Intrinsic vs. Extrinsic Incentivation – How to Motivate Successfully?

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Intrinsic vs. Extrinsic Incentivation – How to Motivate Successfully?

Extrinsic Motivation

Moving on to describing and assessing external incentivation, almost all measures, depending on the definition used, can be summed up under one term: ‘money’. Whether it is the base salary, the bonus, the commission, the pension plan, health benefits, or the company car – it all can be boiled down to a monetary value that is provided to the individual by an external entity. The aim of theses monetary rewards is to refund the individual for the efforts he is taking on in pursuing a goal on someone else behave and motivating him to do that in an efficient and effective way to his best means. This is the playground of classical principal-agent theory and has become one of the main research fields in motivation research. The goals of company owners, management, and the firm itself have to be aligned with the personal goals of each individual to create a consistent frame for activities. Controlling and reducing the ‘agency costs’ inherent in the principle-agent relationship to a minimum is a key aim of external incentivation. Beside intrinsic motivation, which was discussed in the previous section, external incentivation is especially prominent in the context of managing a sales force as the principal-agent conflict is strong in these settings (Basu, Lal, Srinivasan, & Staelin, 1985). One important reason for this connection is the relative detachedness of the sales representatives ‘on the road’ from the rest of the organization. However, the transaction based nature of the sales process also makes it easy to track and reward performance, which in turn is one important instrument in handling the problem. The obvious question that large amounts of research have dealt with is, how to archive the alignment of interest, the transformation of external goals into personal goals of the individual, by using external incentivation in a meaningful and most efficient way. In the next paragraphs we will provide a brief overview of the research results aiming at answering this question and give some practical insights into how to apply these findings in practice.

Principal-Agent Theory

Principal-agent theory in principal discusses problems arising in settings where a person X, the principal, hires person Y, the agent, to perform a task that is in the interest of person X. If this task is for some reason not in the interest of person Y as well, he has an incentive to deviate from performing the task in the way intended by the principal. In theory the principal could deal with this problem by writing a complete contract specifying that the agent is receiving a payment, which is higher than the agent’s alternative choices, for performing the task as intended by principal and in all other cases the agent receives nothing. The underlying problem now becomes obvious when we consider that, first, there is nothing like a complete contract in real live and not all possible states of nature in the future can be captures already in a contract today and second,

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