Managers differ widely in the way they motivate their workers. Whereas some managers rely exclusively on monetary incentives such as bonuses, others complement monetary incentives with provision of praise. Yet other managers single out those who performed poorly and provide social sanctions. In a recent study, we aim to better understand why leadership styles differ. Our paper points towards the importance of labour-market conditions. If workers are hired in a competitive labour market, praise is used whenever that is socially efficient. Social sanctions are used only if there is a binding wage floor.
While managers in some companies are known to generously provide praise to well-performing workers, managers in other companies have a reputation for being harsh on poor performers. For example, the workplace culture at Amazon has been described by the New York Times as “sometimes punishing”. A former employee of Amazon said that “Nearly every person I worked with, I saw cry at their desk”. Similarly, Reuters wrote about Volkswagen’s culture of “fear and respect” under former CEO Martin Winterkorn. A former executive said that “If you presented bad news, those were the moments that it could become quite unpleasant and loud and quite demeaning.”
Not just two extreme cases
Representative questionnaire data show that these are not just two extreme cases. Studies report up to twenty percent of workers having a boss who is sometimes rude and disrespectful towards workers. The same studies sketch a much more friendly picture of many other bosses. A majority of workers report to have a boss who gives praise and recognition for a job well done.
Why is there so much variation in the way managers motivate their workers? Is this just a matter of personalities and coincidence? Or might there be circumstances under which one style is superior to the other?
'One of our key findings is that if workers are hired in a competitive labour market, managers never use social sanctions'
A simple model
In a recent Management Science article with Ola Kvaløy (University of Stavanger) and Anja Schöttner (HU Berlin), we explore these questions. We build a simple economic model where a manager needs a worker to perform a task. The manager can motivate the worker to perform the task using three tools: monetary incentives, praise, and social sanctions. Which tools a manager uses is known to the workers in advance. In addition to motivating the worker, the manager needs to make sure to attract and retain the worker, as workers have other job opportunities in the labour market.
Competition defeats sanctions
One of our key findings is that if workers are hired in a competitive labour market, managers never use social sanctions. Even though sanctions motivate workers to work harder and allow the manager to save on bonus pay, on net the manager does not benefit from the use of sanctions. The reason is that in a competitive labour market, managers have to compensate workers for all negative aspects of the job, including the pain from sanctions following bad performance. Managers therefore prefer to use an instrument that motivates and benefits the worker at the same time, such as bonus pay or praise. The latter is sometimes used in competitive labour markets, but only if it is socially efficient to do so. That is, only when the cost of providing praise for the manager are lower than the joy it brings to the worker. If this condition does not hold, the manager exclusively uses bonus pay to motivate workers.
'If the expected bonus savings are larger than the expected cost of providing sanctions, managers will be inclined to use them'
A minimum wage
In labour markets where workers’ wages do not result from competition, the results are quite different. When wages are dictated by a binding wage floor – e.g. a legal minimum wage or a wage resulting from collective bargaining – managers do sometimes use social sanctions to motivate workers. The reason is that in such labour markets workers need not be compensated by higher wages for negative job aspects, because the binding wage floor makes the job sufficiently attractive already. The use of social sanctions allows the manager to reduce bonus pay, and the more so, the more painful the sanction is. If the expected bonus savings are larger than the expected cost of providing sanctions, managers will be inclined to use them. This is a socially inefficient outcome: it leads to additional costs on the side of the worker as well as the manager. However, managers may nevertheless use it, as it allows them to obtain a higher profit at the expense of the worker.
Robert Dur is Professor of Economics of Incentives and Performance at Erasmus School of Economics and a research fellow of the Tinbergen Institute. He is also President of the Royal Dutch Economic Association. His research interests include Personnel Economics, Organisational Economics, and Behavioural Economics.