RSM465 Midterm Review
WEEK 1: INTRODUCTION
What motivates people? Pay with performance link, recognition, advancement, training
Positive Psychology: 3 types of happiness
1. Pleasant life – Money and material goods; eventually dies out
2. Good life – doing things, being engaged
3. Meaningful life – achieve things, religion
Rewarding A, while Hoping for B (S. Kerr)
Politics – operative/specific goals are wanted, but vague/crowd-pleasing goals are rewarded (with
Medicine – labelling a sick person well or a well person sick…they are more prone to overemphasize the
symptoms of a well person (which is not compatible with morality)
Professors – promotions based on research, not teaching
Sports – coaches like to talk about teamwork, but individual stats are used for rewards and pay
Business – often seek long term growth, but reward quarterly earnings
We overemphasize objective, highly visible, and easily quantifiable behaviours in rewards. There is
hypocrisy because defense attorneys fund US judge’s campaigns, not prosecutors, which make
them less tough on crime. We also emphasize morality or equality rather than efficiency.
3 Types of Motivation
Basic motivation for survival
Motivation based on rewards and punishments, such as carrot and stick approaches (work for
Intrinsic motivation, which allows you to do things for the satisfaction of simply doing them,
conducive to creativity, generates the most long term happiness
According to Daniel Pink, motivation comes from Autonomy, Mastery, and Purpose. Autonomy is our
desire to be self-directed. Mastery is the urge to get better at stuff – look for challenges. Purpose –
have a goal. If-then rewards are incentives that only work for mechanical tasks, but not cognitive
ones. For cognitive ones, offer praise and feedback, as well as autonomy.
Agency Theory – resolving principal and agent problemsThe two problems that agency theory
addresses are: 1.) the problems that arise when the desires or goals of the principal and
agent are in conflict, and the principal is unable to verify (because it difficult and/or
expensive to do so) what the agent is actually doing; and 2.) the problems that arise
when the principal and agent have different attitudes towards risk.
Psychology Process Theories - deal with the “process” of motivation and is concerned with “how” motivation occurs
(expectancy, goal setting)
Content Theories - why human needs change over time, and explains what DRIVES behaviour (X and Y
Theory, ERG theory (Existence, Relationship, and Growth).
Lecture 2: Incentive and Motivation at Work
Productivity – the ratio of output per unit of input
How to Improve It:
1. Scientific Management – standardization of steps, time-motion studies, piece rate and
2. Financial Control (incentives)
3. Human Relations (work environment)
The Hawthorne effect — an increase in worker productivity produced by the psychological stimulus of
being singled out and made to feel important.
The aptitudes of individuals are imperfect predictors of job performance. Although they give some
indication of the physical and mental potential of the individual, the amount produced is strongly
influenced by social factors.
Informal organization affects productivity. The Hawthorne researchers discovered a group life among
the workers. The studies also showed that the relations that supervisors develop with workers tend
to influence the manner in which the workers carry out directives.
Work-group norms affect productivity. The Hawthorne researchers were not the first to recognize that
work groups tend to arrive at norms of what is a fair day's work; however, they provided the best
systematic description and interpretation of this phenomenon.
The workplace is a social system. The Hawthorne researchers came to view the workplace as a social
system made up of interdependent parts.
Does Money Motivate Employees?
Amount of money and relative size matters.
In marketing, the decoy effect (or asymmetric dominance effect) is the phenomenon whereby
consumers will tend to have a specific change in preference between two options when also
presented with a third option that is asymmetrically dominated. An option is asymmetrically
dominated when it is inferior in all respects to one option; but, in comparison to the other option, it
is inferior in some respects and superior in others.
Non-Monetary Rewards/Social Norms
Market Norm & Social Norm
◦ Employee incentives
Purpose of Gift
◦ Employee Benefits
Social Norms takes longer time to establish
◦ Israel daycare experiment Freakonomics: Why Gangs Live with their Mothers
A crack gang works pretty much like the standard capitalist enterprise: You have to be near the top of
the pyramid to make a big wage. But selling crack is a lot more dangerous than most menial labor.
Anyone who was a member of J. T.'s gang for the four years covered in the notebooks stood a 1-in-4
chance of being killed. That's more than five times as deadly as being a timber cutter, which the Bureau
of Labor Statistics calls the most dangerous job in the United States.
Why Incentive Plans Cannot Work (Alfie Kohn)
Incentives do not alter the attitudes that underlie behaviours, and only work temporarily. In a study
done, quality of performance were not affected by incentive plans. At a manufacturing firm, when
incentive plans were taken away, productivity dropped at first, but came back to original levels. The
true costs of incentives are:
1. Pay is not a motivator – doubling pay does not increase performance, especially if the task is
cognitive in nature
2. Rewards punish – by making bonuses contingent on certain actions, workers feel controlled. Not
receiving a reward that you expected is punitive
3. Reward rupture relationships – people care too much about individual gain, less collaboration
and more competition. Workers attempt to hide problems
4. Rewards ignore reasons –
5. Rewards discourage risk taking – instead of exploring possibilities, they do exactly what they are
required to do and not more
6. Rewards undermine interest – rewards cannot replace true interest in a job. Using money
undermines intrinsic interest.
Getting More Bang for Buck (Mickel and Barron)
Monetary rewards require symbolic meaning to increase the perceived value of rewards and increase
Symbolism for money: : (a) achievement and recognition, (b) status and respect, (c) freedom and
control, and (d) power.
The distribution process can induce value: WHO distributes the reward (if it’s the CEO, then the value
increases). Why the reward is given (for big accomplishments = intrinsic). HOW they’re distributed (
ceremonial awards where the public can see is more meaningful).
Whom is receiving it (the number of ranks of people).
Perception of fairness doesn’t affect symbolic meaning, but organizational outcomes. Six Myths about Pay (Jeff Pfeffer): Not True!
1. Labour rates and labour costs are not the same thing (no, because it depends on productivity)
2. Cut labour costs by cutting rates
3. Labour costs are a signficiant portion of total costs
4. Low labour cost is the only competitive strategy
5. Most effective motivator is individual incentive compensation
6. People work for money
Why do they exist? Compensation consulting firms, and that it’s simpler to tweak compensation than to
change the culture of the business.
Explanation of Myth #1 and Myth #2: A labor rate is total salary paid to the labor force divided by total
time worked by them. But, labor costs take productivity into account, besides the total amount paid
to the labor force. Thus, labor rates and labor costs are different. For example, consider two
companies X and Y that are in the same business and produce the same products.
Case 1: Company X pays $10 per-hour to 100 employees for producing Z units of a product in 50
So, Labor Rate = (total salary paid to the labor force)/ (total time worked) = $(10*100*50)/ (50
hours) = $1000/hour
Labor Cost = $50000
Case 2: Company Y pays $15 per-hour to 100 employees for producing Z units of the same product
as Y does in 30 hours. So, Labor Rate = (total salary paid to the labor force)/ (total time worked) =
$(15*100*30)/ (30 hours) = $1500/hour
Labor Cost = $45000
Now, see, although Labor Rate at company Y, $1500/hour, is higher than the Labor Rate at company
X, $1000/hour, but, still, Labor Cost at Y, $45000, is lower than the Labor Cost at X, $50000.
How is this possible? This is possible simply because of higher productivity demonstrated at company
Y than that at company X. The labor force at Y finished the same job in lesser number of hours than
did the labor force at X, keeping the quality of work the same. And, this theory of productivity is true
in, almost, all the fields of businesses.
Case #1 and Case #2, mentioned above, also explain Myth #2 – just by lowering the labor rate, it’s
not possible to reduce the labor cost. Productivity is something that should not be overlooked. In
order to remain competitive in the market, a company cannot afford to live with these two myths.
Explanation of Myth #3: Managers who mix up labor rates and labor costs also tend to accept Myth
#3 that labor costs are a significant portion of total costs. Sometimes, that’s true. It is, for example,
at Accounting and Consulting firms. But, the ratio of labor costs to total costs varies widely in
different industries and companies. And even where it is true, it’s not as important as many
managers believe. One of the reasons why the confusion over costs and rates persists is that labor
rates are a convenient target for managers who want to make an impact. Labor rates are highly
visible, and it’s easy to compare the rates you pay with those paid by competitors or with those paid
in other parts of the world. Moreover, labor rates often appear to be a company’s most malleable
financial variable. It seems a lot quicker and easier to cut wages than to control costs in other ways,
like reconfiguring manufacturing processes, changing corporate culture, or altering product design.
Explanation of Myth #4: Those who swallow this myth may neglect other more effective ways of
competing strategies, such as through quality, service, delivery, and innovation. In reality, low labor
costs are a slippery way to compete and perhaps the least sustainable competitive advantage there
Explanation of Myth #5: Individual incentive pay has been shown to undermine teamwork,
encourage employees to focus on the short term, and lead people to link compensation to political
skills and ingratiating personalities rather than to performance. Instead of individual incentive pay
companies should opt for group-oriented compensation system. Some people might refute group-
oriented pay-system on the basis that it induces “free riding” attitude in the team members. But,
this is incorrect, because individuals do not make decisions about how much effort to expend in a
social vacuum. Moreover, employees are influenced by peer pressure and the social relations they
have with their workmates. Plus, sometimes, individual pay schemes go so far as to affect
customers. For example, salespeople might piss the customers off by pestering them to buy the
services or products that they are selling - in order to meet their targets. Another good reason is
that in the typical individual-based merit pay system, the boss works with a raise budget that’s some
percentage of the total salary budget for the unit. It’s inherently a zero-sum process: the more I get
in my raise, the less is left for my colleagues. So, the worse my workmates perform, the happier I am
because I know I will look better by comparison. This discourages people from sharing best practices
and learning from other employees. Explanation of Myth #6: People do work for money – but they work even more for meaning in their
lives. In fact, they work to have fun. Companies that ignore this fact are essentially bribing their
employees and will pay the price in a lack of loyalty and commitment.
WEEK 3: Moral Hazard and Principal Agent Problem
When those with critical information have interests different from those of the decision maker, they may
fail to report completely and accurately the information needed to make good decisions. E.g.
mechanic tries to get you to buy a new product.
When buyers cannot easily monitor the quality of the goods or services that they receive, there is a
tendency for some suppliers to substitute poor quality goods or to exercise too little effort, care, or
diligence in providing the services. E.g. the car breaks down due to poor installation.
Moral Hazard - Form of ex post opportunism: differences in information distort an agent’s incentives
after the transaction is made.
E.g. if anything is insured, you’re likely to take more risks.
Basic model: two parties
Principal: on whose behalf work is done by …