Is Extrinsic Motivation Really That Bad? Understanding the Balance for Effective Leadership

The widely held belief that extrinsic motivation invariably diminishes intrinsic motivation deserves a nuanced examination. Contrary to this popular notion, a recent study suggests that extrinsic motivators, such as performance-based incentives, do not inherently dampen intrinsic motivation. This article delves into the complexities of balancing extrinsic and intrinsic motivations, particularly in the context of managerial discretion and bonus allocation.

The Myth Revisited

The idea that extrinsic rewards kill intrinsic motivation has been a topic of debate for decades. However, the study by Rebecca Hewett and Hannes Leroy offers a fresh perspective. It posits that performance-related bonuses (PFIP) don’t necessarily reduce intrinsic motivation. Instead, how these bonuses are perceived and implemented plays a pivotal role.

Managerial Discretion and Procedural Fairness

One of the study’s crucial insights is the interplay between perceived managerial discretion and procedural fairness in bonus allocation.

Let‘s first explain what managerial discretion and procedural fairness are:

Managerial Discretion

Perceived managerial discretion, as discussed in the study, refers to employees’ perceptions regarding the extent to which their managers exercise professional judgment in making decisions about performance-related incentives or bonuses. In simpler terms, it’s about how much freedom or flexibility employees think their managers have in deciding who gets bonuses and how much they receive.

Key aspects of perceived managerial discretion include:

1. Subjective Judgment: Employees perceive that their manager uses personal judgment, rather than strictly adhering to formal, objective criteria, when evaluating performance and determining bonuses.
2. Recognition of Unique Contributions: It involves the belief that managers can account for individual differences and unique contributions of employees, beyond what can be measured through standard performance metrics.
3. Adjustment to Formal Criteria: Employees see their managers as having the capability to adjust or override formal performance criteria to better reflect individual performance and contributions.

This concept is important because it influences how employees perceive the fairness of the bonus allocation process and, consequently, how motivated they feel intrinsically. When high perceived managerial discretion is linked with favorable outcomes (like receiving a higher bonus), it tends to enhance the perception of procedural fairness and, as a result, can positively affect intrinsic motivation. Conversely, when perceived discretion is low or linked with unfavorable outcomes, it can have a negative impact on intrinsic motivation.

Procedural Fairness

Procedural fairness, also referred to as procedural justice, is a concept in organizational psychology and management that relates to employees’ perceptions of the fairness of the processes and methods used to make decisions, especially those impacting them directly, such as performance evaluations, promotions, and bonus allocations.

Key elements of procedural fairness include:

1. Consistency: The procedures are applied consistently across all individuals and over time.
2. Bias Suppression: The decision-making process is free from personal bias or favoritism, ensuring impartiality.
3. Accuracy of Information: Decisions are based on accurate and relevant information, acknowledging all aspects of a situation.
4. Correctability: There are mechanisms in place to correct flawed or unfair decisions.
5. Ethical Standards: The procedures adhere to ethical and moral standards.
6. Representation of All Concerned: The process allows for input or representation from all parties affected by the decision.

Opposing forces?

Consistency and suppression of bias can be at odds with managerial discretion. While consistent rules often aim to increase perceived fairness, they might fail to recognize an employee’s individual contribution. An individual manager, on the other hand, can see such contributions that would otherwise fall through the net of a pre-written bonus system. But the more power the manager has in distributing bonuses, the harder it will be to guarantee unbiased decisions. This is a tough balance to strike in practice.

While high managerial discretion can potentially lead to biases, if managed well, it can also enhance the perception of fairness. The key lies in transparency, consistency, and ethical application of discretion. For bonuses to positively impact intrinsic motivation, they must be perceived as fair acknowledgments of individual contributions.

Informational vs. Controlling Bonuses

Bonuses can be informational, providing feedback on competence and effort, or controlling, coercing specific outcomes. The challenge lies in maintaining the informational nature of bonuses. Repetition risks turning these bonuses into expected rewards, thus diminishing their effectiveness. To preserve their intrinsic motivational value, bonuses should be part of a broader culture of recognition and appreciation.

1. Informational vs. Controlling Bonuses: Informational bonuses are those that are perceived as acknowledgments of one’s competence and contribution rather than as a means to control behavior. They are not necessarily unknown or surprises but are characterized more by their intent and the message they convey.
2. Challenge of Repetition: Even bonuses intended as informational can become expected and thus lose their effectiveness in terms of enhancing intrinsic motivation. This is especially true if they start being perceived as entitlements or if they become predictable. The key is in maintaining a sense of appreciation and recognition with each bonus, which can be challenging.
3. Maintaining Intrinsic Motivation: To maintain intrinsic motivation, organizations should focus on fostering a culture where bonuses are part of a broader recognition system that values employee contributions, autonomy, and professional development, rather than the sole or primary motivator.

Achieving the Balance

Achieving the right balance is challenging. It requires: 1. Transparent and Ethical Decision-Making: Managers need to exercise their discretion in a way that is transparent and perceived as fair by all employees. 2. Cultural Sensitivity: Understanding the organizational and cultural context is vital. Different cultures and organizations may have varying perceptions of what constitutes fairness and appropriate managerial discretion. 3. Frequent Communication: Open lines of communication about the criteria and process of bonus allocation can enhance perceptions of fairness. 4. Focus on Recognition Over Control: Shift the focus from using bonuses as mere performance drivers to tools for recognizing and appreciating genuine effort and contribution.

Conclusion

The relationship between extrinsic and intrinsic motivation is more symbiotic than antagonistic. Properly implemented, extrinsic motivators like bonuses can coexist with and even enhance intrinsic motivation. For agile coaches, managers, and leaders, understanding this balance is crucial in creating a motivational environment that values and nurtures both forms of motivation.

Thank you for reading The Agile Compass. I'm Matthias, here to help you help those around you become agile. To learn and grow even faster, upgrade to a paid subscription. You’ll join our premium Discord community and get access to all past articles.

​