Combining Financial and Organizational Incentives to Better Align Individual Behaviour with Organizational Goals

Abstract

Much of the existing literature has focused on financial incentives to align individual behaviour with organizational goals, based on the assumption that individual behaviour is largely motivated by expected pecuniary payoffs. However, past and more recent economic developments show that financial incentives can induce myopic behaviour, and thereby financial incentives alone appear to be aligning individual behaviour with organizational goals too myopically. In this paper, we embrace the idea that individual behaviour is also socially embedded and motivated in order to explore incentives that are geared towards producing long-term oriented behaviour. Specifically, we focus on incentives stem from an individual’s social embeddedness in an organization. We define such ‘organizational incentives’ and discuss their theoretical foundations. However, as we show, organizational incentives alone motivate individual behaviour that is too hyperopic (overly concerned with the long-term survival of the organization). Therefore, we argue that the organization is best served by combining individualistic financial incentives with the socially embedded organizational incentives to motivate individual behaviour which is neither myopic nor hyperopic and which is more in line with organizational goals. We discuss how firms can adjust their financial and organizational incentives accordingly and combine them effectively, and what factors foster an effective combination of financial and organizational incentives.

Keywords: Organizational Incentives, Financial Incentives, Performance, Organization

JEL Classification: M52; M10