Motivation — A Dual-Edged Factor of Production

Employees may work hard for one of two reasons: because they are interested in the work itself (intrinsic motivation) or because they are being paid (extrinsic motivation). These two forms of motivation are interlinked and, as such, companies cannot opt for one or the other in isolation. Under certain circumstances, an extrinsic incentive in the form of variable performance-related pay will undermine intrinsic motivation. This “crowding-out effect” can be clearly illustrated by means of examples. It is also a well-documented phenomenon in economic research, proven in laboratory experiments, field studies and econometric analyses. The crowding out of intrinsic motivation in a work context can be explained by the reduction in self-determination that often accompanies variable performance-related pay and the breaking of a “psychological contract” based on mutual trust.

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