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How Might We Motivate Employees? Answers from Economics and Psychology

Jul 10 2023 • 3 min read

Imagine that you founded a company a few years ago and now find yourself grappling with a difficult question: how might I continue to motivate my employees?

You turn to your trusty co-founders: Erin (who has an economics background) and Paolo (who studied psychology at university). And you soon learn that they have very different ideas which, when taken together, provide some insightful answers to your question.

Erin (the economist) highlights the importance of incentives, which she defines as tools that encourage people to take a desired action. According to this definition, salaries, bonuses, and other financial rewards all count as incentives, and all influence employee motivation.

But Erin is at pains to point out that many factors influence the motivational effect of incentives. As a result, they need to be carefully designed to ensure that they send the appropriate message to employees.

Giving someone a reward of £250 in recognition of an excellent piece of work, for example, might prove highly motivating for that person. Whereas increasing their salary from £30,000 to £30,250 might have the opposite of the intended effect (given the negligible relative increase).

The same £250 reward might also demotivate an employee if their colleague receives a £500 reward for a similar piece of work. Or it might focus employees’ attention so much that it results in unethical behaviour (as when Wells Fargo employees were incentivised to open customer accounts, which resulted in a $185m fine after some 2 million accounts were opened without customers’ permission).

Erin explains that team-based incentives can mitigate some of these risks (although they also have certain limitations). One example would be calculating annual bonuses according to the performance of the organisation as a whole, rather than individual achievement of specific objectives. Another would be asking the recipient of a £250 reward to spend a portion of it on a colleague who has helped them to achieve the goal they are being rewarded for. Both of these schemes are in place at CogCo.

Paolo (the psychologist) agrees that incentives can be an effective motivational tool, but says there are many other factors that influence our motivation at work that are worth paying attention to. He refers to certain core human needs such as autonomy (having a sense of control); belonging (feeling connected to others); competence (developing our skills); and meaning (positively impacting the lives of others).

So in addition to thinking about different forms of incentives, Paolo suggests considering how to create a working environment that supports employees to fulfil these needs. Giving greater autonomy might, for example, mean trusting more junior colleagues to lead important projects. Focusing on competence and meaning might mean giving all staff the opportunity to develop new skills or to pursue a project that they are particularly passionate about.

In summary, when it comes to the question of motivating employees, Erin and Paolo’s ideas highlight the need to think carefully about both the tangible and intangible factors that influence people’s motivation at work. But perhaps overall they demonstrate the need to draw on insights from different disciplines when addressing this difficult question.

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