An Incentive or bonus is
something that motivates an individual to perform an action. The study of
incentive structures is central to the study of all economic activities (both
in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Economic analysis,
then, of the differences between societies (and between different organizations
within a society) largely amounts to characterizing the differences in incentive structures faced
by individuals involved in these collective efforts. Ultimately, incentives aim
to provide value for money and contribute to organizational success.
They can be classified according to the different ways in which they motivate agents to take
a particular course of action. The
different categories are following:
|
Class
|
Definition
|
|
Remunerative incentives
|
are said to exist where an agent can expect some
form of material reward – especially money – in exchange for acting in a
particular way.
|
|
Financial
incentives
|
|
|
Moral incentives
|
are said to
exist where a particular choice is widely regarded as the right thing
to do, or as particularly admirable, or where the failure to act in a
certain way is condemned as indecent. A person acting on a moral incentive
can expect a sense of self-esteem, and approval or even admiration from his
community; a person acting against a moral incentive can expect a sense of
guilt, and condemnation or even ostracism from
the community.
|
|
Coercive
incentives
|
are said to
exist where a person can expect that the failure to act in a particular way
will result in physical force being used against them (or
their loved ones) by others in the community – for example, by inflicting
pain in punishment, or by imprisonment, or by confiscating or destroying
their possessions.
|
|
Natural
Incentives
|
It's also worth noting that these categories are not
necessarily exclusive; one
and the same situation may, in its different aspects, carry incentives that
come under any or all of these categories. In modern American society, for example, economic prosperity and social esteem
are often closely intertwined; and when the people in a culture tend to admire those who are
economically successful, or to view those who are not with a certain amount of contempt prospect of (for
example) getting or losing a job carries not only the obvious remunerative incentives (in terms of the effect on
the pocketbook) but also substantial moral
incentives (such as honor and
respect from others for those who hold down steady work, and disapproval or
even humiliation for those who don't or can't).
Incentive and bonus structures, however, are notoriously
trickier than they might appear to people who set them up. Human beings are
both finite and creative; that means that the people offering incentives are
often unable to predict all of the ways that people will respond to them. Thus,
imperfect knowledge and unintended consequences can often make incentives much more complex than the
people offering them originally expected, and can lead either to unexpected windfalls or to disasters produced by unintentionally perverse incentives.
For example, decision-makers in for-profit firms often
must decide what incentives they will offer to employees and managers to
encourage them to act in ways beneficial to the firm. But many corporate policies – especially of the "extreme
incentive" variant popular during the 1990s – that aimed to encourage
productivity have, in some cases, led to failures as a result of unintended
consequences. For example, stock options were
intended to boost CEO productivity by offering a remunerative incentive
(profits from rising stock prices) for CEOs to improve company performance. But
CEOs could get profits from rising stock prices either (1) by making sound
decisions and reaping the rewards of a long-term price increase, or (2) by
fudging or fabricating accounting information to give the illusion of economic
success, and reaping profits from the short-term price increase by selling
before the truth came out and prices tanked.
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