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

52 Pages Posted: 11 Oct 2010 Last revised: 11 Aug 2012

See all articles by Philipp Meyer-Doyle

Philipp Meyer-Doyle

INSEAD - Strategy

Marshall W. Meyer

University of Pennsylvania - Management Department

Date Written: October 10, 2010

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

Suggested Citation

Meyer-Doyle, Philipp and Meyer, Marshall W., Combining Financial and Organizational Incentives to Better Align Individual Behaviour with Organizational Goals (October 10, 2010). Available at SSRN: https://ssrn.com/abstract=1690229 or http://dx.doi.org/10.2139/ssrn.1690229

Philipp Meyer-Doyle (Contact Author)

INSEAD - Strategy ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

Marshall W. Meyer

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

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