Economic Models of Employee Motivation
SEPTEMBER/OCTOBER 1997
Joseph A. Ritter is a research officer at the Federal Reserve Bank of St. Louis. Lowell J. Taylor is an associate professor at the Heinz School of Public Policy and Management, Carnegie Mellon University. Eran Segev and Joshua D. Feldman provided research assistance.
Economic Models of Employee Motivation
Joseph A. Ritter Lowell J. Taylor
use the terms “wage” and “compensation” interchangeably throughout the article) high enough to deter undesirable behavior by making a job too good to lose are said to pay efficiency wages. It is fairly easy to see whether a firm is using some sort of piece rate plan. There is quite a bit of controversy, however, about whether firms that do not use piece rates adopt efficiency-wage or performancebonding plans. We follow our overview with a discussion of the nature of the evidence supporting the different models.
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o most people it is a common sense proposition that hiring workers is a trickier problem than buying ballpoint pens. It is often difficult to find the right worker to hire, and workers who have already been hired can quit, steal, be hung over, refuse to cooperate with other workers, or simply not work very hard. In some workplaces some of these problems are relatively easy to solve, either by direct supervision or by directly linking pay to production. In general, however, things like ability, effort, and honesty are difficult to verify and consequently present special problems for personnel managers and economic theorists. The ways firms solve the problems of selecting, motivating, and retaining employees are potentially interesting to a wide cross-section of economists because they can affect how labor markets function and, therefore, how the entire economy operates. This article presents an overview of economists’ main hypotheses about the compensation strategies businesses use to address these kinds of problems. Broadly speaking, these solutions fall into three categories (with
Joseph A. Ritter is a research officer at the Federal Reserve Bank of St. Louis. Lowell J. Taylor is an associate professor at the Heinz School of Public Policy and Management, Carnegie Mellon University. Eran Segev and Joshua D. Feldman provided research assistance.
Economic Models of Employee Motivation
Joseph A. Ritter Lowell J. Taylor
use the terms “wage” and “compensation” interchangeably throughout the article) high enough to deter undesirable behavior by making a job too good to lose are said to pay efficiency wages. It is fairly easy to see whether a firm is using some sort of piece rate plan. There is quite a bit of controversy, however, about whether firms that do not use piece rates adopt efficiency-wage or performancebonding plans. We follow our overview with a discussion of the nature of the evidence supporting the different models.
T
o most people it is a common sense proposition that hiring workers is a trickier problem than buying ballpoint pens. It is often difficult to find the right worker to hire, and workers who have already been hired can quit, steal, be hung over, refuse to cooperate with other workers, or simply not work very hard. In some workplaces some of these problems are relatively easy to solve, either by direct supervision or by directly linking pay to production. In general, however, things like ability, effort, and honesty are difficult to verify and consequently present special problems for personnel managers and economic theorists. The ways firms solve the problems of selecting, motivating, and retaining employees are potentially interesting to a wide cross-section of economists because they can affect how labor markets function and, therefore, how the entire economy operates. This article presents an overview of economists’ main hypotheses about the compensation strategies businesses use to address these kinds of problems. Broadly speaking, these solutions fall into three categories (with
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