Economic Theory X and Theory Y

Theory X and Theory Y
In his 1960 book, The Human Side of Enterprise, Douglas McGregor proposed two theories by which to view employee motivation. He avoided descriptive labels and simply called the theories Theory X and Theory Y. Both of these theories begin with the premise that management's role is to assemble the factors of production, including people, for the economic benefit of the firm. Beyond this point, the two theories of management diverge.

Theory X
Theory X assumes that the average person: Dislikes work and attempts to avoid it. Has no ambition, wants no responsibility, and would rather follow than lead. Is self-centered and therefore does not care about organizational goals. Resists change. Is gullible and not particularly intelligent. Essentially, Theory X assumes that people work only for money and security.

Theory X - The Hard Approach and Soft Approach
Under Theory X, management approaches can range from a hard approach to a soft approach. The hard approach relies on coercion, implicit threats, close supervision, and tight controls, essentially an environment of command and control. The soft appoach is to be permissive and seek harmony with the hope that in return employees will cooperate when asked to do so. However, neither of these extremes is optimal. The hard approach results in hostility, purposely low-output, and hard-line union demands. The soft approach results in ever-increasing requests for more rewards in exchange for everdecreasing work output.

The optimal management approach under Theory X probably would be somewhere between these extremes. However, McGregor asserts that neither approach is appropriate because the assumptions of Theory X are not correct.

The Problem with Theory X
Drawing on Maslow's hierarchy, McGregor argues that a satisfied need no longer motivates. Under Theory X the firm relies on money and benefits to satisfy employees' lower needs, and once those needs are satisfied the source of motivation is lost. Theory X management styles in fact hinder the satisfaction of higher-level needs. Consequently, the only way that employees can attempt to satisfy their higher level needs in their work is by seeking more compensation, so it is quite predictable that they will focus on monetary rewards. While money may not be the most effective way to self-fulfillment, in a Theory X environment it may be the only way. Under Theory X, people use work to satisfy their lower needs, and seek to satisfy their higher needs in their leisure time. But it is in satisfying their higher needs that employees can be most productive.

McGregor makes the point that a command and control environment is not effective because it relies on lower needs as levers of motivation, but in modern society those needs already are satisfied and thus no longer are motivators. In this situation, one would expect employees to dislike their work, avoid responsibility, have no interest in organizational goals, resist change, etc., thus making Theory X a self fulfilling prophecy. From this reasoning, McGregor proposed an alternative: Theory Y.

Theory Y
The higher-level needs of esteem and self-actualization are continuing needs in that they are never completely satisfied. As such, it is these higher-level needs through which employees can best be motivated.

Theory Y makes the following general assumptions: Work can be as natural as play and rest. People will be self-directed to meet their work objectives if they are committed to them. People will be committed to their objectives if rewards are in place that address higher needs such as self-fulfillment. Under these conditions, people will seek responsibility. Most people can handle responsibility because creativity and ingenuity are common in the population.

Under these assumptions, there is an opportunity to align personal goals with organizational goals by using the employee's own quest for fulfillment as the motivator. McGregor stressed that Theory Y management does not imply a soft approach. McGregor recognized that some people may not have reached the level of maturity assumed by Theory Y and therefore may need tighter controls that can be relaxed as the employee develops.

Theory Y Management Implications
If Theory Y holds, the firm can do many things to harness the motivational energy of its employees:

Decentralization and Delegation - If firms decentralize control and reduce the number of levels of management, each manager will have more subordinates and consequently will be forced to delegate some responsibility and decision making to them. Job Enlargement - Broadening the scope of an employee's job adds variety and opportunities to satisfy ego needs. Participative Management - Consulting employees in the decision making process taps their creative capacity and provides them with some control over their work environment. Performance Appraisals - Having the employee set objectives and participate in the process of evaluating how well they were met.

If properly implemented, such an environment would result in a high level of motivation as employees work to satisfy their higher level personal needs through their jobs.

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