The effect of employer incentives and peers on the relationship between employee intrinsic and extrinsic motivation

Abstract

The paper aims to investigate empirically how employer incentives and peer effects, namely productivity spillovers and inequity aversion, affect the relationship between employee intrinsic and extrinsic motivation. Bounded rationality in employees means that employers struggle to predict the influence of incentives and peer effects on employee motivation and they need to be cognisant of the potential to crowd out intrinsic motivation. Data was collected from an online survey sent to knowledge workers in South Africa. Scenarios were based on the gift exchange game and tested incentives such as base pay, bonuses, and sanctions as well as peer effects. This research found a positive correlation between intrinsic and extrinsic motivation and therefore contributes empirically to research where incentives and motivation act as complements. Monetary incentives that are perceived as fair will increase employee motivation and effort. Employees are inequity averse and pay discrepancies will significantly reduce motivation. Productivity spillovers from peers will increase employee motivation even at lower compensation levels. This study contributes empirically to Self-determination theory and Behavioural agency theory by investigating the relationship between intrinsic and extrinsic motivation.