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Managerial Motivation Dynamics and Incentives

Aye Kocabykolu, Ioana Popescu

Department of Management, Bilkent University, Bilkent, Ankara 06800, Turkey
Decision Sciences Area, INSEAD, Boulevard de Constance, 77300 Fontainebleau, France
aysekoca{at}bilkent.edu.tr
ioana.popescu{at}insead.edu

Firms can increase profitability by appropriately motivating managers. We investigate drivers of managerial motivation, and propose how firms can use performance pay to alter motivational patterns. We focus on the agent’s optimal effort decision in trading off compensation utility with effort cost in a static and dynamic setting. Surprisingly, we find that lower risk aversion or increased pay are not necessarily motivating factors, and identify the relevant effort drivers underlying the agent’s utility and compensation plan. We characterize properties of agents’ preferences for output lotteries (risk aversion, aggressiveness, prudence) that trigger systematic motivational patterns with respect to a variety of factors, such as the agent’s productivity and past performance, time to evaluation, the firm’s capabilities, and market factors. Our insights are robust, holding under very general modeling assumptions on preferences, rewards, and the stochastic effort-output function.

Key Words: decision analysis; risk preferences; risk aversion; incentives; salesforce compensation
History: Received: November 9, 2005;