Incentive Systems - Employee Cost and Incentive System, Cost Management Video Lecture | Cost Management - B Com

the study of incentives is one of the
central topics in microeconomics
incentives to work hard to produce
quality products to study to invest to
save etc how to design institutions that
provide good incentives for economic
agents has been a central question of
economics behind this though is the idea
of motivation what motivation do
economic agents operate under in this
module we will be presenting two very
different frameworks for understanding
agents motives and associated incentive
systems we'll look at the model of
incentive theory that is central to
standard economics and then go on to
talk about the more complex model of
intrinsic motives and choice
architecture that is emerging out of
behavioral economics
the motivation of economic agents
derives from the needs desires and
aspirations that they're trying to
fulfill these different types of needs
are typically structured through the use
of a model called Maslow's hierarchy
that fundamentally divides them into
primary needs and secondary needs
primary needs are physiological in
nature they include such things as food
water shelter sleep and so on secondary
needs are internal states like the
desire for power achievement belonging
opportunities for advancement relations
with work colleagues input in
decision-making etc people's and
society's needs can change over time as
agents move on to new ones that become
more intensified and important to them
motives are the reason or reasons one
has for acting or behaving in a
particular way it accounts for the
direction level and persistence of a
person's resource expenditure in
performing an activity or trying to
achieve some end motives are divided
into two different kind intrinsic and
extrinsic extrinsic motives always have
an end a locus of desire and the process
is just a means forgetting their
intrinsic motives do not necessary have
a final point of design they are more
process orientated the end value is the
process
a central question then within economics
is how to create systems for aligning
agents behavior with those of the
organizational society from driving too
fast to smoking to work apathy to lack
of health insurance economists business
management and policy makers spend a lot
of their time thinking about this
question and there are really just two
ways to do this either we use direct
incentives or we alter the context
within which agents are acting
behavioral economics focuses on this
latter solution while standard economics
focuses on the former which is called
the incentive theory
the basic premise of standard economics
is that people respond to incentives the
theory of incentives is one of the major
theories of motivation and suggests that
behavior is motivated by a desire for
reinforcement or incentives in contrast
with other theories that might suggest
we are pushed into action by internal
drives incentive Theory instead suggests
that we are pulled into action by
outside incentives according to this
view people are pulled towards behavior
that offers positive incentives and
pushed away from behavior associated
with negative incentives in other words
differences in behavior from one person
to another or from one situation to
another can be traced back to the
incentives available and the value a
person placed on those incentives
the most common incentive would be a
reward rewards can be tangible or
intangible and is presented generally
after the occurrence of the action or
behavior that one is trying to correct
or cause to happen again this is done by
associating positive meaning to the
behavior or action studies show that if
the person receives the reward
immediately the effect is greater and
decreases as delay lengthens a
combination of repetitive actions and
rewards can cause an action to become
habitual this model has both its
achievements and limitations incentive
Theory will give us a nice closed form
model with direct a linear
cause-and-effect relations they are very
well suited to a top-down form of
management because extrinsic incentives
are designed to give compliance they are
explicit and directly trying to alter
agents behavior according to the
instructions of some managing body
incentive systems have to be
well-designed aligned with the interests
of the agents in the system and the
desired outcomes human beings are both
finite and creative that means that the
people offering incentives are often
unable to predict all of the ways the
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
unintentional distorted incentives added
to this direct incentives may have a
crowding out effect if we only take into
account one form of value we may try to
optimize it at the expense of others
with the overall throughput becoming
suboptimal extrinsic incentive systems
work well when there's a clear set of
steps and a clear well-defined expected
outcome or goal but they only really
work for analytical processes as they
now our focus and concentrate our mind
extrinsic incentives only work as long
as the task involves only rudimentary
mechanical tasks simple algorithmic
operations research has shown the when
tasks become more complex that is as
soon as the task involves some form of
cognitive skill creative skills or
conceptual capabilities extrinsic
incentives were no longer effective and
actually led to a poorer performance
this theory of management has been the
default since the Industrial Age this
system has been the motivational
structure for making people work
throughout the 19th and 20th century it
is a core part of the whole Industrial
Age capitalist model and the dichotomy
between work and leisure but the
post-industrial
economic environment we're moving into
requires a new skill set involving
entrepreneurship cognitive capabilities
innovation and self engagement in this
economy people's needs and motive
structures are more complex it is an
economy where people are connected and
feel motivated by forming part of
networks that give them different value
through social media collaborative
consumption peer production creative
commons open source and so on all of
these go beyond our traditional
understanding of why people render
professional services and this
necessitates a more complex nonlinear
model that looks at the whole context
within which agents are embedded in
making their decisions
by incorporating a wider spectrum of
motives and values behavioral economics
has developed a very different model
within this paradigm we're thinking
about how the border context affects the
choices that agents are making we're
looking at the physical social and
cultural networks or connections that
the HS make choices within and how these
different networks can add or subtract
value from the motives of the agents in
order to alter them for example in a
purely physical context behavioral
economics looks and how choices are
arranged within space such as the layout
of a city where plentiful open spaces
make walking a more desirable mode of
transport than other options or in a
canteen restaurant for example where
there's a choice where we place the
items we might put the healthy food at
the entrance making it more accessible
than other options these choices that
are the easiest option due to their
spatial location are examples of
attractor States being the easiest
options they are a default they attract
users to adopt this choice this is an
example of what is called a nudge a
small influence within the environment
that attracts our attention and
influences the behavior that we make of
course marketing has been using nudge
theory for a long time in the layout of
shops or the placement of products and
catalogues but because marketing is
largely about creating a context for
influencing people's choices it is never
really fitted in with standard economic
theory
the social context within which choices
are made is just as important as the
physical with the advent of social
networking the social dimension has
become much more important within
economics both in work and consumption
by simply connecting people and making
social information available this can
strongly influence people's choices and
provide motivation through a social
context intrinsic motives are self
directional they can be best fostered by
simply giving them space to develop that
is to say not crowding them out with
incentive systems we see some companies
like Google who instead of offering an
incentive to employees for coming up
with new innovations they simply give
the employees a day off every week to
explore their interests as directed by
intrinsic motives by so doing they're
simply not crowding out the intrinsic
motives
choice architecture is another outgrowth
from behavioral economics which deals
with the design of different ways in
which choices can be presented to
consumers and the impact of these
presentations on consumer
decision-making for example the number
of choices presented how we arrange
those choices or which one is the
default option an important question
here is how do we frame those choices
when we set a car do we tell prospective
buyers the amounts of fuel to run the
car or the amount of money to run the
car although they both relate to the
same underlining piece of information it
has been shown that people often make
different decisions based on different
ways that the information has been
framed choice architecture is built on
our understanding of people as non
rational agents and how they use all
sorts of shortcuts to cope when making
difficult decisions
in this short module we've been talking
about incentive systems within economics
we firstly talked about how different
kinds of needs create different
motivational structures we look to the
standard approach to influencing
people's choices towards desired social
outcomes through incentive theory which
suggests that agents are pulled into
action by outside incentives and by
altering the payoffs associated with
different choices we can alter their
motivation inversely behavioral
economics built on this idea of agents
as non rational actors tries to
understand how people act in the real
world looking more at internal motives
and the set of environments or
conditions that influence those motives