SPI Working Paper Series

WP #: 121

Date: Dec 2014


SPI Funded Paper

Job Mission as a Substitute for Monetary Incentives: Experimental Evidence

    Lea Cassar

    University of Zürich

Are monetary and non-monetary incentives used as substitutes in motivating effort? I address this question in a laboratory experiment in which the choice of the job charac- teristics (i.e., the mission) is part of the compensation package that principals can use to influence agents’ effort. Principals offer contracts that specify a piece rate and a charity— which can be either the preferred charity of the agent, or the one of the principal. The agents then exert a level of effort that generates a profit to the principal and a dona- tion to the specified charity. My results show that the agents exert more effort than the level that maximizes their own pecuniary payoff in order to benefit the charity, especially their preferred one. The principals take advantage of this intrinsic motivation by offering lower piece rates and by using the choice of the charity as a substitute to motivate effort. However, I also find that because of fairness considerations, the majority of principals are reluctant to lower the piece rate below a fair threshold, making the substitution between monetary and non-monetary incentives imperfect. These findings have implications for the design of incentives in mission-oriented organizations and contribute to our understanding of job satisfaction and wage differentials across organizations and sectors.

SPI Quick Look:
Charities, non-profit organizations and, more generally, private organizations involved in the provision of goods with positive social impact can often benefit from the intrinsic motivation of their employees. This project investigates how the managers of such organizations can combine monetary and non-monetary incentives—in particular, providing employees with discretion over which projects to pursue—to motivate effort. I design a laboratory labor market experiment, in which managers offer contracts that specify a performance-based monetary incentive and a charity -which can be either the preferred charity of the employee, or the one of the manager. The employees then exert a level of effort that generates a revenue to the manager and a donation to the specified charity. I show that by letting the employees work for their preferred charities, managers were able to induce the same level of effort with 10% lower monetary incentives. However, I also find that the majority of managers sacrificed profits because they were reluctant to pay the employees less than a fair amount. This work has implications for how organizations design compensation packages to attract and motivate their employees.