Literature Review Academic Skills - The effect of monetary incentives on the productivity and - Studeersnel (2024)

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The effect of monetary incentives on the productivity and

creativity of employees

Literature reviewAnouk BeerepootInternational Business AdministrationLiterature reviewCourse: Academic SkillsTutorial teacher: Selen Oskan1 - 02 - 2021VunetId: abtStudent number: 2699701

The effect of monetary incentives on the productivity and

creativity of employees

IntroductionLarge numbers of employees have episodes of boredom at work. Boredom has a negative impact on anemployee’s job satisfaction and productivity, accordingly the company they work for is at a loss (Fisher,1991). To prevent the decrease in net profit due to failure of output, organizations use various reward orcompensation systems which boost the effort of employees with an overall higher productivity as desiredresult (Lazear, 1996). This literature review focusses on one type of reward system: monetary incentives.The stimulating system implies that employees receive a reward for their performance or productivity inmeans of piece rates, pay raise, bonusses, sharing profits etc. (Bhasin, 2017). Nowadays, knowledge-intensive organizations are on the rise and the constant need for innovation is growing. Hence, not onlyhigh productivity is crucial, the skill to think creatively sets the new standard for business processes(Chang & Birkett, 2004). Companies want to realize high productivity parallel with creative performance,so the option of an extra hand to maximize full employee potential is thought provoking. Monetaryincentives are therefore frequently considered by companies; nonetheless, it’s crucial to understand theimpact of these motivators (Lazear, 1996). Thus, this paper focusses on the question: what is the effect ofmonetary incentives on the productivity and creativity of employees?By investigating a situation with piece rate and competitive incentives prominent researchers have foundhigher rates of effort in comparison to a base-line condition with no monetary incentives. Theirexperiment, on the other hand, did not lead to an outcome in regard to employee creativity (Erat &Gneezy, 2015). Accordingly, John A Morningstar concluded the following in his research paper: “What is known is that when it comes to creativity, if people are asked to clearly find creative solutions, those with financial drives improve their performance; however, better results are achieved if intrinsic motivators are used instead” (Morningstar, 2012).Further, prior research focused on the effects of money in relation to Herzberg’s motivation-hygienetheory in the Malaysian retail sector. The outcome concluded intrinsic motivation (natural motivation)and extrinsic motivation (monetary rewards) to be effectively motivating the researched workers (Tan &Waheed, 2011). Prior research is limited as many papers researching the likewise subject focus single-sided on quantitative research. Further research should be done by collecting and analyzing non-numerical data known as qualitative research (Scribbr, sd). Hereby, researchers could study the actualmotivation behind the performance and creativity-enhancing attitude of monetary incentives instead of

Today the most widely accepted used assessment of creative thinking is the Torrance Tests of CreativeThinking (Torrance, 1974) which sets divergent thinking as the base for creativity (Sternberg, 2006). Asstated in the introduction, creative thinking has become a desired trait of employees. The ability to thinkcreatively provokes to the invention of new ideas, perspectives, concepts, principles and products(Mossing, 2013). Besides creative thinking, productivity is one of the most crucial factors that guides theproduction process of companies. It defines the relation between output and input, in other words; to whatdegree are available resources utilized (Tangen, 2002). The dissimilar definition of both constructs isconspicuous. However, there is to be realized that research by Shalley (1991), Clements-Croome (2015)and Saravanakumar (2020) and more has shown both contradictory and positive links between beingproductive and creative at work.In the context of the Cognitive Evaluation Theory we can identify monetary incentives as an extrinsicmotivator since it is a stimulating reward attempting to increase valuable outcome. It also states that theintroduction of monetary incentives has a negative impact on the intrinsic motivation of an employeecompleting a task (Deci & Ryan, 1985). Having positive intrinsic motivation is the bases to thinkingcreatively, suggesting that a loss of intrinsic motivation would imply a loss of creativity (Collins &Amabile, 1999). Therefore Deci and Ryan’s Cognitive Evaluation Theory indicates that the effect ofmonetary incentives is unfavorable for creative thinking. Further, Deci mentioned the following in hisarticle Intrinsic Motivation, Extrinsic Reinforcement, and Inequity regarding a case where a man wasrewarded with money : “... so the high performance predicted in the first case would occur because of inequity in his own mind, not because intrinsic motivation increased. This additional performance would last only until equity was restored” (Deci, 1972).Deci suggests that the high performance (representing the productivity) is a result of the inequity in themind arising from the feeling of having to perform higher when a reward is given. This feeling ensues therise of productivity to restore the equilibrium of input and output. Accordingly, taking the CognitiveEvaluation Theory in mind, monetary rewards would have an increasing effect on productivity.Prior research focusing on the relationship between extrinsic rewards and productivity has shown that thehigher the willingness of employees to be maximally productive the higher the outcome of theorganization. Accordingly, reward system management is said to help increase this readiness. By the useof an experiment, researchers concluded that the productivity of routine workers increased when theyreceived rewards for faster and better performance (Danish, Khan, Shahid, Raza, & Humayon, 2015).However, not all employees have a routine occupation. When looking at a factory worker who performs a

changeless task, the motivation to do it the best or quickest determines the outcome. In this case, as aresult of the previously mentioned research, it is valid to say monetary incentives have a positive effect onthe productivity of routine workers. When looking at other personnel (where the value of the outcome ismuch more reliant on the performance of the worker) recent studies have shown that different forms ofmonetary incentives are more effective than an increase of salary. This refers to New Pay for PerformanceCompensation, a new technique of rewarding employees who are more knowledge and process-based andwork at network organizations defining many of the employees worldwide (Luthans & Stajkovic, 1999).The following was stated in their research paper: “New pay goes beyond rewarding the number of products, services or sales revenues and profits. It puts monetary rewards on customer service, leadership, employee satisfaction, cycle time, quality, teams, skills, and competencies” (Luthans & Stajkovic, 1999).By the use of an experiment, prior research has likewise shown that employee benefits indeed increase theproductivity by 7,9%. However, the effect of the monetary incentives is stronger in the manufacturingindustry than the non-manufacturing industry. An explanation for this is the difference between routinizedwork in the manufacturing industry and more knowledge-intensive labor in the non-manufacturingindustry. To motivate the knowledge and process-based employees further, new ways of nonmonetaryincentives or more indirect forms of employee benefits should be used like the New Pay for PerformanceCompensation method (Lee, Yu, & Kang, 2016). All in all, research and it’s additional data has statedmonetary incentives to be effective in increasing the productivity, however, the effect of the monetaryincentives is higher in certain parts of the industry. So, according to the researched data assessed in thisliterature review monetary incentives increase the productivity of employees.Employee creativity has become significantly important for innovation processes, effective labor and inthe end the survival of an organization. Therefore one of the main priorities of managers is to keepmotivating employees to be creative in their thinking process. Introducing extrinsic reward systems hasbeen a favorable way to encourage employees to be at their best, however, the question whether it alsoboosts creativity has been the center of abundant research (Amabile, 1996). A study on rewards andcreative performance (which carried out an experiment to collect data on the specific subject) has statedthat nonmonetary incentives tend to motivate employees more to be creative than extrinsic rewards. Theresults of the experiment also concluded the use of financial rewards based on performance or completionof the task to be demotivating. The research participants of the experiment were on the other handworkers who were not completing routinized tasks but tasks that require more creativity and knowledge(Baer, Oldham, & Cummings, 2003). Further research has pointed out the distinction between motivatingroutinized workers and motivating creative workers. According to the supplementary experiment,

Appendix

List of references

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Luthans, F., & Stajkovic, A. D. (1999). Reinforce for performance: the need to go beyond pay and even rewards. The Academy of Management Executive.Mitchel, T. R., & Mickel, A. E. (1999). The Meaning of Money: An Individual-Difference Perspective. The Academy of Management Review.Morningstar, J. A. (2012). Drives, Performance, Creativity and Introversion in the Workplace. Munich Personal RePEc Archive.Mossing, S. (2013). The Importance of Creative Thinking and the Arts in Education. Honors Project.Saravanakumar, A. (2020). Life Skill Education for Creative and Productive Citizens. Journal of Critical Reviews.Scribbr. (n.). What is Qualitative Research? Retrieved from Scribbr: scribbr/methodology/qualitative-research/Shalley, C. (1991). Effects of productivity goals, creativity goals, and personal discretion on individual creativity. Journal of Applied Psychology.Sternberg, R. J. (2006). The Nature of Creativity. Creativity Research Journal.Tan, T., & Waheed, A. (2011). Herzber's motivation-hygiene theory and job satisfaction in the malaysian retail sector: the mediating effect of love of money. Asian Acadamey of Management Journal.Tangen, S. (2002). Understanding the concept of productivity. Asia Pacific Industrial Engineering and Management Systems Conference. The Royal Institute of Technology.Torrance, E. (1974). The Torrance Tests of Creative Thinking: Norms-Technical Manual. Personal Press.Zhou, Y., Zhang, Y., & Montoro-Sanchez, A. (2011). Utilitarianism or romanticism: the effect of rewards on employee's innovative behaviour. International Journal of Manpower.