structured effectively, they can positively influence motivation, productivity, and output at both individual and organizational levels.^[16] Performance-based pay, such as commission-based compensation, ties rewards to productivity or output over a defined period. Firms may also pay overtime wages or provide rewards for work beyond expectations. Expectancy theory holds that if employees believe that greater effort will lead to better performance and value the associated reward, monetary incentives can help sustain high levels of effort and reduce shirking, thereby increasing both individual and overall productivity.^[13]

The effectiveness of monetary incentives depends on job type and task characteristics. In routine jobs, such as clerical or administrative work, they can help sustain consistent effort once intrinsic motivation declines. For difficult tasks, however, monetary incentives may have little effect on increasing performance.^[17] For example, in creative workplace tasks, a field experiment on employee suggestions found that rewards for approved ideas increased idea quality but did not increase the net number of submitted ideas.^[18] The framing of rewards can also affect their impact. For instance, in cadaveric organ donation, funeral aid is perceived as more ethical and socially acceptable than direct cash payments of equal value, and may increase willingness to donate.^[19]^[20] Firms may also use negative incentives, such as the threat of demotion or termination for poor performance, which can motivate employees when they perceive their careers to be at risk.^[15]

Executive compensation

Boards of directors use incentives to align CEO behavior with shareholder interests. CEOs may receive salaries, bonuses, shares, or stock options to reward performance, while dismissal or reputational loss serve as penalties for poor performance. Ownership of company stock provides additional motivation by tying CEO wealth to shareholder value.^[21] Non-monetary incentives such as prestige, recognition, or authority may also influence performance, though their impact is debated.^[21]

Non-monetary incentives

Non-monetary incentives are rewards not directly tied to financial compensation but used to motivate individuals to perform specific actions or achieve desired outcomes.^[22]^[23] They are based on the recognition that individuals are motivated by a range of factors beyond money, and can reinforce engagement and productivity.^[24]

Examples include additional holidays, recognition, praise, opportunities for growth, gifts, family benefits, or more engaging work assignments. These incentives often enhance job satisfaction, reduce turnover, and are perceived as more memorable than financial incentives by standing apart from normal pay.^[25] They have also been found to promote long-term commitment, loyalty, and positive perceptions of an organization.^[23]^[26] Some research suggests that non-monetary incentives produce stronger and longer-lasting effects on motivation and productivity than financial rewards.^[12]^[27]

Non-monetary incentives may be less effective for individuals primarily motivated by financial rewards, such as those in low-paying jobs or under financial stress.^[23] They can also be more difficult to quantify and evaluate than monetary incentives, which makes designing effective programs challenging.^[23]

Microeconomics

In economics, incentives are analyzed through the systems that determine how agents can be motivated to achieve outcomes desired by a principal.^[15] Firms use incentives to link rewards to productivity, aiming to reducing turnover by retaining productive employees, and improving overall output by encouraging greater effort and engagement.^[15] Increasing pay variance within firms globally reflects the rising demand for high productivity, leading to a shift toward pay-for-performance models.^[28] These schemes reinforce the link between work and reward.

Incentives, however, can also produce unintended outcomes.^[29] Poorly designed systems may encourage "gaming" behavior, where individuals maximize rewards without meeting actual objectives. This is central to the principal–agent problem, in which the goals of the principal (such as a government or company) diverge from those of the agent (such as employees). Misaligned incentives can lead to moral hazard—where agents take risks without bearing full costs—or to adverse selection, when asymmetric information causes inefficient or distorted outcomes.

Self-selection effects of incentives

Because employees know more about their own skills, competitiveness, and risk attitudes than employers do, firms also design incentives to recruit suitable workers. This is called the self-selection or sorting effect. For example, pay-for-performance schemes attract more productive, less risk-averse workers, while fixed wages appeal to more risk-averse individuals.^[30]^[31]^[32]

Misaligned incentives

A misaligned incentive arises when the goals of different parties conflict. This can occur within firms, but also in government, healthcare, education, and environmental policy. For example, principals in a firm want agents to act in the firm's best interests, but employees may pursue different objectives.^[33] Because of information asymmetry, principals often lack precise knowledge of how to motivate or evaluate agents.^[34] Compensation plans are therefore difficult to design. Principal–agent theory is often used to align incentives with employee effort in order to achieve efficient output.^[35]

In this relationship, agents usually have informational advantages over principals. Moral hazard arises when principals cannot be sure that agents are exerting full effort, while adverse selection occurs when principals cannot determine which agents are best suited for tasks.^[36] Agents may shirk, leak information, misreport, or conceal abilities in order to reduce their workload or benefit competitors.^[37]^[38]

Tournament theory

Tournament theory describes a framework of compensation based on an individual's position within a firm's hierarchy,^[35] such that compensation is a function of relative, rather than absolute, performance. Ceteris paribus, the larger the difference in compensation between one position to the next, the greater the incentive to exert more effort in order to achieve a promotion.^[13] Larger firms, with more competitors, may dilute the effect of increasing effort by way of competition.^[13] Relative pay schemes may, however, foster rivalry and reduce cooperation, forcing firms to balance pay variance with workplace harmony.^[13]

Team-based incentives

Due to constantly advancing technologies, individual employees seldom have an absolute advantage across all skills required within a firm.^[35] Many large firms organize production around teams to address complex, multidimensional tasks requiring diverse skills.^[35] In such settings, individual performance is difficult to measure, making team-based incentives preferable to individual piece rates.^[39] Team-based incentives reward collective performance, fostering cooperation, trust, and cohesion.^[40]^[41] Studies find positive effects on efficiency, stability, pay, and company output.^[42]^[43]

Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding.

Team-based incentives, however, may be seen as unfair if unequal contributions receive equal rewards.^[44]

Team-based incentives may also induce free-riding. This happens, for example, if employees have to share team output so that each employee only gets a fraction of what he or she generates.^[45] Managers may mitigate this through sufficiently strong incentives, penalties, or peer rating systems.,^[44]^[46] or by relying on peer pressure or hiring intrinsically motivated employees.^[47]^[48] Free-riding also arises when team members' responsibility diffuses because members cannot be jointly held accountable.^[49] In this case, declaring a single person responsible may help.^[49]

Cultural differences

The effectiveness of pay-for-performance incentives varies across cultures. One study across six countries found that monetary incentives generally increased effort more than psychological nudges, but this effect was stronger in Western than non-Western cultures.^[50] Another study found that financial rewards improved test performance among US students, but not among students in China.^[51] These findings align with cross-cultural studies showing that pay-for-performance is more common in individualistic societies, such as the US and UK, than in collectivist ones.^[52]^[53]

Potential issues in firms

Ratchet effect

Incentives can sometimes reduce productivity through the ratchet effect. Firms may use an employee's initial output as a benchmark for future standards. Anticipating this, employees may withhold effort at the start or conceal their true capabilities, later increasing output strategically to gain rewards.^[54]^[55] This reduces efficiency in both firms and planned economies.^[56]

Crowding-out effect

Economists and psychologists have also studied the crowding-out effect, in which extrinsic incentives undermine intrinsic motivation. Richard Titmuss's 1970 book The Gift Relationship argued that monetary incentives disrupted social norms around voluntary contribution.^[57] Large incentives may temporarily offset this, but may also signal undesirable implications, reducing their effectiveness.^[58] Removing temporary incentives can also depress effort below baseline levels.^[57]

Stock options

Stock options were widely adopted in the 1990s to align CEO and shareholder interests, but often produced mixed outcomes. While successful decisions could raise long-term stock prices, some CEOs engaged in accounting manipulation to preserve incentive-based pay. Such schemes proved costly and were not always effective at ensuring alignment.^[59]

Pay variance conflicts

Pay inequality within firms can also lower morale. Low-paid employees may reduce effort, disengage, or find it harder to cooperate with higher-paid colleagues, lowering overall productivity.^[60] Bonus-based systems may also reduce motivation if rewards fluctuate with company profits rather than effort. Firms sometimes offset this by using non-monetary rewards, such as promotions or extra vacation time, to maintain fairness and engagement.

Philanthropy and charity

When it comes to volunteering activities, monetary incentives can bring negative effects. According to the self-perception theory, humans constantly seek explanations for their behavior.^[61] When individuals are involved in volunteering activities, they most likely perceive themselves as prosocial and altruistic, and attach a symbolic price to the act of volunteering.^[62]^[63] When a monetary reward is attached to an otherwise prosocial activity such as volunteering, people may perceive that their originally altruistic actions are now linked to extrinsic incentives,^[64] causing their self-image benefit^[65] and prosocial motivation to decrease.^[66] A crowding-out effect leads to a decrease in individuals' desire to volunteer and people eventually stop contributing due to the rewards attached. For example, if monetary incentives are offered for voluntary blood donation, it will have a negative effect on the number of people donating blood.^[64]

Education

Extrinsic incentives offered to unmotivated students can potentially have positive short-run effects.^[57] However, the use of extrinsic incentives in education raises issues of morality and corruption, and have the potential to crowd out intrinsic incentives.^[57] Empirical evidence also largely supports the success of monetary incentives in improving educational inputs such as attendance and enrolment, but not educational outputs such as academic achievement.^[67]

Studies have demonstrated that the impact of monetary incentives is dependent on previous academic performance and individual ability.^[68] Monetary incentives tend to improve the academic results of high-ability students but have an adverse effect on the performance of students with lower aptitude.^[68]

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@@ Line 1: / Line 1: @@
 {{Short description|Something that motivates individuals to perform}}
 {{Other uses}}
+An '''incentive''' is anything that persuades a person or organization to alter their behavior to produce a desired outcome. Incentives are widely studied in [[personnel economics]], where researchers and human resource managers examine how firms use [[Salary|pay]], career opportunities, [[Performance appraisal|performance evaluation]], and other mechanisms to motivate employees and improve organizational outcomes. Higher incentives are often associated with greater levels of effort and higher levels of performance. In comparison, [[disincentive]]s discourage certain actions.
-[[File:Stop Climate Change - Climate Strike Melbourne 21 May 2021 (51194849093).jpg|thumb|Protest sign displaying "Stop Climate Change" at [[Climate movement|climate strike]] in [[Melbourne]], [[Australia]]. Climate movements may incentivize governments and industry to take [[collective action]] in the fight against [[climate change]].]]
-In general, '''incentives''' are anything that persuade a person to alter their behavior in the desired manner.<ref name="auto1">{{cite journal |last1=Gneezy |first1=Uri |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |date=2011 |volume=25 |issue=4 |page=191 |doi=10.1257/jep.25.4.191|doi-access=free}}</ref> It is emphasized that incentives matter by the basic law of economists and the laws of behavior, which state that higher incentives amount to greater levels of effort and therefore higher levels of performance.<ref name="auto3">{{cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |date=Fall 2011 |volume=25 |issue=4 |page=191 |doi=10.1257/jep.25.4.191 |doi-access=free}}</ref>
+Incentives encourage specific behaviors or actions by persons and organizations, and are commonly employed by governments, businesses, and other organizations. Incentives may generally be divided into two categories: intrinsic and extrinsic. Incentives, however, can also produce unintended outcomes, relating to the [[overjustification effect]], [[principal–agent problem]], [[moral hazard]], [[Free-rider problem|free-riding]], or [[adverse selection]].
-==Divisions==
-An incentive is a powerful tool to influence certain desired behaviors or action often adopted by governments and businesses.<ref>{{Cite journal |last1=Clark |first1=Peter B. |last2=Wilson |first2=James Q. |date=1961 |title=Incentive Systems: A Theory of Organizations |url=https://www.jstor.org/stable/2390752 |journal=Administrative Science Quarterly |volume=6 |issue=2 |pages=129–166 |doi=10.2307/2390752 |jstor=2390752 |issn=0001-8392}}</ref>
-Incentives can be broadly broken down into two categories: intrinsic incentives and extrinsic incentives.<ref>{{cite web |last1=Masterclass |title=Understanding Incentives in Economics: 5 Common Types of Economic Incentives |url=https://www.masterclass.com/articles/understanding-incentives-in-economics |website=Masterclass |access-date=2022-04-29}}</ref> Overall, both types of incentives can be powerful tools often employ to increase effort and higher performance according to the "law of behavior."
+==Classification==
-Incentives are most studied in the area of [[personnel economics]] where economic analysts, such as those who take part in human resources management practices, focus on how firms make employees more motivated, through pay and career concerns, [[Financial compensation|compensation]] and performance evaluation, to motivate employees and best achieve the firms' desired performance outcomes.<ref name=":4">{{Cite journal |last1=Lazear |first1=Edward. P |last2=Shaw |first2=Kathryn. L |date=2007 |title=Personnel Economics: The Economist's View of Human Resources |url=http://www.nber.org/papers/w13653.pdf |journal=Journal of Economic Perspectives |volume=21 |issue=4 |pages=91–114 |doi=10.1257/jep.21.4.91}}</ref>
+Incentives encourage specific behaviors or actions by persons and organizations,<ref>[https://www.aeaweb.org/articles?id=10.1257/jep.12.4.115 Gibbons, Robert. "Incentives in organizations." Journal of economic perspectives 12.4 (1998): 115-132.]</ref> and are commonly employed by governments, businesses, and other organizations.<ref>{{Cite journal |last1=Clark |first1=Peter B. |last2=Wilson |first2=James Q. |date=1961 |title=Incentive Systems: A Theory of Organizations |journal=Administrative Science Quarterly |volume=6 |issue=2 |pages=129–166 |doi=10.2307/2390752 |issn=0001-8392 |jstor=2390752 }}</ref> Incentives may generally divided into two categories: intrinsic and extrinsic.<ref>{{cite web |last1=Masterclass |title=Understanding Incentives in Economics: 5 Common Types of Economic Incentives |url=https://www.masterclass.com/articles/understanding-incentives-in-economics |access-date=2022-04-29 |website=Masterclass}}</ref>
+=== Theories ===
-=== Intrinsic and extrinsic incentive ===
+Political scientists Peter B Clark and James Q Wilson categorise incentives into three types: material, solidary, and purposive.<ref>{{cite journal |last1=Clark |first1=Peter B. |last2=Wilson |first2=James Q. |date=September 1961 |title=Incentive Systems: A Theory of Organizations |journal=Administrative Science Quarterly |volume=6 |issue=2 |pages=129–166 |doi=10.2307/2390752 |jstor=2390752}}</ref>
-An intrinsic incentive is when a person is motivated to act in a certain way for their own personal satisfaction without seeking any external reward, nor facing any external pressure to perform the task.<ref name="auto4">{{cite web |last1=Li |first1=Pamela |date=19 April 2019 |title=What is Intrinsic Motivation & How Does it Work? |url=https://www.parentingforbrain.com/intrinsic-motivation/ |access-date=2022-04-29 |website=Parenting for Brain}}</ref> For instance, a singer who enjoys singing may be intrinsically motivated to spend several hours a day to improve their performance without receiving any recognition or awards from others.<ref>{{cite book |last1=Benati |first1=Igor |chapter=Rewards in Bureaucracy and Politics |date=2018 |title=Global Encyclopedia of Public Administration, Public Policy, and Governance |pages=1–6 |editor-last=Farazmand |editor-first=Ali |place=Cham |publisher=Springer International Publishing |language=en |doi=10.1007/978-3-319-31816-5_3417-1 |isbn=978-3-319-31816-5 |last2=Coccia |first2=Mario|s2cid=158421245 }}</ref> Often, intrinsic incentives are useful in increasing one's empowerment, utility level, and autonomy and can reinforce employees’ work involvement and commitment.<ref>{{Cite journal |last1=O'Reilly |first1=C. A. |last2=Chatman |first2=J. |last3=Caldwell |first3=D. F. |date=September 1991 |title=People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit |journal=Academy of Management Journal |language=en |volume=34 |issue=3 |pages=487–516 |doi=10.2307/256404 |issn=0001-4273 |jstor=256404 |s2cid=45619898}}</ref>
+Author [[David Callahan]] identifies three broad classes of incentives.<ref>{{Cite book |last=Callahan |first=David |title=The cheating culture: Why more Americans are doing wrong to get ahead |publisher=Harcourt |year=2004 |isbn=978-0-15-603005-2}}</ref><ref name=":22">{{Cite book |last=Dalkir |first=Kimiz |title=Knowledge Management in Theory and Practice |publisher=The MIT Press |year=2011 |isbn=978-0-262-01508-0 |edition=Second}}</ref> Remunerative or financial incentives, involve material rewards.<ref name=":22" /> Moral incentives involve action being regarded as the right or admirable choice; individuals acting on moral incentives may experience self-esteem, praise, or admiration from others, while failing to act accordingly can result in guilt, condemnation, or even [[ostracism]].<ref name=":22" /> Coercive incentives threaten, when failure to act in a specified way occurs, the use of physical or coercive force by others.<ref name=":22" />
-Intrinsic incentives and extrinsic incentives are both important in driving people's behavior. Experts believe that intrinsic incentives are stronger motivators compared to extrinsic incentives as they increase employees’ work engagement and genuine enjoyment of work.<ref>{{Cite book |last1=Waqas |first1=Zafarullah |last2=Saleem |first2=Sharjeel |url=http://worldcat.org/oclc/1358510932 |title=The Effect of Monetary and Non-Monetary Rewards on Employee Engagement and Firm Performance |date=2014-11-01 |publisher=The International Institute for Science, Technology and Education (IISTE) |oclc=1358510932}}</ref> However, people's intrinsic motivation tends to decrease when they are offered too many extrinsic rewards. In order to maintain the action, constant incentives have to be provided. This is known as the [[overjustification effect|Overjustification Effect]].
+=== Intrinsic and extrinsic incentives ===
-While both types of incentive are a fundamental concept in economics that play a crucial role in motivating behavior, the extent to which and how they influence individual may depend on varies factors. Factors to consider may include the type of activity being incentivized, the individual's personal values and goals, and the context in which the incentive is offered. A well-designed incentive system should take into account to avoid unintended consequences and ensure that they align with the desired outcomes.
+An intrinsic incentive arises when an individual is motivated by personal satisfaction, interest, or enjoyment in an activity, without seeking external rewards or responding to external pressure.<ref>{{cite book |last1=Benati |first1=Igor |title=Global Encyclopedia of Public Administration, Public Policy, and Governance |last2=Coccia |first2=Mario |date=2018 |publisher=Springer International Publishing |isbn=978-3-319-31816-5 |editor-last=Farazmand |editor-first=Ali |place=Cham |pages=1–6 |language=en |chapter=Rewards in Bureaucracy and Politics |doi=10.1007/978-3-319-31816-5_3417-1 |s2cid=158421245}}</ref> Extrinsic incentives involve external rewards or pressures, such as monetary compensation, recognition, or the threat of punishment.<ref>"Extrinsic Rewards". ''AIHR''. Retrieved 2025-10-11.</ref>{{Citation needed|date=August 2025}}
+Both intrinsic and extrinsic incentives influence behavior,<ref name="auto1">{{cite journal |last1=Gneezy |first1=Uri |date=2011 |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |volume=25 |issue=4 |page=191 |doi=10.1257/jep.25.4.191 |doi-access=free}}</ref> though research suggests intrinsic motivation may have stronger and more sustainable effects by increasing genuine enjoyment and engagement.<ref>{{Cite book |last1=Waqas |first1=Zafarullah  |title=The Effect of Monetary and Non-Monetary Rewards on Employee Engagement and Firm Performance |last2=Saleem |first2=Sharjeel |date=2014-11-01 |publisher=The International Institute for Science, Technology and Education (IISTE) |oclc=1358510932}}</ref> Intrinsic incentives are often associated with greater autonomy, commitment, and work involvement.<ref>{{Cite journal |last1=O'Reilly |first1=C. A. |last2=Chatman |first2=J. |last3=Caldwell |first3=D. F. |date=September 1991 |title=People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit |journal=Academy of Management Journal |language=en |volume=34 |issue=3 |pages=487–516 |issn=0001-4273 |jstor=256404 |s2cid=45619898}}</ref> At the same time, excessive reliance on external rewards can diminish intrinsic motivation, a phenomenon known as the [[overjustification effect]], and [[Motivation crowding theory|crowd out]] intrinsic incentives.<ref name="auto3">{{cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |date=Fall 2011 |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |volume=25 |issue=4 |page=191 |doi=10.1257/jep.25.4.191 |doi-access=free}}</ref>
-There are some parties who oppose the benefits of using extrinsic incentives and believe that they cause more harm than good. These opponents believe that the constant use of extrinsic incentives can lead to the crowding out of intrinsic incentives, which are also valuable performance motivators.<ref name="auto3" /> When people are constantly being incentivized by external pressures, they neglect their intrinsic motives which could consequently be detrimental to their work ethic.<ref name="auto2">{{cite web |last1=Behavioral Science Solutions |title=Incentives |url=https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/incentives/ |website=Behavioral Economics |access-date=2022-04-29}}</ref> Employees can become too comfortable with consistently gaining some reward for acting in a manner which is consistent with the interests of the firm. As a result, employees begin to believe that they deserve to earn rewards for doing certain things, not for the benefit of the firm but rather for their own benefit, which leads to them shirking if no extrinsic incentive is offered in return for high effort.<ref name="auto2" />
+==== Monetary incentives ====
-Nonetheless, incentives (both intrinsic and extrinsic) can be beneficial in altering a person's behavior and can be effectively used and executed within many different areas of life including in the workforce, in education and within one's personal life.<ref name="auto1" />
+Monetary incentives are financial rewards given to influence behavior and align an individual's actions with those of the provider of the incentive.<ref name=":03">{{Cite journal |last=Lazear |first=Edward P. |date=Summer 2018 |title=Compensation and Incentives in the Workplace |journal=Journal of Economic Perspectives |language=en |volume=32 |issue=3 |pages=195–214 |doi=10.1257/jep.32.3.195 |issn=0895-3309 |s2cid=158410132 |doi-access=free}}</ref> They are a type of extrinsic incentive and are common in workplaces. The effects of monetary incentives are often described as a "standard direct price effect" and an "indirect psychological effect." These two effects can act in opposite directions, sometimes reducing the very behavior the incentives are designed to encourage.<ref name="auto3" /> Some research suggests that these [[Motivation crowding theory|crowding-out]] effects can be managed using models that account for nonstandard behavioral assumptions.<ref name="auto3" /> A 2026 [[meta-analysis]] of 2,193 estimates from 88 economics experiments found that, after correction for publication bias, the mean effect of financial incentives on performance is close to zero in most field settings, with modest positive effects in laboratory experiments and when incentives are framed as losses.<ref>{{cite journal |last1=Cala |first1=Petr |last2=Havranek |first2=Tomas |last3=Irsova |first3=Zuzana |last4=Luskova |first4=Martina |last5=Matousek |first5=Jindrich |last6=Novak |first6=Jiri |year=2026 |title=Financial Incentives and Performance: A Meta-Analysis of Experiments in Economics |journal=Journal of Political Economy Microeconomics |url=https://meta-analysis.cz/incentives/incentives.pdf |via=meta-analysis.cz}}</ref>
+Examples of monetary incentives include [[profit sharing]], bonuses, stock options, and paid vacation time.<ref name=":3">{{Cite book |last=Neilson |first=William S. |title=Personnel Economics |publisher=Pearson Education Inc |year=2007 |isbn=978-0-13-148856-4 |page=11}}</ref> When structured effectively, they can positively influence motivation, productivity, and output at both individual and organizational levels.<ref>{{Cite journal |last=Pokorny |first=Kathrin |date=May 2008 |title=Pay—but do not pay too much: An experimental study on the impact of incentives |journal=Journal of Economic Behavior & Organization |language=en |volume=66 |issue=2 |pages=251–264 |doi=10.1016/j.jebo.2006.03.007 |issn=0167-2681}}</ref> Performance-based pay, such as [[Commission (remuneration)|commission-based compensation]], ties rewards to productivity or output over a defined period. Firms may also pay overtime wages or provide rewards for work beyond expectations. [[Expectancy theory]] holds that if employees believe that greater effort will lead to better performance and value the associated reward, monetary incentives can help sustain high levels of effort and reduce shirking, thereby increasing both individual and overall productivity.<ref name=":03"/>
-==Classification==
+The effectiveness of monetary incentives depends on job type and task characteristics. In routine jobs, such as clerical or administrative work, they can help sustain consistent effort once intrinsic motivation declines. For difficult tasks, however, monetary incentives may have little effect on increasing performance.<ref>{{cite book |last1=Camerer |first1=Colin F. |title=Elicitation of Preferences |last2=Hogarth |first2=Robin M. |last3=Budescu |first3=David V. |last4=Eckel |first4=Catherine |date=1999 |publisher=Springer Netherlands |isbn=978-90-481-5776-1 |editor-last1=Fischhoff |editor-first1=Baruch |place=Dordrecht |pages=7–48 |chapter=The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework |doi=10.1007/978-94-017-1406-8_2 |editor-last2=Manski |editor-first2=Charles F. |chapter-url=https://resolver.caltech.edu/CaltechAUTHORS:20110208-132914477}}</ref> For example, in creative workplace tasks, a field experiment on employee suggestions found that rewards for approved ideas increased idea quality but did not increase the net number of submitted ideas.<ref>{{Cite journal |last=Gibbs |first=Michael |last2=Neckermann |first2=Susanne |last3=Siemroth |first3=Christoph |date=2017 |title=A Field Experiment in Motivating Employee Ideas |url=https://direct.mit.edu/rest/article/99/4/577-590/58381 |journal=The Review of Economics and Statistics |language=en |volume=99 |issue=4 |pages=577–590 |doi=10.1162/REST_a_00631 |issn=0034-6535|url-access=subscription }}</ref> The framing of rewards can also affect their impact. For instance, in cadaveric [[organ donation]], funeral aid is perceived as more ethical and socially acceptable than direct cash payments of equal value, and may increase willingness to donate.<ref>{{cite journal |author1=Arnold, R. |author2=Bartlett, S. |author3=Bernat, J. |author4=Colonna, J. |author5=Dafoe, D. |year=2002 |title=Financial incentives for cadaver organ donation: an ethical reappraisal |journal=Transplantation |volume=73 |issue=8 |pages=1361–1367 |doi=10.1097/00007890-200204270-00034 |pmid=11981440 |s2cid=29823737 |doi-access=free}}</ref><ref>{{cite journal |author1=Pham, V. |year=2021 |title=Cash, Funeral Benefits or Nothing at All: How to Incentivize Family Consent for Organ Donation |url=https://mpra.ub.uni-muenchen.de/111047/12/MPRA_paper_111047.pdf |journal=Review of Behavioral Economics |volume=8 |issue=2 |pages=147–192 |doi=10.1561/105.00000136 |s2cid=237705443}}</ref> Firms may also use negative incentives, such as the threat of demotion or termination for poor performance, which can motivate employees when they perceive their careers to be at risk.<ref name=":3" />
-Classified by [[David Callahan]], the types of incentives can be further broken down into three broad classes according to the different ways in which they motivate agents to take a particular course of actions:<ref>{{Cite book|last=Callahan|first=David|title=The cheating culture: Why more Americans are doing wrong to get ahead|publisher=Harcourt|year=2004|isbn=9780156030052}}</ref><ref name=":2">{{Cite book|last=Dalkir|first=Kimiz|title=Knowledge Management in Theory and Practice|publisher=The MIT Press|year=2011|isbn=9780262015080|edition=Second }}</ref>
+==== Executive compensation ====
-{| class="wikitable"
+{{Main|Executive compensation}}
-|-
-!Class
-!Definition
-|-
-|Remunerative incentives (or financial incentives)
-|Exist where an agent can expect some form of a material reward like money in exchange for acting in a particular way.<ref name=":2" />
-|-
-|Moral incentives
-|Exist where a particular choice is widely regarded as the right thing to do or is particularly admirable among others.<ref name=":2" /> An agent acting on a moral incentive can expect a sense of positive self-esteem, and praise or admiration from their community. However, an agent acting against a moral incentive can expect a sense of guilt, condemnation or even [[ostracism]] from the community.<ref name=":2" />
-|-
-|Coercive incentives
-|Exist where an agent can expect that the failure to act in a specific way will result in physical force being used against them by others – for example, by inflicting pain, or by imprisonment, or by confiscating or destroying their possessions.<ref name=":2" />
-|}
+Boards of directors use incentives to align CEO behavior with shareholder interests. CEOs may receive salaries, bonuses, shares, or stock options to reward performance, while dismissal or reputational loss serve as penalties for poor performance. Ownership of company stock provides additional motivation by tying CEO wealth to [[shareholder value]].<ref name=":92">{{Cite journal |last1=Jensen |first1=Michael C. |last2=Murphy |first2=Kevin J. |date=Winter 2010 |title=CEO Incentives-It's Not How Much You Pay, But How |journal=Journal of Applied Corporate Finance |volume=22 |issue=1 |pages=64–76 |doi=10.1111/j.1745-6622.2010.00262.x |issn=1078-1196 |s2cid=219968200}}</ref> Non-monetary incentives such as prestige, recognition, or authority may also influence performance, though their impact is debated.<ref name=":92" />
-==Monetary incentives==
-Monetary incentives are any form of financial good given to someone to incentivize their actions and align their incentives with those of the principal who provides the monetary incentive.<ref name=":0">{{Cite journal |last=Lazear |first=Edward P. |date=Summer 2018 |title=Compensation and Incentives in the Workplace |journal=Journal of Economic Perspectives |language=en |volume=32 |issue=3 |pages=195–214 |doi=10.1257/jep.32.3.195 |s2cid=158410132 |issn=0895-3309 |doi-access=free}}</ref> This is a type of extrinsic incentive and is commonly seen in the workplace. The effect of monetary incentive can be broken down into two categories: the "standard direct price effect," and "indirect psychological effect".  These two types of monetary effect often work in opposite direction and crowd out incentivised behaviour.<ref name="Gneezy 191–210">{{Cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |date=2011-11-01 |title=When and Why Incentives (Don't) Work to Modify Behavior|journal=Journal of Economic Perspectives |volume=25 |issue=4 |pages=191–210 |doi=10.1257/jep.25.4.191 |issn=0895-3309|doi-access=free }}</ref> However, several studies have suggested that it is possible to manage the crowding-out effects by utilising a principal-agent model that incorporates nonstandard assumptions.<ref name="Gneezy 191–210"/> For instance, a monetary incentive may come in the forms of [[profit sharing]], bonuses, stock options or even paid vacation time. As such, a well-chosen monetary incentive programs can produce positive motivation and influence the productivity and output of individuals and firms.<ref>{{Cite journal |last=Pokorny |first=Kathrin |date=May 2008 |title=Pay—but do not pay too much: An experimental study on the impact of incentives |journal=Journal of Economic Behavior & Organization |language=en |volume=66 |issue=2 |pages=251–264 |doi=10.1016/j.jebo.2006.03.007 |issn=0167-2681}}</ref>
+=== Non-monetary incentives ===
-A common monetary incentive system used by firms is performance-based pay where incentives are paid based on employees' productivity or output over a particular period of time. Some methods are commission-based where the employee, for example a salesperson, receives a payment directly correlated to their output level. Firms also pay additional wages or rewards for employees who work overtime and for their additional work above firm expectations. [[Expectancy theory]] implies that, provided employees place sufficient value on the monetary incentive to justify their extra effort and perceive that greater effort will result in better performance, such incentives can motivate employees to maintain high levels of effort and discourage shirking. This in turn increases the individual productivity of workers and the overall productivity of the firm.<ref name=":0" />
+Non-monetary incentives are rewards not directly tied to financial compensation but used to motivate individuals to perform specific actions or achieve desired outcomes.<ref>{{Cite journal |last1=Hooi |first1=L. W. |last2=Abdullah |first2=A. A. |date=2013 |title=Relationships of Non-Monetary Incentives, Job Satisfaction and Employee Job Performance |journal=International Review of Management and Business Research |volume=2 |issue=4 |pages=1085–1091}}</ref><ref name="Lefebvre e02273602">{{Cite journal |last1=Lefebvre |first1=Mathieu |last2=Stenger |first2=Anne |date=2020-01-17 |title=Short- & long-term effects of monetary and non-monetary incentives to cooperate in public good games: An experiment |journal=PLOS ONE |volume=15 |issue=1 |article-number=e0227360 |bibcode=2020PLoSO..1527360L |doi=10.1371/journal.pone.0227360 |issn=1932-6203 |pmc=6968839 |pmid=31951622 |doi-access=free}}</ref> They are based on the recognition that individuals are motivated by a range of factors beyond money, and can reinforce engagement and productivity.<ref name=":152">{{Cite journal |last=Burgess |first=S. |date=2003-06-01 |title=The Role of Incentives in the Public Sector: Issues and Evidence |journal=Oxford Review of Economic Policy |volume=19 |issue=2 |pages=285–300 |doi=10.1093/oxrep/19.2.285 |issn=1460-2121}}</ref>
+Examples include additional holidays, recognition, praise, opportunities for growth, gifts, family benefits, or more engaging work assignments. These incentives often enhance [[job satisfaction]], reduce turnover, and are perceived as more memorable than financial incentives by standing apart from normal pay.<ref name=":16">{{Cite journal |last1=Cassar |first1=Lea |last2=Meier |first2=Stephan |date=Summer 2018 |title=Nonmonetary Incentives and the Implications of Work as a Source of Meaning |journal=Journal of Economic Perspectives |language=en |volume=32 |issue=3 |pages=215–238 |doi=10.1257/jep.32.3.215 |issn=0895-3309 |s2cid=52834710 |doi-access=free}}</ref> They have also been found to promote long-term commitment, loyalty, and positive perceptions of an organization.<ref name="Lefebvre e02273602" /><ref>{{Cite journal |last1=Depedri |first1=Sara |last2=Tortia |first2=Ermanno C. |last3=Carpita |first3=Maurizio |date=2010 |title=Incentives, Job Satisfaction and Performance: Empirical Evidence in Italian Social Enterprises |journal=Euricse Working Papers |at=N.012 {{!}} 10 |ssrn=1698598}}</ref> Some research suggests that non-monetary incentives produce stronger and longer-lasting effects on motivation and productivity than financial rewards.<ref name="auto3" /><ref>{{Cite journal |last=Jeffrey |first=S. |date=2004 |title=The benefits of tangible non-monetary incentives |journal=University of Chicago |pages=702–77}}</ref>
-Other monetary incentives are less direct, such as awarding periodic, discretionary bonuses to top performers, offering the possibility of a promotion to a higher-paying position or [[profit sharing]] for team projects.<ref name=":3" /> Alternatively, firms can also incentivize their employees to perform by threatening to demote or terminate them for poor performance.<ref name=":3" /> When employees feel that their careers are in jeopardy, they are more likely to increase their efforts.
+Non-monetary incentives may be less effective for individuals primarily motivated by financial rewards, such as those in low-paying jobs or under financial stress.<ref name="Lefebvre e02273602" /> They can also be more difficult to quantify and evaluate than monetary incentives, which makes designing effective programs challenging.<ref name="Lefebvre e02273602" />
-Monetary incentives do affect the effort and average performance of employees but are likely dependent on the scope of the job and the task variables. For routine jobs such as clerical and administration jobs that are mundane, the presence of monetary incentives will encourage employees to demonstrate consistent effort of diligence when the intrinsic incentive has been exhausted. On the other hand, if the task assigned is too challenging, monetary incentives make little to no difference in increasing an employee's contribution to work.<ref>{{cite book |last1=Camerer |first1=Colin F. |last2=Hogarth |first2=Robin M. |last3=Budescu |first3=David V. |last4=Eckel |first4=Catherine |chapter=The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework |date=1999 |doi=10.1007/978-94-017-1406-8_2 |editor-last1=Fischhoff |editor-first1=Baruch |editor-last2=Manski |editor-first2=Charles F. |title=Elicitation of Preferences |pages=7–48 |place=Dordrecht |publisher=Springer Netherlands |isbn=978-90-481-5776-1 |chapter-url=https://resolver.caltech.edu/CaltechAUTHORS:20110208-132914477 }}</ref>
+== Microeconomics ==
-The effect of monetary incentives can depend on the framing of the rewards. For example, in cadaveric [[organ donation]], funeral aids are perceived to be more ethical (particularly in showing gratitude and honoring the deceased donor) and potentially increase donation willingness than direct cash payments of the same monetary value.<ref>{{cite journal |author1=Arnold, R. |author2=Bartlett, S. |author3=Bernat, J. |author4=Colonna, J. |author5=Dafoe, D. |title=Financial incentives for cadaver organ donation: an ethical reappraisal |journal=Transplantation |year=2002 |volume=73 |issue=8 |pages=1361–1367 |doi=10.1097/00007890-200204270-00034 |pmid=11981440 |s2cid=29823737|doi-access=free }}</ref><ref>{{cite journal |author1=Pham, V. |title=Cash, Funeral Benefits or Nothing at All: How to Incentivize Family Consent for Organ Donation |journal=Review of Behavioral Economics |year=2021 |volume=8 |issue=2 |pages=147–192 |s2cid=237705443 |doi=10.1561/105.00000136 |url=https://mpra.ub.uni-muenchen.de/111047/12/MPRA_paper_111047.pdf}}</ref>
+{{Main|Price elasticity of supply}}
+In [[economics]], incentives are analyzed through the systems that determine how agents can be motivated to achieve outcomes desired by a principal.<ref name=":3" /> Firms use incentives to link rewards to productivity, aiming to reducing turnover by retaining productive employees, and improving overall output by encouraging greater effort and engagement.<ref name=":3" /> Increasing pay variance within firms globally reflects the rising demand for high productivity, leading to a shift toward [[Performance-related pay|pay-for-performance]] models.<ref>{{Cite journal |last1=Lazear |first1=Edward P. |last2=Shaw |first2=Kathryn L. |date=2007 |title=Personnel Economics: The Economist's View of Human Resources |url=http://www.nber.org/papers/w13653.pdf |journal=The Journal of Economic Perspectives |publisher=American Economic Association |volume=21 |issue=4 |pages=91–114 |doi=10.1257/jep.21.4.91  |doi-access=free|jstor=30033753}}</ref> These schemes reinforce the link between work and reward.
-==Non-monetary incentives==
-Non-monetary incentives can act as an impactful reward system to employees with superior performance that is independent to predetermined targets.<ref>{{Cite journal |last1=Hooi |first1=L. W. |last2=Abdullah |first2=A. A. |date=2013 |title=Relationships of Non-Monetary Incentives, Job Satisfaction and Employee Job Performance |journal=International Review of Management and Business Research |volume=2 |issue=4 |pages=1085–1091}}</ref> They refer to the use of rewards or benefits that are not directly related to money or financial compensation to motivate individuals to perform specific actions or achieve desired outcomes <ref name="Lefebvre e0227360">{{Cite journal |last1=Lefebvre |first1=Mathieu |last2=Stenger |first2=Anne |date=2020-01-17 |title=Short- & long-term effects of monetary and non-monetary incentives to cooperate in public good games: An experiment |journal=PLOS ONE |volume=15 |issue=1 |pages=e0227360 |doi=10.1371/journal.pone.0227360 |pmid=31951622 |issn=1932-6203|pmc=6968839 |doi-access=free }}</ref>
+Incentives, however, can also produce unintended outcomes.<ref>{{Cite journal |last1=Edmans |first1=Alex |last2=Fang |first2=Vivian W. |last3=Huang |first3=Allen |date=2018 |title=The Long-Term Consequences of Short-Term Incentives |journal=SSRN Electronic Journal |doi=10.2139/ssrn.3037354 |issn=1556-5068 |s2cid=53073899}}</ref> Poorly designed systems may encourage "gaming" behavior, where individuals maximize rewards without meeting actual objectives. This is central to the [[principal–agent problem]], in which the goals of the principal (such as a government or company) diverge from those of the agent (such as employees). Misaligned incentives can lead to [[moral hazard]]—where agents take risks without bearing full costs—or to [[adverse selection]], when asymmetric information causes inefficient or distorted outcomes.
-The use of non-monetary incentives is based on the recognition that individuals are motivated by a range of factors beyond financial rewards and acts as a reinforcement to encourage work engagement and productivity.<ref name=":15">{{Cite journal |last=Burgess |first=S. |date=2003-06-01 |title=The Role of Incentives in the Public Sector: Issues and Evidence |journal=Oxford Review of Economic Policy |volume=19 |issue=2 |pages=285–300 |doi=10.1093/oxrep/19.2.285 |issn=1460-2121}}</ref> Some examples of these incentives include extra paid holidays, recognition, praise, opportunity for personal or professional growth, gifts, family benefits or even work-based perks such as more interesting projects or work.
+=== Self-selection effects of incentives ===
-Individual may be motivated by a sense of purpose, a desire for personal fulfillment or growth, a need for social recognition or status, or other non-financial factors. By providing these types of incentives tend to boost employees' job satisfaction as they feel more appreciated for their efforts and lower turnover rates. Compared to monetary incentives, studies have shown that employees find non-monetary incentives more memorable as they are separated from normal pay and hence are more distinguishable.<ref name=":1">{{Cite journal |last1=Cassar |first1=Lea |last2=Meier |first2=Stephan |date=Summer 2018 |title=Nonmonetary Incentives and the Implications of Work as a Source of Meaning |journal=Journal of Economic Perspectives |language=en |volume=32 |issue=3 |pages=215–238 |doi=10.1257/jep.32.3.215 |s2cid=52834710 |issn=0895-3309 |doi-access=free}}</ref> In addition, non-monetary incentives are known to promote long-term commitment and loyalty among employees<ref name="Lefebvre e0227360"/> Effective use of non-monetary incentives can positively influence employees’ perception of the company's image as well as increase the morale of firms.<ref>{{Cite journal |last1=Depedri |first1=Sara |last2=Tortia |first2=Ermanno C. |last3=Carpita |first3=Maurizio |date=2010 |title=Incentives, Job Satisfaction and Performance: Empirical Evidence in Italian Social Enterprises |journal=Euricse Working Papers |at=N.012 {{!}} 10 |ssrn=1698598}}</ref> Compared to monetary incentives, non-monetary incentives hold a stronger and longer-lasting influence on employees’ motivation as it results in a higher utility level.<ref>{{Cite journal |last=Jeffrey |first=S. |date=2004 |title=The benefits of tangible non-monetary incentives |journal=University of Chicago |pages=702–77}}</ref> Employees with higher job satisfaction and morale were found to have better overall performance, contribution and hence higher productivity.<ref name=":14" /> Another advantage of non-monetary incentives that it allows a positive work culture that emphasizes cooperation, teamwork, and social responsibility.
+Because employees know more about their own skills, competitiveness, and risk attitudes than employers do, firms also design incentives to [[Recruitment|recruit]] suitable workers. This is called the self-selection or sorting effect. For example, pay-for-performance schemes attract more productive, less risk-averse workers, while fixed wages appeal to more risk-averse individuals.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=14–15 |doi=10.1257/jel.37.1.7}}</ref><ref>{{Cite journal |author1=Bram Cadsby, C. |author2=Song, F. |author3=Tapon, F. |date=April 2007 |title=Sorting and Incentive Effects of Pay for Performance: An Experimental Investigation |journal=The Academy of Management Journal |volume=50 |issue=2 |pages=389–392}}</ref><ref>{{Cite journal |author1=Dohmen, T. |author2=Folk, A. |date=2010 |title=You Get What You Pay For: Incentives and Selection in the Education System |url=https://cris.maastrichtuniversity.nl/en/publications/4c771dbe-5bb2-4611-8ae7-814877f04261 |journal=The Economic Journal |volume=120 |issue=546 |pages=257–258 |doi=10.1111/j.1468-0297.2010.02376.x |jstor=40784482 |s2cid=12928709}}</ref>
-However, non-monetary incentives also have some limitations and undesirable consequence.<ref name="Lefebvre e0227360"/>  For instance, it can be less effective in motivating individuals who are primarily motivated by monetary incentives such as financial rewards. This may be especially true for individuals who are in low-paying jobs or who face significant financial stress or insecurity. Another concern is that non-monetary incentives may be more difficult to quantify and evaluate than monetary incentives.<ref name="Lefebvre e0227360"/> This may create several challenges for a firm or organisation to design and implement effective incentive programs that are aligned with their goals and objectives.
-Overall, both monetary and non-monetary incentives are important tools to influence individual and organizational behavior. While monetary incentives may be more effective for some individuals or in some contexts, non-monetary incentives can be equally effective in promoting long-term commitment, fostering a positive work culture, and promoting social responsibility. Ultimately, the most effective incentive programs will likely incorporate a combination of monetary and non-monetary incentives to create a positive and comprehensive approach to motivation and performance.
-==Incentives in the economic context==
-The economic analysis of incentives focuses on the systems that determine the incentives needed for an agent to achieve a desired outcome dictated by the principal.<ref name=":3">{{Cite book |last=Neilson |first=William S. |title=Personnel Economics |publisher=Pearson Education Inc |year=2007 |isbn=9780131488564 |pages=11}}</ref> Incentives can help companies link employees' rewards to their productivity. When a firm wants their employees to produce a certain amount of output, it must be prepared to offer a compensation scheme such as a monetary bonus to persuade employees to reach the target output.<ref name=":3" /> Compensation must achieve two goals. The first is to reduce employee turnover and retain the highest performing and most productive employees. Compensating employees can help attract workers to work harder and retain their ability. The second is to improve productivity. Compensation can not only stimulate the ability of workers to produce output, but also improve the enthusiasm of employees to work, thus promoting business development.<ref name=":3" /> A rise in pay variance across the firm reflects an increased demand for highly productive workers, and therefore compensation has begun shifting towards [[Performance-related pay|pay-for-performance]].<ref>{{Cite journal |last1=Lazear |first1=Edward P. |last2=Shaw |first2=Kathryn L. |date=2007 |title=Personnel Economics: The Economist's View of Human Resources |journal=The Journal of Economic Perspectives |publisher=American Economic Association |volume=21 |issue=4 |pages=91–114 |doi=10.1257/jep.21.4.91 |jstor=30033753 |url=http://www.nber.org/papers/w13653.pdf}}</ref> This helps employees recognize the direct relationship between their work output and their reward.
-While incentive has become one of a powerful tool to motivate and influence certain behaviour or action, they can also have unintended consequences.<ref>{{Cite journal |last1=Edmans |first1=Alex |last2=Fang |first2=Vivian W. |last3=Huang |first3=Allen |date=2018 |title=The Long-Term Consequences of Short-Term Incentives |url=http://dx.doi.org/10.2139/ssrn.3037354 |journal=SSRN Electronic Journal |doi=10.2139/ssrn.3037354 |s2cid=53073899 |issn=1556-5068}}</ref> Recent research indicated how extensive and intrinsic can come into conflict with other motivation. For example, a poorly designed incentive system can potentially lead to unintended behaviours and actions as such, individuals or companies gaming the system to earn rewards without actually achieving the desired outcomes. This is known as the [[Principal–agent problem|"principal-agent problem]]," where the incentives of the principal (e.g., the government or a company) do not align with the incentives of the agent (e.g., individuals or employees). This incentive conflicts can lead to adverse selection and moral hazard.<ref name=":15" /> A [[moral hazard]] refers to a situation in which a particular party engage in a risky behaviour because it fails to bear the full costs of that risk. On the other hand, an [[adverse selection]] occur when there is a [[Information asymmetry|asymmetric information]] between different parties. As such, adverse selection often creates an incentive for plans to inefficiently distorts benefits. As incentive can bring conflicts between parties involve, effective management plan is required to resolve incentive conflicts.
 === Misaligned incentives ===
-A misaligned incentive refers to a situation where the goals of different parties involved in a particular situation such as a firm or system are not aligned and may even conflict with each other. Misaligned incentives can potentially arise in many other contexts, such as in government policies, healthcare, education, and environmental regulations. Principals within a firm want their agents to work for the principals' best interests, but agents often have different goals than the principals.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=7–63 |doi=10.1257/jel.37.1.7}}</ref> Due to this problem of misaligned incentives, firms must design compensation plans to induce workers to act in the firm's best interest and generate a level of output that maximizes the firm's profits.<ref name=":3" /> The problem of [[asymmetric information]] means that the principal does not know exactly how to motivate its agents to act in the firm's best interests. Consequently, compensation plans are difficult for firms to design.<ref name=":5">{{Cite web |title=Asymmetric Information: The Principal-Agent Problem |url=http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |url-status=dead |archive-url=https://web.archive.org/web/20151123003015/http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |archive-date=2015-11-23}}</ref> The [[Principal–agent problem|principal-agent theory]] is used as the guiding framework when aligning incentives with the employee's effort to obtain the efficient level of output for the firm.<ref name=":3" /> For example, a manager may want a certain level of output from an employee but does not know the capabilities of the employee in the presence of imperfect monitoring, and to achieve the best outcome, an optimal incentive scheme must be designed to motivate the worker to increase their productivity.<ref name=":5" /> Research shows that if a principal offers a high incentive, the agent will also recompense with a higher effort.<ref>{{Cite journal |last1=Irlenbusch |first1=Bernd |last2=Sliwka |first2=Dirk |date=September 2005 |title=Incentives, Decision Frames, and Motivation Crowding Out – an Experimental Investigation |journal=IZA Discussion Paper No. 1758 |ssrn=822866 |doi=10.2139/ssrn.822866|s2cid=16424059 |url=https://econpapers.repec.org/RePEc:iza:izadps:dp1758 |hdl=10419/33245 |hdl-access=free }}</ref>
+A misaligned incentive arises when the goals of different parties conflict. This can occur within firms, but also in government, healthcare, education, and environmental policy. For example, principals in a firm want agents to act in the firm's best interests, but employees may pursue different objectives.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=7–63 |doi=10.1257/jel.37.1.7}}</ref> Because of [[information asymmetry]], principals often lack precise knowledge of how to motivate or evaluate agents.<ref name=":52">{{Cite web |title=Asymmetric Information: The Principal-Agent Problem |url=http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |archive-url=https://web.archive.org/web/20151123003015/http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |archive-date=2015-11-23}}</ref> Compensation plans are therefore difficult to design. Principal–agent theory is often used to align incentives with employee effort in order to achieve efficient output.<ref name=":4">{{Cite journal |last1=Lazear |first1=Edward. P |last2=Shaw |first2=Kathryn. L |date=2007 |title=Personnel Economics: The Economist's View of Human Resources |url=http://www.nber.org/papers/w13653.pdf |journal=Journal of Economic Perspectives |volume=21 |issue=4 |pages=91–114 |doi=10.1257/jep.21.4.91 |doi-access=free}}</ref>
-However, in this relationship, an informal advantage usually exists among agents over the principal. A [[moral hazard]] could be present where principals are unable to know for sure if agents are giving their all on a delegated task, and an [[adverse selection]] could exist as principals usually have insufficient knowledge on the agents’ capabilities and face difficulties in selecting the agent best suited for a task.<ref name=":13">{{Cite journal |last1=Braun |first1=Dietmar |last2=Guston |first2=David H |date=October 2003 |title=Principal-agent theory and research policy: an introduction |journal=Science and Public Policy |volume=30 |issue=5 |pages=302–308 |doi=10.3152/147154303781780290 |s2cid=144005311 |issn=0302-3427|url=https://serval.unil.ch/resource/serval:BIB_7A523369F205.P001/REF.pdf }}</ref> In instances where principals have contradicting goals with the agents, agents would have an incentive to shirk and to leak information to competing principals.<ref>{{Cite journal |last1=Waterman |first1=Richard W. |last2=Meier |first2=Kenneth J. |date=1998 |title=Principal-Agent Models: An Expansion? |journal=Journal of Public Administration Research and Theory |volume=8 |issue=2 |pages=173–202|doi=10.1093/oxfordjournals.jpart.a024377 |doi-access=free }}</ref> Self-interested agents may also want to maximize their own interest by lying <ref>{{Cite book |last=Williamson |first=Oliver E. |title=The economic institutions of capitalism: firms, markets, relational contracting |date=1985 |publisher=The Free Press |isbn=978-0-684-86374-0 |oclc=12216444}}</ref> or deliberately hiding information from the principal to decrease their workload.<ref name=":13" />
+In this relationship, agents usually have informational advantages over principals. Moral hazard arises when principals cannot be sure that agents are exerting full effort, while adverse selection occurs when principals cannot determine which agents are best suited for tasks.<ref name=":132">{{Cite journal |last1=Braun |first1=Dietmar |author2-link=David H. Guston |last2=Guston |first2=David H |date=October 2003 |title=Principal-agent theory and research policy: an introduction |url=https://serval.unil.ch/resource/serval:BIB_7A523369F205.P001/REF.pdf |journal=Science and Public Policy |volume=30 |issue=5 |pages=302–308 |doi=10.3152/147154303781780290 |issn=0302-3427 |s2cid=144005311}}</ref> Agents may shirk, leak information, misreport, or conceal abilities in order to reduce their workload or benefit competitors.<ref>{{Cite journal |last1=Waterman |first1=Richard W. |last2=Meier |first2=Kenneth J. |date=1998 |title=Principal-Agent Models: An Expansion? |journal=Journal of Public Administration Research and Theory |volume=8 |issue=2 |pages=173–202 |doi=10.1093/oxfordjournals.jpart.a024377 |doi-access=free}}</ref><ref>{{Cite book |last=Williamson |first=Oliver E. |title=The economic institutions of capitalism: firms, markets, relational contracting |date=1985 |publisher=The Free Press |isbn=978-0-684-86374-0 |oclc=12216444}}</ref>
-=== CEO incentives ===
-The board of directors in a company plays an important role in creating incentives for CEOs so that their best interest aligns with that of the shareholders. CEOs can be given incentives in many forms, including salary, bonuses, shares, and stock options to reward spectacular performance while penalties can be imposed for unsatisfactory performance. To ensure that the CEOs are appropriately incentivized, CEOs can be made the substantial owners of the company's stock by the board of directors. CEOs that own a portion of the company's stock will have an incentive to work towards the common best interest of themselves and the company shareholders. Threat to dismiss the CEOs for unsatisfactory performance can also act as an incentive to reinforce the performance of the CEOs, which can in turn maximize the company's value. The possibility of dismissal will increase CEOs’ accountability for their own actions considering that the possible dismissal would likely lead to a poor reputation for themselves. As a result, a potential increase in work engagement and performance can be seen.<ref name=":9">{{Cite journal |last1=Jensen |first1=Michael C. |last2=Murphy |first2=Kevin J. |date=Winter 2010 |title=CEO Incentives-It's Not How Much You Pay, But How |journal=Journal of Applied Corporate Finance |volume=22 |issue=1 |pages=64–76 |doi=10.1111/j.1745-6622.2010.00262.x |s2cid=219968200 |issn=1078-1196}}</ref>
-Apart from monetary incentives, non-monetary incentives also play a part in increasing the work performance of CEOs. Non-monetary incentives can be introduced in the form of benefits such as power, public acknowledgement, prestige, and title. However, some argue that non-monetary incentives are less impactful'''.''' <ref name=":9" />
 === Tournament theory ===
-[[Tournament theory]] describes a framework of compensation based on an individual's position within a firm's hierarchy.<ref name=":4" /> The theory demonstrates that individuals are not promoted on the basis of their absolute performance and output, but instead based on their performance relative to other employees in the same position within the organization.<ref name=":4" /> ''Ceteris paribus'', the larger the difference in compensation between one position to the next, the greater the incentive to exert more effort in order to achieve a promotion.<ref name=":0" /> However, that incentive is diminished as the size of the firm (and therefore the potential candidates for promotion) increases.
+[[Tournament theory]] describes a framework of compensation based on an individual's position within a firm's hierarchy,<ref name=":4" /> such that compensation is a function of relative, rather than absolute, performance. ''Ceteris paribus'', the larger the difference in compensation between one position to the next, the greater the incentive to exert more effort in order to achieve a promotion.<ref name=":03"/> Larger firms, with more competitors, may dilute the effect of increasing effort by way of competition.<ref name=":03"/> Relative pay schemes may, however, foster rivalry and reduce cooperation, forcing firms to balance pay variance with workplace harmony.<ref name=":03" />
-Firms must address the risk that a relative compensation scheme could incentivize uncooperative behavior amongst co-workers. Accordingly, firms encounter a trade-off between incentivizing workers to increase their efforts by increasing pay variance between the promoted and the unpromoted and, on the other hand, minimizing disharmony amongst co-workers by maintaining some level of pay compression.<ref name=":0" />
-=== Self-selection effects of incentives ===
-Employees know more about their own abilities, competitiveness and risk attitudes than potential employers. Due to this asymmetric information, firms design incentives not only to enhance employees’ motivation to act in the interests of the firm and maximize their output, but also to influence the type and quality of workers that they attract.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=14–15 |doi=10.1257/jel.37.1.7}}</ref> This is known as the self-selection or sorting effect of incentives. For example, empirical studies have shown that firms which implement pay-for-performance rather than fixed wage compensation schemes tend to attract more productive workers who are less risk averse.<ref>{{Cite journal |author1=Bram Cadsby, C. |author2=Song, F. |author3=Tapon, F. |date=April 2007 |title=Sorting and Incentive Effects of Pay for Performance: An Experimental Investigation |journal=The Academy of Management Journal |volume=50 |issue=2 |pages=389–392}}</ref> Greater risk aversion reduces workers' willingness to work for variable as opposed to fixed pay.<ref>{{Cite journal |author1=Dohmen, T. |author2=Folk, A. |date=2010 |title=Yout Get What You Pay For: Incentives and Selection in the Education System |jstor=40784482 |journal=The Economic Journal |volume=120 |issue=546 |pages=257–258|doi=10.1111/j.1468-0297.2010.02376.x |s2cid=12928709 |url=https://cris.maastrichtuniversity.nl/en/publications/4c771dbe-5bb2-4611-8ae7-814877f04261 }}</ref> Accordingly, firms may use incentives as a method of filtering out low productivity workers or workers who lack the personal characteristics that those firms are searching for.
 === Team-based incentives ===
+Due to constantly advancing technologies, individual employees seldom have an [[absolute advantage]] across all skills required within a firm.<ref name=":4" /> Many large firms organize production around teams to address complex, multidimensional tasks requiring diverse skills.<ref name=":4" /> In such settings, individual performance is difficult to measure, making team-based incentives preferable to individual piece rates.<ref>{{Cite book |last1=Franco-Santos |first1=Monica |title=Team-based incentives: Creating a Culture of Collaboration, Innovation, and Performance. The Compensation Handbook. |last2=Gomez-Mejia |first2=Luis R. |publisher=McGraw-Hill |year=2015 |edition=6th |pages=199–209 |chapter=Creating a culture of collaboration, innovation and performance through team-based incentives}}</ref> Team-based incentives reward collective performance, fostering cooperation, trust, and cohesion.<ref>{{Cite book |last1=DeMatteo |first1=J. S. |title=Team-based rewards: Current empirical evidence and directions for future research. Research in organizational behavior |last2=Eby |first2=L. T. |last3=Sundstrom |first3=E. |publisher=Elsevier Science/JAI Press. |year=1998 |volume=20 |pages=141–183}}</ref><ref>{{Cite journal |last1=Beersma |first1=B. |last2=Hollenbeck |first2=J. R. |last3=Humphrey |first3=S. E. |last4=Moon |first4=H. |last5=Conlon |first5=D. E. |last6=Ilgen |first6=D. R. |date=2003 |title=Cooperation, Competition, and Team Performance: Towards a Contingency Approach |journal=Academy of Management Journal |volume=46 |issue=5 |pages=572–590 |doi=10.2139/ssrn.325401 |issn=0001-4273 |ssrn=325401}}</ref> Studies find positive effects on efficiency, stability, pay, and company output.<ref>{{Cite journal |last1=Kruse |first=Douglas |date=May 2022 |title=Does employee ownership improve performance? |journal=IZA World of Labor |at=311 |doi=10.15185/izawol.311 |hdl=10419/148536 |issn=2054-9571 |doi-access=free |hdl-access=free |orig-date=December 2016}}</ref><ref>{{Cite journal |last1=Hamilton |first1=Barton H. |last2=Nickerson |first2=Jack A. |last3=Owan |first3=Hideo |date=June 2003 |title=Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation |journal=Journal of Political Economy |volume=111 |issue=3 |pages=465–497 |doi=10.1086/374182 |issn=0022-3808 |s2cid=11969481}}</ref>[[File:Team-based incentives game.png|thumb|360x360px|Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding.]]Team-based incentives, however, may be seen as unfair if unequal contributions receive equal rewards.<ref name=":11">{{Cite journal |last1=Gerhart |first1=Barry |last2=Rynes |first2=Sara L. |last3=Fulmer |first3=Ingrid Smithey |date=January 2009 |title=6 Pay and Performance: Individuals, Groups, and Executives |journal=Academy of Management Annals |volume=3 |issue=1 |pages=251–315 |doi=10.5465/19416520903047269 |issn=1941-6520}}</ref>
-Production is increasingly organized around teams in many large firms.<ref name=":4" /> Teamwork may enhance company productivity for firms that encounter multidimensional, complex problems. A firm may be able to solve a complex task which requires a high level of various different skills by assigning it to expert workers with complementary skills.<ref name=":4" /> Due to constantly advancing technologies, seldom does an individual employee have an [[absolute advantage]] across all skills that are required to solve the complicated problems that firms face, hence team collaboration is crucial and beneficial to ensure the success of a team.<ref name=":4" />
+Team-based incentives may also induce [[Free-rider problem|free-riding]]. This happens, for example, if employees have to share team output so that each employee only gets a fraction of what he or she generates.<ref name="Holmstrom1982">{{Cite journal |last=Holmstrom |first=Bengt |date=1982 |title=Moral Hazard in Teams |journal=The Bell Journal of Economics |volume=13 |issue=2 |pages=325–328 |doi=10.2307/3003457 |jstor=3003457|hdl=10419/220831 |hdl-access=free }}</ref> Managers may mitigate this through sufficiently strong incentives, penalties, or [[Peer assessment|peer rating]] systems.,<ref name=":11" /><ref>{{Cite conference |last1=Hashim |first1=Matthew J. |last2=Bockstedt |first2=Jesse C. |date=5–8 January 2015 |title=Overcoming Free-Riding in Information Goods: Sanctions or Rewards? |publisher=IEEE |pages=4834–4843 |doi=10.1109/hicss.2015.574 |book-title=2015 48th Hawaii International Conference on System Sciences |place=Kauai, HI, USA}}</ref> or by relying on
+peer pressure or hiring intrinsically motivated employees.<ref name=":82">{{Cite journal |author1=Frederiksen, A. |author2=Hansen, D. |author3=Manchester, C. |date=2022 |title=Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process |url=https://www.iza.org/publications/dp/14986/does-group-based-incentive-pay-lead-to-higher-productivity-evidence-from-a-complex-and-interdependent-industrial-production-process |journal=IZA Institute of Labor Economics |pages=2–4}}</ref><ref>{{Cite journal |author1=Kandel, E. |author2=Lazear, E. |date=1992 |title=Peer Pressure and Partnerships |journal=Journal of Political Economy |volume=100 |issue=4 |pages=803–811 |doi=10.1086/261840 |jstor=2138688 |s2cid=16757647}}</ref> Free-riding also arises when team members' [[diffusion of responsibility|responsibility diffuses]] because members cannot be jointly held accountable.<ref name="LiSchnedler2025">{{cite journal | last1= Li | first1=Xinyu | last2=Schnedler | first2=Wendelin|year=2025 |title=Sharing the Fame but Taking the Blame: When Declaring a Single Person Responsible Solves a Free Rider Problem |journal=Management Science |volume=71 |issue=10   |pages=8252–8266  |doi=10.1287/mnsc.2024.06567|hdl=10419/306485 |hdl-access=free }}</ref> In this case, declaring a single person responsible may help.<ref name="LiSchnedler2025" />
+=== Cultural differences ===
-Individualized incentives are said to be dysfunctional in an interdependent working environment where individual performance is difficult to observe<ref>{{Cite book |last1=Franco-Santos |first1=Monica |title=Team-based incentives: Creating a Culture of Collaboration, Innovation, and Performance. The Compensation Handbook. |last2=Gomez-Mejia |first2=Luis R. |publisher=McGraw-Hill |year=2015 |edition=6th |pages=199–209 |chapter=Creating a culture of collaboration, innovation and performance through team-based incentives}}</ref> and so firms may opt for team-based incentives instead. Team-based incentive refers to the incentive system that rewards employees based on performance of the team.<ref>{{Cite book |last1=DeMatteo |first1=J. S. |title=Team-based rewards: Current empirical evidence and directions for future research. Research in organizational behavior |last2=Eby |first2=L. T. |last3=Sundstrom |first3=E. |publisher=Elsevier Science/JAI Press. |year=1998 |edition=B. M. Staw & L.L. Cummings |volume=20 |pages=141–183}}</ref> Team-based incentives are described as more beneficial to companies than individual-based incentives. By paying a straight piece rate to individual employees, they would have little to no motivation to help each other as the incentives they receive are irrespective of the result of others. On the other hand, paying team incentives based on team output can promote cohesiveness, trust, cooperation, and support within a team.<ref>{{Cite journal |last1=Beersma |first1=B. |last2=Hollenbeck |first2=J. R. |last3=Humphrey |first3=S. E. |last4=Moon |first4=H. |last5=Conlon |first5=D. E. |last6=Ilgen |first6=D. R. |date=2003 |title=Cooperation, Competition, and Team Performance: Towards a Contingency Approach |journal=Academy of Management Journal |volume=46 |issue=5 |pages=572–590 |doi=10.2139/ssrn.325401 |ssrn=325401 |issn=0001-4273}}</ref> Researchers found a positive relationship between team-based incentive and employees’ work efficacy, stability, and salary<ref>{{Cite journal |last=Kruse |first=Douglas |date=May 2022 |orig-year=December 2016 |title=Does employee ownership improve performance? |journal=IZA World of Labor |at=311 |doi=10.15185/izawol.311 |doi-access=free |issn=2054-9571|hdl=10419/148536 |hdl-access=free }}</ref> as well as company output.<ref>{{Cite journal |last1=Hamilton |first1=Barton H. |last2=Nickerson |first2=Jack A. |last3=Owan |first3=Hideo |date=June 2003 |title=Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation |journal=Journal of Political Economy |volume=111 |issue=3 |pages=465–497 |doi=10.1086/374182 |s2cid=11969481 |issn=0022-3808}}</ref>
+The effectiveness of pay-for-performance incentives varies across cultures. One study across six countries found that monetary incentives generally increased effort more than [[Nudge theory|psychological nudges]], but this effect was stronger in Western than non-Western cultures.<ref>{{Cite journal |last=Medvedev |first=Danila |last2=Davenport |first2=Diag |last3=Talhelm |first3=Thomas |last4=Li |first4=Yin |date=March 2024 |title=The motivating effect of monetary over psychological incentives is stronger in WEIRD cultures |url=https://www.nature.com/articles/s41562-023-01769-5 |journal=Nature Human Behaviour |language=en |volume=8 |issue=3 |pages=456–470 |doi=10.1038/s41562-023-01769-5 |issn=2397-3374|pmc=10963269 }}</ref> Another study found that financial rewards improved test performance among US students, but not among students in China.<ref>{{Cite journal |last=Gneezy |first=Uri |last2=List |first2=John A. |last3=Livingston |first3=Jeffrey A. |last4=Qin |first4=Xiangdong |last5=Sadoff |first5=Sally |last6=Xu |first6=Yang |date=December 2019 |title=Measuring Success in Education: The Role of Effort on the Test Itself |url=https://www.aeaweb.org/articles?id=10.1257/aeri.20180633 |journal=American Economic Review: Insights |language=en |volume=1 |issue=3 |pages=291–308 |doi=10.1257/aeri.20180633 |issn=2640-205X}}</ref> These findings align with cross-cultural studies showing that [[Performance-related pay|pay-for-performance]] is more common in [[Individualistic culture|individualistic societies]], such as the US and UK, than in [[Collective|collectivist ones]].<ref>{{Cite web |last=Gomez-Mejia |first=Luis R. |last2=Welbourne |first2=Theresa |date=1991-03-01 |title=Compensation Strategies in a Global Context. {{!}} EBSCOhost |url=https://openurl.ebsco.com/EPDB:gcd:1:9635505/detailv2?sid=ebsco:plink:scholar&id=ebsco:gcd:7700836&crl=c&link_origin=scholar.google.com |access-date=2025-05-06 |website=openurl.ebsco.com |language=en}}</ref><ref>{{Cite journal |last=Schuler |first=Randall S. |last2=Rogovsky |first2=Nikolai |date=1998-03-01 |title=Understanding Compensation Practice Variations Across Firms: The Impact of National Culture |url=https://link.springer.com/article/10.1057/palgrave.jibs.8490030 |journal=Journal of International Business Studies |language=en |volume=29 |issue=1 |pages=159–177 |doi=10.1057/palgrave.jibs.8490030 |issn=1478-6990 |url-access=subscription}}</ref>
+=== Potential issues in firms ===
-Research shows that employees prefer individual-based incentives over team-based incentives due to a few reasons. Firstly, they believe that team-based incentives are prone to unfairness. Employees with more contributions may be discouraged from seeing employees that contributed less receiving the same level of incentive.<ref name=":11">{{Cite journal |last1=Gerhart |first1=Barry |last2=Rynes |first2=Sara L. |last3=Fulmer |first3=Ingrid Smithey |date=January 2009 |title=6 Pay and Performance: Individuals, Groups, and Executives |journal=Academy of Management Annals |volume=3 |issue=1 |pages=251–315 |doi=10.5465/19416520903047269 |issn=1941-6520}}</ref> Moreover, as a team expands and the effect of team incentives weakens, employees struggle to establish a clear link between effort given and incentives received.<ref name=":11" /> It is also inevitable that team incentives could induce the [[free-rider problem]] because an employee's motivation to maximize their individual output could be diminished.<ref>{{Cite journal |last=Holmstrom |first=Bengt |date=1982 |title=Moral Hazard in Teams |jstor=3003457 |journal=The Bell Journal of Economics |volume=13 |issue=2 |pages=325–328|doi=10.2307/3003457 }}</ref> Managers may need to offer a team incentive that is strong enough to ensure that each worker's individual payoff from exerting the level of effort that allows the company to maximize its profits is greater than their individual payoff from free riding on the efforts of other team members.<ref>{{Cite journal |author1=Alchian, A. |author2=Demsetz, H. |date=1972 |title=Production, Information Costs, and Economic Organization |jstor=1815199 |journal=The American Economic Review |volume=62 |issue=5 |pages=779–781}}</ref>
-[[File:Team-based incentives game.png|thumb|360x360px|Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding.]]
-Using [[Game theory]] to illustrate this, firms need to implement a team-based incentive that results in the value of ‘Y’ in Game 1 being greater than 100 and enforce a punishment for free-riding that makes the value of ‘X’ less than 40. This would ensure that both team members’ dominant strategy in Game 1 is to work hard and the [[Nash equilibrium]] is (Work Hard, Work Hard).
-In contrast, some studies have shown that peer pressure and employees’ intrinsic incentive to perform well in a team environment may mitigate the free-rider problem associated with team-based incentives.<ref name=":8">{{Cite journal |author1=Frederiksen, A. |author2=Hansen, D. |author3=Manchester, C. |date=2022 |title=Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process |url=https://www.iza.org/publications/dp/14986/does-group-based-incentive-pay-lead-to-higher-productivity-evidence-from-a-complex-and-interdependent-industrial-production-process |journal=IZA Institute of Labor Economics |pages=2–4}}</ref><ref>{{Cite journal |author1=Kandel, E. |author2=Lazear, E. |date=1992 |title=Peer Pressure and Partnerships |jstor=2138688 |journal=Journal of Political Economy |volume=100 |issue=4 |pages=803–811|doi=10.1086/261840 |s2cid=16757647 }}</ref> Such case studies demonstrate that team incentives increase firm productivity in settings that involve complex, interdependent production where peer pressure and intrinsic incentives outweigh selfish preferences.<ref name=":8" /> Peer rating system can also be introduced for team members to rate each other's contribution to a task. Research findings show that imposing a penalty on free riders is useful in decreasing the tendency of free riding.<ref>{{Cite conference |last1=Hashim |first1=Matthew J. |last2=Bockstedt |first2=Jesse C. |date=5–8 January 2015 |title=Overcoming Free-Riding in Information Goods: Sanctions or Rewards? |book-title=2015 48th Hawaii International Conference on System Sciences |place=Kauai, HI, USA |publisher=IEEE |pages=4834–4843 |doi=10.1109/hicss.2015.574}}</ref>
-===Potential issues associated with the use of incentives in firms===
 ==== Ratchet effect ====
-Incentives are arguably beneficial in increasing productivity, however, they can also have an adverse effect on the firm.<ref name=":3" /> This is evident through the [[ratchet effect]]. A firm may use its observation of an employee's output level when they are first employed as a guide to set performance standard and objectives for the future.<ref name=":6">{{Cite journal |last1=Kanemoto |first1=Yoshitsugu |last2=MacLeod |first2=W. Bentley |date=1992 |title=The Ratchet Effect and the Market for Secondhand Workers |journal=Journal of Labor Economics |publisher=University of Chicago Press |volume=10 |issue=1 |pages=85–98 |doi=10.1086/298279 |jstor=2535130 |s2cid=154244118}}</ref> Knowing this, an employee may deliberately reduce their output level when first employed or hide their ability to produce at a higher output with the intent of exploiting being rewarded in the future when they strategically increase their output level.<ref name=":6" /> Best performances of employees can be limited from it. Thus, the ratchet effect can significantly diminish production levels of a firm and planned economies.<ref>{{Cite journal |last1=Cooper |first1=David J. |last2=Kagel |first2=John H. |last3=Lo |first3=Wei |last4=Gu |first4=Qing Liang |date=1999 |title=Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers |journal=The American Economic Review |volume=89 |issue=4 |pages=781–804 |doi=10.1257/aer.89.4.781 |jstor=117159 |issn=0002-8282 |url=http://s3.amazonaws.com/fieldexperiments-papers2/papers/00038.pdf}}</ref>
+Incentives can sometimes reduce productivity through the [[ratchet effect]]. Firms may use an employee's initial output as a benchmark for future standards. Anticipating this, employees may withhold effort at the start or conceal their true capabilities, later increasing output strategically to gain rewards.<ref name=":62">{{Cite journal |last1=Kanemoto |first1=Yoshitsugu |last2=MacLeod |first2=W. Bentley |date=1992 |title=The Ratchet Effect and the Market for Secondhand Workers |journal=Journal of Labor Economics |publisher=University of Chicago Press |volume=10 |issue=1 |pages=85–98 |doi=10.1086/298279 |jstor=2535130 |s2cid=154244118}}</ref><ref>{{Cite journal |last1=Cooper |first1=David J. |last2=Kagel |first2=John H. |last3=Lo |first3=Wei |last4=Gu |first4=Qing Liang |date=1999 |title=Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers |url=http://s3.amazonaws.com/fieldexperiments-papers2/papers/00038.pdf |journal=The American Economic Review |volume=89 |issue=4 |pages=781–804 |doi=10.1257/aer.89.4.781 |issn=0002-8282 |jstor=117159}}</ref> This reduces efficiency in both firms and [[Planned economy|planned economies]].<ref>{{Cite journal |last1=Cooper |first1=David J. |last2=Kagel |first2=John H. |last3=Lo |first3=Wei |last4=Gu |first4=Qing Liang |date=1999 |title=Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers |url=http://s3.amazonaws.com/fieldexperiments-papers2/papers/00038.pdf |journal=The American Economic Review |volume=89 |issue=4 |pages=781–804 |doi=10.1257/aer.89.4.781 |issn=0002-8282 |jstor=117159}}</ref>
 ==== Crowding-out effect ====
-Additionally, in the 1970s psychologists began exploring the relationship between extrinsic and intrinsic motivation whilst economists were simultaneously studying the "crowding-out" effects of monetary incentives. This came as a result of Richard Titmuss' 1970 publication, "The Gift Relationship", which explained how the constant use of extrinsic incentives can result in conflict with intrinsic motivators and lead to the desired behavior being "crowded out".<ref name="auto5">{{cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |date=Fall 2011 |volume=25 |issue=4 |page=192 |doi=10.1257/jep.25.4.191 |doi-access=free }}</ref> In his publication, Titmuss argued that the use of monetary incentives was disrupting social norms around the idea of voluntary contribution and would ultimately have a crowding-out effect. He acknowledged that if the incentives are large enough, they are more likely to offset crowding-out effects (at least in the short run while the incentives are being offered). However, Titmuss noted that making the incentives too large could also have an adverse effect due to the possibility of negative inferences being drawn from the size of the incentives.<ref>{{cite journal |last1=Ariely |first1=Dan |last2=Gneezy |first2=Uri |last3=Loewenstein |first3=George |last4=Mazar |first4=Nina |title=Large Stakes and Big Mistakes |journal=The Review of Economic Studies |date=2009 |volume=76 |issue=2 |pages=451–469 |doi=10.1111/j.1467-937X.2009.00534.x |url=https://rady.ucsd.edu/faculty/directory/gneezy/pub/docs/large-stakes.pdf |access-date=3 May 2022}}</ref> Crowding-out effects can also occur when temporary incentives are removed in the long run. In the workplace, the complete removal of extrinsic incentives can result in employee effort levels being lower than they were when the incentives were offered, thereby hindering motivation and performance.<ref name="auto5"/>
+Economists and psychologists have also studied the [[Motivation crowding theory|crowding-out]] effect, in which extrinsic incentives undermine intrinsic motivation. Richard Titmuss's 1970 book ''The Gift Relationship'' argued that monetary incentives disrupted social norms around voluntary contribution.<ref name="auto52">{{cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |date=Fall 2011 |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |volume=25 |issue=4 |page=192 |doi=10.1257/jep.25.4.191 |doi-access=free}}</ref> Large incentives may temporarily offset this, but may also signal undesirable implications, reducing their effectiveness.<ref>{{cite journal |last1=Ariely |first1=Dan |last2=Gneezy |first2=Uri |last3=Loewenstein |first3=George |last4=Mazar |first4=Nina |date=2009 |title=Large Stakes and Big Mistakes |url=https://rady.ucsd.edu/_files/faculty-research/uri-gneezy/large-stakes.pdf |url-status=live |journal=The Review of Economic Studies |volume=76 |issue=2 |pages=451–469 |doi=10.1111/j.1467-937X.2009.00534.x |archive-url=https://web.archive.org/web/20230326043518/https://rady.ucsd.edu/_files/faculty-research/uri-gneezy/large-stakes.pdf |archive-date=March 26, 2023 |access-date=3 May 2022}}</ref> Removing temporary incentives can also depress effort below baseline levels.<ref name="auto52" />
 ==== Stock options ====
+Stock options were widely adopted in the 1990s to align CEO and shareholder interests, but often produced mixed outcomes. While successful decisions could raise long-term stock prices, some CEOs engaged in accounting manipulation to preserve incentive-based pay. Such schemes proved costly and were not always effective at ensuring alignment.<ref>{{Cite book |last1=Chiappori |url=http://crest.science/RePEc/wpstorage/2002-11.pdf |title=Advances in Economics and Econometrics |last2=Salanié |publisher=Cambridge University Press |year=2003 |isbn=978-0-511-61024-0 |editor=M. Dewatripont |volume=1 |place=Cambridge |pages=115–149 |chapter=Testing contract theory: a survey of some recent work |doi=10.1017/CBO9780511610240.005 |editor2=L. Hansen |editor3=S. Turnovsky |s2cid=3067063}}</ref>
-Incentives are not always effective at aligning employees' incentives with those of the firm.<ref>{{Cite book |last1=Chiappori |last2=Salanié |year=2003 |chapter=Testing contract theory: a survey of some recent work |editor=M. Dewatripont |editor2=L. Hansen |editor3=S. Turnovsky |title=Advances in Economics and Econometrics |volume=1 |pages=115–149 |place=Cambridge |publisher=Cambridge University Press |doi=10.1017/CBO9780511610240.005 |isbn=9780511610240 |s2cid=3067063 |url=http://crest.science/RePEc/wpstorage/2002-11.pdf}}</ref> For example, some [[corporation|corporate]] policies popular during the 1990s aimed to encourage productivity have led to failures as a result of unintended consequences.<ref name=":7">{{Cite book |last=Jain |first=Abha |title=Sports Psychology |publisher=Friends Publications |year=2019 |isbn=978-93-88457-75-0 |location=India |pages=215}}</ref> Moreover, providing [[stock option]]s was intended to boost [[CEO]] productivity through offering a remunerative incentive to align the CEOs' interests with those of the shareholders to improve company performance.<ref name=":7" /> However, CEOs were found to either make good decisions which resulted in a reward of a long-term price increase of the stock, or were found to have fabricated the accounting information to give the illusion of economic success and to retain their incentive-based pay.<ref name=":7" /> Furthermore, it has been found to be extremely costly for firms to incentivize CEOs with stock options. Nevertheless, firms are forced to pay substantial amounts of money to ensure that CEOs act in the best interest of the firms.<ref name=":3" />
-==== Conflicts generated by pay variance ====
-Incentives can have a bipolar effect on the company.
-On the one hand, the company's incentives to employees may create a pay gap. For example, low-paid employees may reduce their production or contribution to the company. Low-paid employees and high-paid employees may not be able to communicate and cooperate effectively, causing low-paid employees to gradually lose their enthusiasm for work.<ref>{{cite journal |last1=Breza |first1=Emily |last2=Kaur |first2=Supreet |last3=Shamdasani |first3=Yogita |title=The Morale Effects of Pay Inequality* |journal=The Quarterly Journal of Economics |date=10 October 2017 |volume=133 |issue=2 |pages=611–663 |doi=10.1093/qje/qjx041|doi-access=free }}</ref> Firms should provide a fair amount of incentives for both low-paid and other employees, incentives for low-paid workers can be breaks rather than monetary incentives. Motivating employees with financial rewards may make a difference. That's because if the company is profitable in the first year, it may have plenty of bonuses to hand out to employees. However, if the company makes less money in the second year than it did in the first year, the company may not be able to give employees the same bonuses as in the first year even though they put in the same effort. This also reduces employees' motivation to work. Therefore, incentives may be counterproductive. Firm can provide other types of incentives rather than monetary incentives, such as promotion or vacation breaks for high-performing employees.
+==== Pay variance conflicts ====
-== Incentives in the context of voluntary contributions ==
+Pay inequality within firms can also lower morale. Low-paid employees may reduce effort, disengage, or find it harder to cooperate with higher-paid colleagues, lowering overall productivity.<ref>{{cite journal |last1=Breza |first1=Emily |last2=Kaur |first2=Supreet |last3=Shamdasani |first3=Yogita |date=10 October 2017 |title=The Morale Effects of Pay Inequality* |journal=The Quarterly Journal of Economics |volume=133 |issue=2 |pages=611–663 |doi=10.1093/qje/qjx041 |doi-access=free}}</ref> Bonus-based systems may also reduce motivation if rewards fluctuate with company profits rather than effort. Firms sometimes offset this by using non-monetary rewards, such as promotions or extra vacation time, to maintain fairness and engagement.
-When it comes to volunteering activities, monetary incentives can bring negative effects. According to the [[Self-perception theory]], humans constantly seek explanations for their behavior.<ref>{{cite book |last=Bem |first=Daryl J. |chapter=Self-Perception Theory |date=1972 |doi=10.1016/s0065-2601(08)60024-6 |editor=Leonard Berkowitz |title=Advances in Experimental Social Psychology |volume=6 |pages=1–62 |publisher=Academic Press |isbn=9780120152063}}</ref> When individuals are involved in volunteering activities, they most likely perceive themselves as prosocial and altruistic, and attach a symbolic price to the act of volunteering.<ref>{{Cite journal |last1=Frey |first1=Bruno S. |last2=Jegen |first2=Reto |date=December 2001 |title=Motivation Crowding Theory |journal=Journal of Economic Surveys |volume=15 |issue=5 |pages=589–611 |doi=10.1111/1467-6419.00150 |issn=0950-0804}}</ref><ref>{{Cite journal |last1=Heyman |first1=James |last2=Ariely |first2=Dan |date=November 2004 |title=Effort for Payment |journal=Psychological Science |volume=15 |issue=11 |pages=787–793 |doi=10.1111/j.0956-7976.2004.00757.x |pmid=15482452 |s2cid=8573184 |issn=0956-7976}}</ref> When a monetary reward is attached to an otherwise prosocial activity such as volunteering, people may perceive that their originally altruistic actions are now linked to extrinsic incentives,<ref name=":10">{{Cite journal |last1=Bolle |first1=Friedel |last2=Otto |first2=Philipp E. |date=February 2010 |title=A Price Is a Signal: on Intrinsic Motivation, Crowding-out, and Crowding-in |journal=Kyklos |volume=63 |issue=1 |pages=9–22 |doi=10.1111/j.1467-6435.2010.00458.x |s2cid=154039981 |issn=0023-5962}}</ref> causing their [[self-image]] benefit<ref>{{Cite journal |last1=Brekke |first1=Kjell Arne |last2=Kverndokk |first2=Snorre |last3=Nyborg |first3=Karine |date=September 2003 |title=An economic model of moral motivation |journal=Journal of Public Economics |volume=87 |issue=9–10 |pages=1967–1983 |doi=10.1016/s0047-2727(01)00222-5 |issn=0047-2727|hdl=10419/192272 |hdl-access=free }}</ref> and prosocial motivation to decrease.<ref>{{Cite journal |last1=Qiao |first1=Dandan |last2=Lee |first2=Shun-Yang |last3=Whinston |first3=Andrew B. |last4=Wei |first4=Qiang |date=2021-01-02 |title=Mitigating the Adverse Effect of Monetary Incentives on Voluntary Contributions Online |journal=Journal of Management Information Systems |language=en |volume=38 |issue=1 |pages=82–107 |doi=10.1080/07421222.2021.1870385 |s2cid=232765666 |issn=0742-1222}}</ref> A crowding-out effect leads to a decrease in individuals’ desire to volunteer and people eventually stop contributing due to the rewards attached. For example, if monetary incentives are offered for voluntary blood donation, it will have a negative effect on the number of people donating blood.<ref name=":10" />
-== Incentives in education ==
+== Philanthropy and charity ==
+When it comes to volunteering activities, monetary incentives can bring [[disincentive|negative effects]]. According to the [[self-perception theory]], humans constantly seek explanations for their behavior.<ref>{{cite book |last=Bem |first=Daryl J. |chapter=Self-Perception Theory |date=1972 |doi=10.1016/s0065-2601(08)60024-6 |editor=Leonard Berkowitz |title=Advances in Experimental Social Psychology |volume=6 |pages=1–62 |publisher=Academic Press |isbn=978-0-12-015206-3}}</ref> When individuals are involved in volunteering activities, they most likely perceive themselves as prosocial and altruistic, and attach a symbolic price to the act of volunteering.<ref>{{Cite journal |last1=Frey |first1=Bruno S. |last2=Jegen |first2=Reto |date=December 2001 |title=Motivation Crowding Theory |journal=Journal of Economic Surveys |volume=15 |issue=5 |pages=589–611 |doi=10.1111/1467-6419.00150 |issn=0950-0804}}</ref><ref>{{Cite journal |last1=Heyman |first1=James |last2=Ariely |first2=Dan |date=November 2004 |title=Effort for Payment |journal=Psychological Science |volume=15 |issue=11 |pages=787–793 |doi=10.1111/j.0956-7976.2004.00757.x |pmid=15482452 |s2cid=8573184 |issn=0956-7976}}{{Expression of Concern|doi=10.1177/09567976211035782|pmid=34296633|http://retractionwatch.com/?s=statcheck ''Retraction Watch''|http://retractionwatch.com/2021/07/29/prominent-behavioral-scientists-paper-earns-an-expression-of-concern/ ''Retraction Watch''}}</ref> When a monetary reward is attached to an otherwise prosocial activity such as volunteering, people may perceive that their originally altruistic actions are now linked to extrinsic incentives,<ref name=":10">{{Cite journal |last1=Bolle |first1=Friedel |last2=Otto |first2=Philipp E. |date=February 2010 |title=A Price Is a Signal: on Intrinsic Motivation, Crowding-out, and Crowding-in |journal=Kyklos |volume=63 |issue=1 |pages=9–22 |doi=10.1111/j.1467-6435.2010.00458.x |s2cid=154039981 |issn=0023-5962}}</ref> causing their [[self-image]] benefit<ref>{{Cite journal |last1=Brekke |first1=Kjell Arne |last2=Kverndokk |first2=Snorre |last3=Nyborg |first3=Karine |date=September 2003 |title=An economic model of moral motivation |journal=Journal of Public Economics |volume=87 |issue=9–10 |pages=1967–1983 |doi=10.1016/s0047-2727(01)00222-5 |issn=0047-2727|hdl=10419/192272 |hdl-access=free }}</ref> and prosocial motivation to decrease.<ref>{{Cite journal |last1=Qiao |first1=Dandan |last2=Lee |first2=Shun-Yang |last3=Whinston |first3=Andrew B. |last4=Wei |first4=Qiang |date=2021-01-02 |title=Mitigating the Adverse Effect of Monetary Incentives on Voluntary Contributions Online |journal=Journal of Management Information Systems |language=en |volume=38 |issue=1 |pages=82–107 |doi=10.1080/07421222.2021.1870385 |s2cid=232765666 |issn=0742-1222}}</ref> A crowding-out effect leads to a decrease in individuals' desire to volunteer and people eventually stop contributing due to the rewards attached. For example, if monetary incentives are offered for voluntary blood donation, it will have a negative effect on the number of people donating blood.<ref name=":10" />
-Extrinsic incentives offered to unmotivated students can potentially have positive short-run effects on education.<ref name="auto5" /> However, the use of extrinsic incentives in education has been opposed on the basis that they are morally corrupt and have the potential to crowd out intrinsic incentives for educational effort.<ref name="auto5" /> Furthermore, there is scarce empirical evidence to support the success of monetary incentives awarded for educational ''outputs'' such as academic achievement as opposed to educational ''inputs'' such as attendance and enrolment.<ref>{{Cite journal |last=Fryer |first=Roland |date=November 2011 |title=Financial Incentives and Student Achievement: Evidence from Randomized Trials |doi=10.1093/qje/qjr045 |journal=The Quarterly Journal of Economics |volume=126 |issue=4 |pages=1758 |doi-access=free}}</ref>
+== Education ==
-The dynamic effects of incentives are evident in the context of education. Studies have demonstrated that the impact of monetary incentives is dependent on previous academic performance and individual ability.<ref name=":12">{{Cite journal |author1=Leuven, E. |author2=Osteerbeck, H. |author3=van der Klaauw, B. |date=2010 |title=The Effect of Financial Rewards on Students' Achievement: Evidence from a Randomized Experiment |journal=Journal of the European Economic Association |volume=8 |issue=6 |pages=1259}}</ref> Monetary incentives tend to improve the academic results of high-ability students but have an adverse effect on the performance of students with lower aptitude.<ref name=":12" />
+Extrinsic incentives offered to unmotivated students can potentially have positive short-run effects.<ref name="auto52"/> However, the use of extrinsic incentives in education raises issues of morality and corruption, and have the potential to crowd out intrinsic incentives.<ref name="auto52"/> Empirical evidence also largely supports the success of monetary incentives in improving educational ''inputs'' such as attendance and enrolment, but not educational ''outputs'' such as academic achievement.<ref>{{Cite journal |last=Fryer |first=Roland |date=November 2011 |title=Financial Incentives and Student Achievement: Evidence from Randomized Trials |journal=The Quarterly Journal of Economics |volume=126 |issue=4 |page=1758 |doi=10.1093/qje/qjr045 |doi-access=free}}</ref>
+Studies have demonstrated that the impact of monetary incentives is dependent on previous academic performance and individual ability.<ref name=":12">{{Cite journal |author1=Leuven, E. |author2=Osteerbeck, H. |author3=van der Klaauw, B. |date=2010 |title=The Effect of Financial Rewards on Students' Achievement: Evidence from a Randomized Experiment |journal=Journal of the European Economic Association |volume=8 |issue=6 |page=1259}}</ref> Monetary incentives tend to improve the academic results of high-ability students but have an adverse effect on the performance of students with lower aptitude.<ref name=":12" />
-== Conclusion ==
-Ultimately, there is always potential for conflicts to arise, both in the short and in the long run, during the application of incentives in different areas, as incentives that seek to change behaviors can crowd-out intrinsic motivators. A growing pool of evidence suggests that economists must broaden their focus when exploring the effects of incentives as the effect they have is largely dependent on how they are designed and specifically how they interact with intrinsic and social motivators in the short run and the long run.<ref name=":14">{{cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |date=Fall 2011 |volume=25 |issue=4 |page=206 |doi=10.1257/jep.25.4.191 |doi-access=free}}</ref>
-==See also==
+== See also ==
 {{Wiktionary|incentive}}
 {{Div col|colwidth=18em}}
@@ Line 137: / Line 100: @@
 * [[Incentivisation|Incentivization]]
 * [[Investment incentive]]
+* [[Laffer Curve]]
 * [[Long-term incentive plan]]
 * [[Loyalty marketing]]
@@ Line 166: / Line 130: @@
 [[Category:Motivation]]
 [[Category:Macroeconomics]]
+[[Category:Incentives| ]]

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